Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 3

Corporation tax: loss relief

Overview

This Chapter provides, in the case of corporation tax, for —

  • relief for trading losses generally by way of set-off against all profits of the company of the current accounting period, the carry back of unrelieved losses for set-off against profits of preceding accounting periods ending within a specified time and the carry-forward of losses for set-off against trading income of future accounting periods (section 396),
  • relief for relevant trading losses (i.e. losses incurred in a trade the income from which is taxable at the 12.5% rate) by way of offset against relevant trading income (i.e. income taxable at the 12.5% rate) of the current accounting period and the carry back of such unrelieved losses against relevant trading income of preceding accounting periods ending within a specified time (section 396A),
  • relief on a value basis for relevant trading losses that cannot be offset against relevant trading income (section 396B),
  • a limit on relief for losses of participating institutions in NAMA (section 396C),
  • relief for terminal losses sustained in the final 12 months of trading (section 397),
  • relief for “Case IV” losses against other “Case IV” income of the same accounting period or a subsequent accounting period (section 399),
  • relief for the excess of “Case V” deficiencies against “Case V” income of previous accounting periods (that is, a carry back) ending within a specified time and the carry-forward of an excess of such deficiencies not so relieved (section 399).

The Chapter also ensures the continuing availability of losses and capital allowances following the transfer of a trade to another company, provided there is a substantial degree of common identity of ownership of the 2 companies concerned (section 400). Finally, the Chapter contains provisions concerned with countering the tax avoidance device of “loss buying” (section 401) and preventing in certain instances losses which were incurred in respect of transactions which were exempt from tax from being taken into account (section 398).

The availability of loss relief is restricted in the case of certain trades and activities by other provisions of the Act. The restriction may involve allowing the loss to be offset only against other income arising to the person from the same trade or activity. This type of restriction of relief is known as “ring-fencing”. The most important such provisions are —

  • section 403 (restriction on use of capital allowances for certain leased assets),
  • section 404 (restriction on use of capital allowances for certain leased machinery or plant),
  • section 405 (restriction on use of capital allowances on holiday cottages),
  • section 406 (restriction on use of capital allowances on fixtures and fittings for furnished residential accommodation),
  • section 407 (restriction on use of losses and capital allowances for qualifying shipping trade),
  • section 455 (restriction of losses attributable to the sale of goods within the meaning of Part 14 – that is, manufacturing losses),
  • section 687 (treatment of losses arising in a petroleum trade),
  • section 753 (restriction on relief for losses in case of dividends paid out of accumulated profits), and
  • section 1013 (losses and capital allowances in respect of limited partnerships).

Special provisions also apply in the way losses may be used where they arise in a trade of farming (section 663). It is to be noted that special restrictions apply on the amount of losses which may be utilised for relief where a company submits a late corporation tax return (section 1085).

396 Relief for trading losses other than terminal losses

Summary

This section provides for a trading loss to be carried forward from an accounting period and set off against income of the same trade for succeeding accounting periods. Alternatively, a company may claim to have the loss set off against profits of any description for the same accounting period in which the loss was incurred or of an immediately preceding accounting period of the same length. It is also provided that charges on income laid out wholly and exclusively for trade purposes, to the extent that they exceed the total profits of the accounting period from which they are deductible, are treated as trading expenses for the purposes of computing a loss and may be carried forward for set-off against income of the same trade for a subsequent accounting period.

Details

Carry-forward of losses

(1) Subject to section 396C, the carry-forward and set-off of a loss incurred in a trade against income from the same trade for a subsequent accounting period is to be allowed on the making of a claim for such relief. A loss carried forward must be set off against the income of the trade for an earlier in priority to a later accounting period. A loss or a part of a loss cannot be relieved by way of carry-forward if it is relieved against profits of the same accounting period or of the immediately preceding accounting period under subsection (2) or if it is relieved under section 396A or 396B.

Carry-back of losses and same period set-off

(2) As an alternative to the carry-forward of relief under subsection (1), a company is entitled to claim that a trading loss incurred in an accounting period may be set —

  • against profits of any kind (that is, trading income, other income and chargeable gains) of the same accounting period, and
  • against profits of any kind of all the accounting periods ending in the period (which is the same length as the length of the accounting period in which the loss was incurred) which immediately precedes the accounting period in which the loss was incurred. This only applies where the trade was carried on by the company during that immediately preceding period. Any balance may be carried forward against trading income of the same trade.

The profits of an accounting period against which a loss is to be set are the profits as reduced by an earlier loss brought forward under subsection (1) to that accounting period.

Where relief is to be given against the profits for an immediately preceding period of the same length as the accounting period in which the loss was incurred and that preceding period comprises more than one accounting period the loss is to be set against the profits for a later accounting period in priority to those for an earlier accounting period or part of an accounting period comprised in that preceding period.

Profits against which losses may be carried back

(3) The profits against which a loss may be carried back are limited to those arising in accounting periods or parts of accounting periods falling within a period of time equal in length to, and immediately preceding, the accounting period in which the loss was incurred.

Example 1

Company A’s accounts disclose results —

12 months to 30/9/2001

Profits

€60,000

9 months to 30/6/2002

Loss

(€90,000)

The loss for set-off against the profits of the accounting

period to 30/9/2001 is limited to 9/12 × €60,000 =

(€45,000)

The balance of loss available for carry-forward and set-off against profits of the trade arising subsequent to 30/6/2002 is (€90,000)–(€45,000) =

(€45,000)

Example 2

Company B’s accounts disclose results —

12 months to 31/12/2000

Profits

€20,000

9 months to 30/9/2001

Profits

€60,000

12 months to 30/9/2002

Loss

(€80,000)

The loss for set-off against the profits of the accounting period to 30/9/2001 is 9/12 × €80,000.

(€60,000)

The set-off against the profits of the accounting period of 12 months to 31/12/2000 is however limited to the amount of those profits apportioned to the period from 1/10/2000 to 31/12/2000, namely 3/12 × €20,000 =

(€5,000)

The balance of loss available for carry-forward and set-off against the profits of the trade arising subsequent to 30/9/2002 is €80,000 – (€60,000 + €5,000) =

(€15,000)

“Case III” trades

(4) Relief for losses by way of carry-back and same period set-off against other income is not available where a trade is carried on wholly abroad. Such losses may only be relieved by way of carry-forward for set-off against future profits of the same trade. Such a trade is entitled to terminal loss relief under section 300.

Computation of losses

(5)(a) A trading loss is to be computed in the same manner as trading income.

(5)(b) In computing the loss incurred in a trade of a life assurance company, management expenses which are deductible under section 83 are not to be deducted in computing a loss sustained in the trade. This ensures that such management expenses cannot be taken into account twice and, effectively, relieved twice.

Treatment of interest and certain dividends

(6) While in strictness interest and dividends (other than dividends paid by an Irish company) are in the nature of trading receipts in the hands of a company such as a financial concern, such receipts may in practice have borne corporation tax under provisions other than those applicable to trading income (for example, untaxed interest from Irish Government securities or dividends from British companies may have been charged under Case III of Schedule D). In such circumstances the loss in the trade is to be set off not only against the trading profits charged under Case I but also against such investment income charged under Case III.

Dividends received by an Irish resident company from another Irish resident company are not within the charge to corporation tax in the hands of the receiving company (section 129) and the loss, therefore, is not available for carry forward against such dividends. Relief in such circumstances may, however, be available under section 158.

Charges on income

(7) Where charges on income (net of any part of those charges relieved under section 243B) exceed the profits against which they are deductible, any part of those charges which are paid wholly and exclusively for the purposes of the company’s trade may, up to the amount of the excess, be treated as a deductible trade expense and, thus, may be used to create a loss which can then be carried forward for relief against the future profits of the same trade.

Application

(8) Loss relief under this section is only available to companies carrying on a trade which is within the charge to corporation tax at all material times.

Time limits for claims

(9) A claim to set off a trading loss against profits of any kind for the current or preceding accounting period may be made within 2 years from the end of the accounting period in which the loss was incurred.

Example

Accounting period

12 months

9 months

12 months

to 31/12/00

to 30/9/01

to 30/9/02

Trading income

€10,000

Nil

€40,000

Other income chargeable to

corporation tax

€110,000

€160,000

€170,000

Total profits

€120,000

€160,000

€210,000

In the 9 months to 30/9/01 the company incurred a trading loss of (€20,000).

Carry forward of loss (subsection (1))

The loss can be carried forward against income of the trade —

Accounting period 12 months to 30/9/02

Income from trade

€40,000

less loss carried forward

(€20,000)

€20,000

Other income

€170,00

Total profits for assessment

€190,00

Same period set-off (subsection (2))

The loss may be set off against other profits of the accounting period in which the loss was incurred —

9 months to 30/9/01

Total profits

€160,000

less trading loss set off

(€20,000)

Net profits

€140,000

If the trading loss for the 9 months to 30/9/01 was (€180,000) a sum of (€160,000) could be set against the other profits of that accounting period and the balance (€20,000) carried back and set against the apportioned profits of €90,000 for 9 months to 31/12/00.

Relevant Date: Finance Act 2020