How UK Subsidiaries Can Use, Carry Forward and Share Tax Losses
Foreign-owned UK companies can make Corporation Tax losses for many reasons, particularly during their first years of operation.
A UK subsidiary may incur losses while establishing its business, investing in employees, developing technology, entering the UK market or building its customer base.
Making a tax loss does not necessarily mean that the loss is permanently lost. Depending on the type of loss and the circumstances, a UK company may be able to carry losses forward, carry certain trading losses back or surrender eligible losses to another group company through group relief.
However, foreign-owned companies need to consider additional issues, including group structure, changes in ownership, transfer pricing and whether the loss relates to the UK company’s own business.
This guide explains the main UK Corporation Tax loss rules relevant to foreign-owned UK subsidiaries.
What Is a Corporation Tax Loss?
A company generally makes a Corporation Tax loss when its allowable expenses and other relevant deductions exceed its taxable income or profits for the relevant accounting period.
The tax calculation does not simply follow the accounting profit or loss shown in the financial statements.
For example, a UK subsidiary may report an accounting loss of £500,000, but the amount of the tax loss may be different after making the required Corporation Tax adjustments.
The tax calculation can include adjustments relating to:
- Disallowable expenses
- Capital allowances
- Depreciation
- Financing costs
- Non-trading income and expenses
- Other tax adjustments
The type of loss is also important because different categories of losses are subject to different rules.
What Types of Losses Can a UK Company Have?
A UK company may have several different types of tax losses.
The most important include:
Trading losses
These arise from the company’s normal trading activities.
For example, a UK technology subsidiary may incur a trading loss because its operating expenses exceed its revenue.
Property business losses
These can arise from a UK property business.
Capital losses
These generally arise when a company disposes of an asset for less than its allowable tax cost.
Capital losses have different rules and generally cannot simply be used against ordinary trading profits.
Non-trading loan relationship deficits
These can arise from certain financing and loan relationship activities.
The distinction between the different categories is important because a loss cannot necessarily be used against every type of profit.
Can a UK Subsidiary Carry Corporation Tax Losses Forward?
Yes.
A UK company can generally carry certain unused losses forward to future accounting periods, subject to the relevant rules.
For trading losses arising on or after 1 April 2017, the rules generally provide greater flexibility than the pre-2017 regime, with many carried-forward trading losses capable of being set against total profits rather than only profits from the same trade. Certain restrictions and exceptions apply.
This can be particularly relevant to foreign-owned subsidiaries that expect to become profitable after an initial investment period.
Example
A UK subsidiary makes:
Year 1: £500,000 tax loss
Year 2: £300,000 taxable profit
Subject to the applicable rules, the company may be able to use part of its carried-forward loss against its later profits.
The unused balance can potentially remain available for future periods.
The company should maintain clear records showing:
- Original loss
- Losses already used
- Losses carried forward
- Losses surrendered as group relief
- Remaining balance
Can a UK Company Carry Back a Trading Loss?
In certain circumstances, yes.
A trading loss can generally be carried back against profits of the previous 12 months, provided the relevant conditions are met.
One important condition is that the company must have been carrying on the same trade during the relevant earlier period.
For example:
Previous year: £400,000 taxable profit
Current year: £250,000 trading loss
The company may be able to carry the loss back and reduce the previous year’s taxable profit, potentially generating a Corporation Tax repayment.
The carry-back rules should be reviewed carefully because the amount available and the periods against which the loss can be used depend on the company’s circumstances.
What Happens to Losses When a UK Subsidiary Becomes Profitable?
This is a common situation for foreign-owned companies.
A UK subsidiary may initially be loss-making because the parent is investing in:
- Employees
- Product development
- Marketing
- Office infrastructure
- Technology
- Market expansion
- Research and development
When the company becomes profitable, its carried-forward tax losses may become valuable.
However, the company should not assume that all historical losses can automatically be used against all future profits.
The rules depend on:
- Type of loss
- Date the loss arose
- Nature of the trade
- Ownership changes
- Group structure
- Relevant restrictions
Proper loss tracking is therefore important from the first year the UK subsidiary generates a tax loss.
Restrictions on Carried-Forward Losses
One of the most important points for UK companies is that carried-forward losses are subject to restrictions on how much profit can be relieved in a period.
Broadly, for relevant carried-forward losses, companies with profits above the deductions allowance cannot generally reduce their profits to nil solely through carried-forward losses.
The rules broadly allow relief for the deductions allowance plus up to 50% of remaining profits. The deductions allowance is subject to a maximum of £5 million, with group rules potentially affecting the amount available.
This means that a company with significant carried-forward losses may still have some taxable profit in a later year.
The calculation can become more complicated for companies that are part of a wider group.
Can a UK Subsidiary Transfer Its Losses to Another Group Company?
Potentially.
The UK group relief rules can allow qualifying companies within the same group to share certain losses.
For example:
UK Subsidiary A: £1 million loss
UK Subsidiary B: £1 million taxable profit
Subject to the relevant conditions, Subsidiary A may potentially surrender eligible losses to Subsidiary B.
This can allow the group to reduce the overall UK Corporation Tax liability.
The rules also allow certain carried-forward losses arising on or after 1 April 2017 to be surrendered as group relief, subject to specific conditions and restrictions.
Can a Foreign Parent Use the UK Subsidiary’s Losses?
This requires an important distinction.
The fact that a foreign parent owns a UK company does not mean that the parent can simply take the UK subsidiary’s losses and deduct them against its own overseas taxable profits.
UK group relief generally operates within the UK Corporation Tax framework and is subject to specific conditions.
The relevant group relationship, the companies involved, the type of loss and the accounting periods all need to be considered.
Therefore, a UK subsidiary’s tax loss is not automatically an asset that can be transferred to its foreign parent.
Group Relief and Foreign-Owned UK Subsidiaries
For a foreign-owned group with several UK companies, group relief can be particularly useful.
For example:
Overseas Parent
↓
UK Holding Company
↙︎ ↘︎
UK Subsidiary A UK Subsidiary B
If Subsidiary A has a qualifying loss and Subsidiary B has taxable profits, the group may be able to make a group relief claim.
The claimant and surrendering companies must satisfy the relevant group conditions and other requirements.
The surrendering company must consent to the surrender, and the claimant company must make the appropriate claim.
What Happens If the UK Company Changes Ownership?
Changes in ownership can be particularly important for companies with significant historical tax losses.
For example, an overseas investor may acquire an existing UK company that already has substantial carried-forward losses.
The new owner should not assume that those losses can automatically be used against future profits.
UK rules can restrict the use of certain carried-forward losses following a change in ownership, particularly where the relevant conditions relating to loss buying or changes in the company’s activities are met.
This is an important consideration during:
- Acquisitions
- Group reorganisations
- Mergers
- Share sales
- Internal restructurings
A tax review should therefore form part of the due diligence process when acquiring a UK company with significant losses.
Do Corporation Tax Losses Expire?
There is not a general fixed expiry period for all UK Corporation Tax losses.
Certain losses can generally be carried forward, subject to the applicable rules and restrictions.
However, losses can become restricted or unavailable in certain circumstances, including changes in ownership or changes affecting the company’s trade.
The company should therefore maintain accurate loss records rather than assuming that a historical loss will always remain fully available.
Common Mistakes With UK Tax Losses
1. Treating accounting losses as tax losses
The accounting loss shown in the financial statements is not necessarily the same as the Corporation Tax loss.
2. Not separating different types of losses
Trading, capital and property losses are subject to different rules.
3. Forgetting about carry-back relief
A company may focus only on carrying losses forward when a qualifying trading loss could potentially be carried back.
4. Assuming all losses can be used immediately
Carried-forward loss restrictions can limit the amount of profit that can be relieved in a particular accounting period.
5. Ignoring group relief
A loss-making UK subsidiary may have another UK group company paying Corporation Tax.
The group should consider whether eligible losses can be surrendered.
6. Assuming the foreign parent can use UK losses
UK tax losses generally cannot simply be transferred to an overseas parent to reduce tax outside the UK.
7. Failing to track losses
Poor records can make it difficult to establish how much loss remains available and how it has previously been used.
Practical Example: Foreign-Owned UK Subsidiary
A foreign technology group establishes a UK subsidiary.
During its first two years, the UK company invests heavily in:
- Employees
- Technology
- Marketing
- Product development
The subsidiary generates:
Year 1: £600,000 trading loss
Year 2: £300,000 trading loss
Year 3: £500,000 taxable profit
The UK company should review whether the losses can be carried forward and used against the Year 3 profit.
If the group also has another UK company generating taxable profits, it should consider whether any eligible losses can be surrendered through group relief.
The analysis should take into account the type and age of the losses and the applicable restrictions.
Year-End Corporation Tax Loss Checklist
Foreign-owned UK companies should review the following before filing their Corporation Tax return:
- Accounting loss has been reconciled to the tax calculation
- Trading losses have been identified
- Capital losses have been identified separately
- Property losses have been considered where relevant
- Previous losses carried forward have been reconciled
- Carry-back opportunities have been considered
- Carried-forward loss restrictions have been reviewed
- UK group relief opportunities have been considered
- Any change in ownership has been reviewed
- Loss schedules are retained
- Corporation Tax return reflects the correct loss position
Frequently Asked Questions
Can a UK subsidiary carry forward Corporation Tax losses?
Yes. Certain unused losses can generally be carried forward to future accounting periods, subject to the relevant rules and restrictions.
Can a UK subsidiary carry back a trading loss?
Potentially. Qualifying trading losses can generally be carried back against profits of the previous 12 months, subject to the applicable conditions.
Can a UK subsidiary transfer its losses to another UK group company?
Potentially. Qualifying companies in the same group may be able to use group relief, including certain carried-forward losses arising on or after 1 April 2017.
Can a foreign parent use losses from its UK subsidiary?
Not simply because it owns the company. UK group relief has specific conditions and generally operates within the UK Corporation Tax system.
Do all Corporation Tax losses have the same rules?
No. Trading losses, capital losses, property business losses and other categories can be subject to different rules.
Can carried-forward losses eliminate all future taxable profits?
Not necessarily. Restrictions apply to the amount of carried-forward losses that can generally be used against profits in an accounting period.
What happens to losses when a UK company is acquired?
The use of existing losses can be restricted following a change in ownership, depending on the circumstances. This should be reviewed as part of acquisition and tax due diligence.
Conclusion
Corporation Tax losses can be particularly important for foreign-owned UK companies, especially during the early stages of establishing or expanding a UK business.
Depending on the circumstances, a UK subsidiary may be able to:
- Carry losses forward
- Carry certain trading losses back
- Use losses against future profits
- Surrender eligible losses through UK group relief
However, the rules depend on the type and date of the loss, the company’s activities, its ownership and its wider group structure.
For foreign-owned businesses, maintaining accurate loss schedules and reviewing the available reliefs each year can help ensure that valuable UK tax losses are not overlooked.
How FKGB Accounting Can Help
FKGB Accounting works with foreign-owned UK companies and international groups on Corporation Tax compliance, year-end accounts, tax loss calculations, group relief and wider UK tax reporting.
We can help UK subsidiaries review their tax loss position and identify how available losses may be used or carried forward within the UK tax rules.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
