The Corporate Tax Loss Restriction

There are two main corporate tax loss restrictions in UK law: the Corporate Income Loss Restriction (CILR), effective from 1 April 2017, and the Corporate Capital Loss Restriction (CCLR), effective from 1 April 2020. Here is a structured overview:

What the Law Says

The legislative framework is found in CTA 2010, Part 7ZA (for income losses) and TCGA 1992 s.2A / CTA 2010 s.269ZBA (for capital losses), as introduced by the Finance (No.2) Act 2017 and Finance Act 2020 respectively.

The 50% restriction: Companies with profits in excess of the deductions allowance cannot reduce those profits to nil using carried-forward losses. The maximum relief available is the company's deductions allowance plus 50% of any remaining profits in excess of that allowance.

The deductions allowance: A deductions allowance of up to £5 million per twelve-month period is available, shared across a group. It can be allocated between trading profits, non-trading income profits, and (from 1 April 2020) chargeable gains. It is period-specific and cannot be carried forward or back.

Types of losses restricted (CILR): The restriction applies to the following carried-forward losses:

• Non-trading loan relationship deficits (NTLRDs) — CTA09/s.463G
• Trade losses — CTA10/s.45A
• Non-trading losses on intangible fixed assets — CTA09/s.753
• Management expenses — CTA09/s.1219 & s.1223
• UK property business losses — CTA10/s.62 & s.63
• Pre-1 April 2017 trading losses (CTA10/s.45(4)) and certain streamed post-2017 losses (CTA10/s.45B)

Corporate Capital Loss Restriction (CCLR): From accounting periods commencing on or after 1 April 2020, carried-forward capital losses used to offset capital gains are restricted so that only 50% of those gains can be offset, subject to the deductions allowance.

HMRC Guidance / Practice

Two aims of the reform: HMRC explains that the F(No.2)A 2017 reform had two aims: (1) to restrict the amount of loss relief available to businesses with substantial profits; and (2) to relax the rules so that most carried-forward losses arising from 1 April 2017 can be used more flexibly against total taxable profits (rather than only specific profit streams) of a company and its group members.

How the restriction works in practice: After deducting in-year reliefs, a company's profits can only be reduced by carried-forward losses up to: (a) the deductions allowance, plus (b) 50% of any remaining profits above the allowance. If a company's profits are lower than the deductions allowance, carried-forward losses may be set against those profits without restriction.

The deductions allowance is not a tax-free allowance: HMRC clarifies that the deductions allowance does not itself provide tax relief — it merely enables companies to gain greater use of their carried-forward losses than would otherwise be possible under the restriction.

Relevant maxima: Where a company has "streamed" losses (i.e. losses only usable against specific profit types), it must calculate separate relevant maxima for trading profits, non-trading income profits, and (from 1 April 2020) chargeable gains, allocating the deductions allowance accordingly.

The restriction applies to all carried-forward losses, including those carried forward from periods prior to 1 April 2017, but only against profits arising from 1 April 2017.

Banking companies face an additional, stricter restriction — the bank loss restriction — which limits relief for certain pre-2015 carried-forward losses to 25% of relevant profits (reduced from 50% with effect from 1 April 2016).