Forward trading losses and tax
Discussion
First off I've sent a message to our account and im waiting on a reply but in the mean time.
Ltd Company, we've made a profit for the year 23/2024 of 200K, this is a capital gain through asset disposal, we've got carry forward trading losses for previous years of 400K, can any of this be used to reduce the tax liability for that year?
Ltd Company, we've made a profit for the year 23/2024 of 200K, this is a capital gain through asset disposal, we've got carry forward trading losses for previous years of 400K, can any of this be used to reduce the tax liability for that year?
Accountant has said no issue for offsetting the same year's losses against capital gains but we can't use the trade losses carried forward to further reduce our CT.
The accountant is new to us, they were recommended after our old one let us down hence the double checking the information.
We have plant and machinery written down to zero value in our accounts through depreciation, these have subsequently been sold for £260,000 and with the current trading losses gives us a gain of around £200,000 for the year 23/24.
There's £400K of trading losses carried forward but I can't quite understand the reason they've given as to why we can't use those losses against the gain.
Tried HMRC but they have to come back to me as they didn't know when asked.
The accountant is new to us, they were recommended after our old one let us down hence the double checking the information.
We have plant and machinery written down to zero value in our accounts through depreciation, these have subsequently been sold for £260,000 and with the current trading losses gives us a gain of around £200,000 for the year 23/24.
There's £400K of trading losses carried forward but I can't quite understand the reason they've given as to why we can't use those losses against the gain.
Tried HMRC but they have to come back to me as they didn't know when asked.
To be honest it's roughly 25 years since I did my accountancy exams and things may have changed since then. However the guidance below seems to agree with what I thought.
https://www.gov.uk/guidance/carry-forward-corporat...
Carry forward a trading loss
Your company can carry trading losses forward to deduct from profits of future accounting periods as long as the trade continues.
If your company is using a carried forward trading loss in an accounting period that ends before 1 April 2017, you can only use the relief against profits of the same trade.
Where your company is using a carried forward trading loss in an accounting period that starts on or after 1 April 2017, the situation depends on when your company made the loss in question. If your company made the loss:
before 1 April 2017, it can only be used against profits of the same trade
on or after 1 April 2017, it can normally be used against your company’s total profits
I believe MaxFromage and EricMc are both practising accountants so hopefully they will pop in at some point
https://www.gov.uk/guidance/carry-forward-corporat...
Carry forward a trading loss
Your company can carry trading losses forward to deduct from profits of future accounting periods as long as the trade continues.
If your company is using a carried forward trading loss in an accounting period that ends before 1 April 2017, you can only use the relief against profits of the same trade.
Where your company is using a carried forward trading loss in an accounting period that starts on or after 1 April 2017, the situation depends on when your company made the loss in question. If your company made the loss:
before 1 April 2017, it can only be used against profits of the same trade
on or after 1 April 2017, it can normally be used against your company’s total profits
I believe MaxFromage and EricMc are both practising accountants so hopefully they will pop in at some point
You can utilise the brought forward loss against the current year capital gain. This has been the case since 2017 as noted above.
What was the original cost of the P&M you sold for £260K?
Also was this one item or made up of a number of items? The chattel rules may apply:
https://www.gov.uk/hmrc-internal-manuals/capital-g...
You may also need to consider indexation.
What was the original cost of the P&M you sold for £260K?
Also was this one item or made up of a number of items? The chattel rules may apply:
https://www.gov.uk/hmrc-internal-manuals/capital-g...
You may also need to consider indexation.
Thanks, so the losses and gain for the year 23/24 are fine and not questioned.
The P&M, these were sold in 2 lots within the year.
One lot for £13K was made up of roughly 30 machines, these would have been purchased for around £15-20K each, dating from around 1975 to 1990. These were broken up in that half the machine was sold and the other half scrapped. They have a zero value on our accounts due to depreciation.
The second lot is for 6 machines, sold at £250,000, purchase price on these would be 3 at around £100K Ea secondhand and around 30-40 years old and 3 at around £225-275K Ea, bought new with capital allowances against them, 20-30 years old. Again showing zero value in the accounts due to depreciation.
How would indexation apply against machines that we have written off in the accounts, say we bought a machine for £15K in 1975 and the indexation shows as 2.01 but we have written off the machines original value already to zero what does the indexation apply to?
The P&M, these were sold in 2 lots within the year.
One lot for £13K was made up of roughly 30 machines, these would have been purchased for around £15-20K each, dating from around 1975 to 1990. These were broken up in that half the machine was sold and the other half scrapped. They have a zero value on our accounts due to depreciation.
The second lot is for 6 machines, sold at £250,000, purchase price on these would be 3 at around £100K Ea secondhand and around 30-40 years old and 3 at around £225-275K Ea, bought new with capital allowances against them, 20-30 years old. Again showing zero value in the accounts due to depreciation.
How would indexation apply against machines that we have written off in the accounts, say we bought a machine for £15K in 1975 and the indexation shows as 2.01 but we have written off the machines original value already to zero what does the indexation apply to?
That's correct, however see below.
You can ignore chattels and indexation then, as the original costs are more than the proceeds.
You will have disposal proceeds in the capital allowances section, essentially writing back the capital allowances you claimed in the first place. The actual adjustment to your trading profit will depend on the current tax written down values of your capital allowance pool. However this is all classed as trading and so, depending on my previous sentence, you may have a 'trading profit' of £200K. There are no capital gains as selling price is less than cost.
The trading profit for this year will be reduced to zero by the trading losses brought forward.
You can ignore chattels and indexation then, as the original costs are more than the proceeds.
You will have disposal proceeds in the capital allowances section, essentially writing back the capital allowances you claimed in the first place. The actual adjustment to your trading profit will depend on the current tax written down values of your capital allowance pool. However this is all classed as trading and so, depending on my previous sentence, you may have a 'trading profit' of £200K. There are no capital gains as selling price is less than cost.
The trading profit for this year will be reduced to zero by the trading losses brought forward.
Edited by MaxFromage on Monday 28th April 22:44
Our accountant is adamant that it's a capital gain and as such can't have carried forward trading losses offset against it.
Their reasoning is that the machines have a zero value within the accounts and as such the sale price is 100% profit, no issue there. That as we are not in the business of trading machines but of actually using them they are capital and as such the profit is a capital gain.
Their reasoning is that the machines have a zero value within the accounts and as such the sale price is 100% profit, no issue there. That as we are not in the business of trading machines but of actually using them they are capital and as such the profit is a capital gain.
Did the business claim Capital Allowances on these assets?
If it did, on disposal, the proceeds on disposal are dealth with through the Capital Allowances system, not separately as part of a Capital Gains computation.
Basically, HMRC claws back some of the Capital Allowances claimed by the business over the years the asset was in use by the business.
If it did, on disposal, the proceeds on disposal are dealth with through the Capital Allowances system, not separately as part of a Capital Gains computation.
Basically, HMRC claws back some of the Capital Allowances claimed by the business over the years the asset was in use by the business.
That's my take on it too.
If it is an item of equipment that was used by the business in furtherance of its trading activity and capital allowances were claimed over the period of ownership, then the disposal proceeds are incorporated in the balancing charge/balancing allowance calculations as part of the business' normal year end capital allowance calculations.
It is not considered a disposal for Capital Gains tax purposes.
If it is an item of equipment that was used by the business in furtherance of its trading activity and capital allowances were claimed over the period of ownership, then the disposal proceeds are incorporated in the balancing charge/balancing allowance calculations as part of the business' normal year end capital allowance calculations.
It is not considered a disposal for Capital Gains tax purposes.
MyM2006 said:
Our accountant is adamant that it's a capital gain and as such can't have carried forward trading losses offset against it.
Their reasoning is that the machines have a zero value within the accounts and as such the sale price is 100% profit, no issue there. That as we are not in the business of trading machines but of actually using them they are capital and as such the profit is a capital gain.
I'm afraid you need to change accountants, that really is an incredible lack of understanding. Both with relation to trading activity and what is considered a capital gain.Their reasoning is that the machines have a zero value within the accounts and as such the sale price is 100% profit, no issue there. That as we are not in the business of trading machines but of actually using them they are capital and as such the profit is a capital gain.
Sole traders and partnerships too will not be charged, in most circumstances, on the disposal of business assets on which Capital Allowances were claimed as part of the normal buisness tax computations.
I'm sure there are exceptions (as there always are in British tax) but simple items such as office equipment, plant and machinery and even motor vehicles will not be subject to CGT.
I'm sure there are exceptions (as there always are in British tax) but simple items such as office equipment, plant and machinery and even motor vehicles will not be subject to CGT.
Countdown said:
My understanding was that for a Ltd Company
Capital gains are liable to CT
Trading profits/losses are liable to CT
The two can be combined/offset
Essentially yes, but as Eric suggested there are quirks and situations that don't conform to the normal rules.Capital gains are liable to CT
Trading profits/losses are liable to CT
The two can be combined/offset
Either way, the OP's situation is such a simple, everyday occurrence, that I can't believe they've received such poor advice. In this case to the tune of potentially £50K in overpaid tax.
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