What do you need to know about carrying forward losses?
As a business owner, you don’t necessarily want your business to be loss-making. But moving losses from one accounting period to another can be an effective solution to managing your Corporation Tax liabilities.
By offsetting future profits with losses, you can minimise your tax bill and keep your business financially healthy.
However, it’s essential to understand the rules and regulations around carrying forward losses to ensure that you comply with the Corporation Tax Act.
What is a loss-making period?
A Corporation Tax loss occurs when your business spends more money than it earns in a particular accounting period.
It’s not uncommon for businesses, especially start-ups, to experience loss-making periods as they require significant investments to get off the ground while generating relatively small revenues.
But as your business grows, the balance between expenditure and income usually shifts. That said, you can carry forward losses from previous accounting periods to offset any future profits, reducing your Corporation Tax liability.
How can you carry a loss forward?
Carrying a loss forward is not as simple as shifting expenses around. To qualify for this, a loss has to be a trading loss, rather than the failure of an investment.
Therefore, only net losses are taken into account, which is the result of offsetting your business expenses against your income from sales and recurring revenue after a review of your cash flow.
For this to be counted, it must be taxable income from which allowable tax deductions have already been made.
While it’s possible to carry back losses, you won’t be able to carry the same loss forward into a new accounting period if you choose to do this.
When it comes to reporting losses – unlike carrying back profits, where you need to make a separate claim when you file your CT600 Company Tax return – your trading losses are automatically carried forward to offset profits for the accounting period.
For advice on carrying forward losses and corporation tax, please don't hestiate to contact us.