Business Taxes

Chapter 5Relief for Losses

AIM

The aim of this chapter is to teach students about the reliefs available when a company incurs a loss or excess charges.

LEARNING OUTCOMES

Once you have studied this chapter, you should be able to:

5.1 Interpret the rules for trading loss relief and explain how they apply to a set of facts 114
5.2 Conclude on the use of trade charges to create or augment a trading loss and the displacement of trading loss carried forward by non-trade charges 130
5.3 Explain the restriction to trading loss relief that occurs on a change in ownership and in the nature or conduct of a trade 134
5.4 Compare the loss relief available to an Irish company for its Irish trade to that available for foreign trades 138
5.5 Conclude on the relief available for rental losses 139
5.6 Calculate the taxable profits for Irish and foreign properties after claiming loss relief 144
5.7 Assess if there are special loss relief rules relating to other sources of income and if relevant, apply these rules to calculate the applicable relief 145
5.8 Judge what loss reliefs are available and what restrictions apply. Apply all loss reliefs and restrictions in the correct order and identify any relief to be carried forward 146

MAIN LEGISLATIVE PROVISIONS

Part 4, Chapter 4 and 5 TCA 1997

Part 8, Chapter 2 TCA 1997

Part 12, Chapter 3 TCA 1997

FURTHER READING

Corporation Tax 2010, ITI

Chapter 4 Losses

The Taxation of Capital Gains, Finance Act 2016, Irish Tax Institute

Chapter 10 Company Chargeable Gains

Revenue Tax Briefing

Tax Briefing 42

RELEVANT PAST EXAM QUESTIONS

2015, Summer, Question 2(a)

2015, Autumn, Question 2(a)

2016, Summer, Question 2

2016, Autumn, Question 3

2017, Summer, Question 5

2017, Autumn, Question 2(a)

2018, Summer, Question 3

5.1.Interpret the rules for trading loss relief and explain how they apply to a set of facts

5.1.1.Basic relief for trading losses and excepted trading losses (Section 396(2), Section 396(1), Section 396A & Section 396B TCA 1997)

Relief is available for corporate trading losses under the following sections:

Section 396(2) TCA 1997: Set off excepted trading losses against total profits

Section 396(1) TCA 1997: Carry forward unutilised trading losses against future trading income from the same trade

Section 396A TCA 1997: Relief for relevant trading losses

Section 396B TCA 1997: Relief for certain trading losses on a value basis

Task 5.1

Read Section 396, 396A and 396B TCA 1997.

Basics

The same rules which apply when computing trading profits under Case I also apply where a trading loss arises (Section 396(5) TCA 1997). Remember – unlike for income tax purposes, a tax adjusted Case I income or loss for corporation tax purposes is after deduction of capital allowances.

A company which incurs trading losses can use these losses with much more flexibility than an individual can.

Excepted trading losses: Case I and Case II (Section 396 TCA 1997)

Chapter 1 dealt with the taxation of excepted trades. These are trades (other than foreign trades which are taxed under Case III) that are taxed at the 25% rate of corporation tax rather than the standard 12.5% rate.

Section 21A TCA 1997 provides that an excepted trade is one where the source of income is from one of the following:

(a) dealing in or developing land, but not any parts of such trades which consist of construction operations or that refer to “qualifying land”;

(b) working minerals;

(c) petroleum activities whether exploration, extraction activities or acquisition, enjoyment or exploration of petroleum rights.

A company which incurs a Case I/II loss in an excepted trade may obtain relief for that loss in the following ways:

a) by set off against total profits of the company in the same accounting period in which the loss arises (Section 396(2) TCA 1997).

b) by set off against total profits of the immediately preceding accounting period of the same length, provided the company was carrying on the same excepted trade in the previous period (Section 396(2) TCA 1997).

c) by carrying forward against future income of the same excepted trade (Section 396(1) TCA 1997).

Set off against total profits (Section 396(2) TCA 1997)

An excepted trading loss may be offset against total profits of the company in the same period in which the loss arises and, to the extent required, may be carried back against the total profits of the immediately preceding period of the company if it was then carrying on that same excepted trade (Section 396(2) TCA 1997). Please refer to 1.2.1 and Chapter 7 to understand what is meant by total profits.

Relief under Section 396(2) TCA 1997 is granted on the making of a claim by the company which incurs the loss within 2 years of the end of the accounting period in which the loss arises (Section 396(9) TCA 1997. There is no obligation on a company to make such a claim and if not made, the losses are carried forward for offset against future income from the same trade under Section 396(1) TCA 1997.

The profits of an accounting period against which a loss is to be offset must first be reduced by losses carried forward from earlier periods. Therefore, relief for losses forward from earlier periods must be taken in priority to relief for losses carried back from later periods (Section 396(2) TCA 1997).

It is not possible to reduce the profits of an earlier period unless the losses are first used to reduce the profits of the current accounting period (Section 396(2) TCA 1997).

The length of the preceding accounting period against which the trading loss may be offset must be equivalent in length to the current accounting period in which the loss arises. Therefore if the current period is for 6 months, then the loss arising can only be carried back against total profits before charges in the previous 6 month period (Section 396(3) TCA 1997).

Where the immediately preceding accounting period is of longer duration e.g. 12 months, the profits of that period must be time apportioned. Equally, if the preceding accounting period is of shorter duration e.g. 3 months then one may look also to the pre-preceding period and calculate any profits arising in 3 months (6 months less the 3 already used in the preceeding period) of that period on a time apportionment basis (Section 396(3) TCA 1997).

Step plan for use of loss relief in an excepted trade

1. Set-up a heading for each year (noting if any period is less than twelve months and splitting any periods for longer than twelve months)

2. Insert the relevant income from each source under each year (ignoring the losses at this stage)

3. For each loss open a loss memo on a separate page, identify the relevant legislation and how the loss can be utilised, noting any applicable restrictions for short periods.

4. Claim the loss relief in the correct order, this is generally as follows:

A. Claim the loss against total profits in the current period; i.e. Section 396(2) TCA 1997

B. Claim the loss against total profits of the prior period; i.e. Section 396(2) TCA 1997

C. Carry any unused loss forward; i.e. Section 396(1) TCA 1997

Ensure you quote the relevant legislative section for each claim

5. Calculate any tax payable after utilising all losses available

6. Note the losses carried forward

Example 5.1

Section 396(2) TCA 1997

Loss Mania Ltd had the following results

9 months to 30 Sept 2018 Year ended 31 Dec 2017
Excepted trading profit (Loss) (12,000) 6,400
Chargeable gain (as adjusted) 1,600
Gross deposit interest received 2,000 1,200
The company wishes to claim immediate relief.
Accounting period 9 months 30.09.18 12 months 31.12.17
Case I Nil 6,400
Case III 2,000 1,200
Total income 2,000 7,600
Chargeable gain - 1,600
Total Profits 2,000 9,200
Loss relief under Section 396 (2) (2,000) (note 1) (6,900)
Taxable Nil 2,300

Because relief is available for a ‘corresponding’ accounting period, we must calculate the profits arising in an equivalent 9 month period.

Note 1:

Profits arising in the period 1.4.17 – 31.12.17 (9 months)

9/12 × €9,200 = 6,900
Loss memo
Case I loss (p/e 30 Sept 18) 12,000
Utilised:
Acc. Period 30.09.18 2,000
Acc. Period 31.12.17 6,900
(8,900)
Balance available to carry forward under Section 396 (1) 3,100

Task 5.2

L Ltd had the following results:

Year ended 31 Dec 2016 9 months to 30 Sept 2017 Year ended 30 Sept 2018
Excepted trade 4,000 3,000 (10,000)
Deposit Interest received gross 400 600 700
Rental Income Nil 2,400 2,000

The company wishes to claim maximum relief against the profits of the accounting periods to 30 September 2018. Calculate all available loss relief.

Relevant trading losses (Section 396A and Section 396B TCA 1997)

Relevant trading losses are defined in Section 396A TCA 1997 as a loss incurred in a trade carried on by the company other than an excepted trade or certain leasing trades.

As losses arising in excepted trades are excluded from the definition above, this means that a “relevant trading loss” is a trading loss in a trade the profits of which would be charged to corporation tax at the standard rate of corporation tax (where there are profits).

Relevant trading losses cannot be used to offset total profits of a company under Section 396(2) TCA 1997. This is because Section 396A(2) TCA 1997 provides that losses that can be relieved in the manner outlined in Section 396(2) TCA 1997 are reduced by relevant trading losses.

Section 396A(3) TCA 1997 provides that a relevant trading loss for an accounting period can be set off against other relevant trading income in the same period and of the preceding period of similar length (see above). Relevant trading losses can also be used to shelter foreign dividends which the company elects to tax at the standard rate of corporation tax under Section 21B TCA 1997. The company must make a claim for relief under Section 396A(3) TCA 1997 within 2 years of the end of accounting period in which the relevant trading loss arises (Section 396A(5) TCA 1997).

If the relevant trading loss cannot be fully absorbed by using Section 396A(3) TCA 1997 then Section 396B TCA 1997 allows the company to make a claim to set off the tax value of the relevant trading loss (i.e. the amount of the loss multiplied by the standard rate of corporation tax) against corporation tax arising on other income and profits of the company in the accounting period in which the loss arises and the immediately preceding accounting period (i.e. this section ensures that relief is given on a value basis).

The reason for the value basis is that a loss in a relevant trade of €10,000 is worth €1,250 at the standard rate of tax (€10,000 × 12.5%), whereas the cost of sheltering rental income of €10,000 is €2,500 (€10,000 × 25%) and therefore the value basis gives relief for losses at their tax “worth”. It would take relevant trade losses of €20,000 (€2,500/12.5%) to cancel the charge to corporation tax on the rental income.

A claim for relief under Section 396B TCA 1997 can only be made to the extent that the total relevant trading loss arising in the period exceeds the amount of the loss that can be utilised by the company making a claim under Section 396A TCA 1997 regardless of whether the company actually makes such a claim. This means that a company is not obliged to make a claim under Section 396A TCA 1997 but if it wishes to make a claim under Section 396B TCA 1997, the amount of the loss available for relief on a value basis is calculated as if a claim under Section 396A TCA 1997 had already been made.

As for loss relief claims under Section 396(2) and Section 396A(3) TCA 1997, a claim for relief under Section 396B TCA 1997 must be made within 2 years from the end of the accounting period in which the loss is incurred (Section 396B(6) TCA 1997).

The order in which reliefs for relevant trading losses are to be claimed is:

1. offset against other relevant trading income or foreign dividends which are taxed at the standard rate of corporation tax of the accounting period in which the loss is incurred

2. offset against relevant trading income or foreign dividends which are taxed at the standard rate of corporation tax of the immediately preceding period of the same length as the period in which the loss is incurred

3. offset the tax value of the relevant trading loss against corporation tax arising on other income and profits arising in the same accounting period as the loss

4. offset the tax value of the relevant trading loss against corporation tax arising on other income and profits arising in the immediately preceding period of the same length as the period in which the loss is incurred.

Any relevant trading loss not fully utilised by claims under Section 396A and Section 396B TCA 1997 may be carried forward for offset against future income from the same trade under Section 396(1) TCA 1997.

Example 5.2

A Ltd’s results for the last 3 accounting periods are as follows:

12 months 6 months 12 months
31/12/16 30/6/2017 30/6/2018
Case I (non-excepted trade) 250,000 100,000 (500,000)
Case V 100,000 20,000 25,000

Solution

Note - numbers indicate order of claims

Case I 250,000 100,000 0
S.396A (125,000) (2) (100,000) (1) 0
125,000 0 0
Case V 100,000 20,000 25,000
Income 225,000 20,000 25,000
Passive Inc - 25% 25,000 5,000 6,250
Trade Inc - 12.5% 15,625
Section 396B (12,500) (5) (5,000) (4) (6,250) (3)
CT Liability 28,125 0 0
Loss memo
1. Case I loss (y/e 30 Jun 18) (500,000)
S. 396A Set-off against Case I (6 mths to 30 Jun 17) 100,000 (1)
S. 396A Set-off against Case I (6 mths to 31 Dec 16) €250,000 × 6/12 125,000 (2)
Balance (275,000)
S. 396B CT liability (y/e 30 Jun 18) €6,250 / 12.5% 50,000 (3)
S. 396B CT liability (p/e 30 Jun 17) €5,000 / 12.5% 40,000 (4)
S. 396B CT liability (y/e 31 Dec 16) €25,000 / 12.5% × 6/12 100,000 (5)
Balance (available for carry forward under Section 396(1)) (85,000)

Practical application of the reliefs:

1. A Ltd would have filed its CT1 returns for the year ended 31 December 2016 by 23 September 2017 and paid any tax owing in full.

2. It would have filed the return for the 6 months ended 30 June 2017 by 23 March 2018 and paid any tax owing in full.

3. It then files the CT1 return for the loss year, 30 June 2018, by 23 March 2019.

4. As noted above, under the legislation it must claim the Section 396A & Section 396B loss reliefs within two years of the end of the loss period, this would be 30 June 2020.

5. The company would generally make the claim by revising its previously filed return and resubmitting via ROS at any time during the 2 year period in which a claim can be made.

6. The company’s Inspector of Taxes then reviews the claim and if all is in order two refunds will issue to the company for 2016 and 2017.

7. If the company has fallen behind in submitting their tax returns the Collector General may not process the refunds until all returns have been filed and/or may set-off the refunds against other taxes due by the company (e.g. PAYE, VAT) – see Section 960H TCA 1997.

Example 5.3

Brookwood Limited’s results for the last two accounting periods are as follows:

Year ended 31/12/2017 Year ended 31/12/2018
Case I – Trade 1(not excepted trade) 50,000 (800,000)
Case I –Trade 2 (not excepted trade) 25,000 50,000
Case III 5,000 2,000
Case V 7,000 4,000

Note - numbers indicate order of claims

31/12/2018
Case I (Trade 1) Nil
Case I (Trade 2) 50,000
S.396A TCA 1997 (1) (50,000)
Case III 2,000
Case V 4,000
Total income 6,000
Corporation tax €6,000 × 25% 1,500
S.396B TCA 1997 (3) (1,500)
Tax payable
31/12/2017
Case I (Trade 1) 50,000
Case I (Trade 2) 25,000
S.396A TCA 1997 (2) (75,000)
Trade income
Case III 5,000
Case V 7,000
Total income 12,000
Corporation tax €12,000 × 25% 3,000
S.396B TCA 1997 (4) (3,000)
Tax payable
Loss Memo
Trading loss 31 December 2018 800,000
S.396A claim 31 December 2018 (1) (50,000)
S.396A claim 31 December 2017 (2) (75,000)
S.396B claim 31 December 2018, €1,500 / 12.50% (3) (12,000)
S.396B claim 31 December 2017 €3,000 / 12.50% (4) (24,000)
Loss available for carry forward against income from Trade 1 639,000

Task 5.3

Dunluce Ltd’s results for the last 3 accounting periods are as follows:

12 months 31/12/2016 6 months 30/6/2017 12 months 30/06/2018
Case I 125,000 75,000 (600,000)
Case V 50,000 40,000 24,000

The company wishes to claim maximum relief against the profits of the accounting periods to 30 June 2018. Calculate all available loss relief.

Carry forward (Section 396(1) TCA 1997)

A trading loss in an accounting period may be carried forward indefinitely for offset against the trading income from the same trade in succeeding accounting periods.

Losses carried forward must be set against the first available income from the same trade. No claim is necessary to carry the unutilised loss forward i.e. it is automatically brought forward if it is not used by way of offset against profits or corporation tax of the current or previous accounting periods under Section 396(2), Section 396A or Section 396B TCA 1997.

Losses carried forward under this section are for both unutilised excepted trade and relevant trade losses but can only be used to shelter income in future periods from the same trade that incurred the loss initially.

5.1.2.Pre-trading expenses (Section 82 TCA 1997)

Section 82 TCA 1997 allows certain pre-trading expenditure to be deductible in computing for tax purposes the trading income of the trade or profession once it commences.

Section 82 TCA 1997 provides that where a company incurs expenditure for the purpose of a trade or profession before the time that the trade or profession has been set up and commenced by that company, and such expenditure:

a) is incurred not more than three years before that time; and

b) is not allowable as a deduction for the purposes of computing the profits of the trade or profession but would have been so allowable if it had been incurred after that time;

then the expenditure shall be treated for that purpose as having been incurred at that time (i.e. on the date the trade commences).

The pre-trading expenditure which is allowed as a deduction cannot be used for the purpose of set off against income of the company other than that arising from the trade or profession in respect of which the expenditure was incurred. This means that any part of a loss arising as a result of pre-trading expenses in the first accounting period after a trade commences cannot be relieved under Sections 396(2), 396A or 396B TCA 1997.

Example 5.4

X DAC commenced trading on 1 February 2018. It incurred pre-trading expenditure as follows:

June 2014 Market research survey 8,000
February 2016 Annual salary of managing director 30,000
February 2017 Annual salary of managing director 30,000
August 2017 Donation to political party 5,000
January 2018 Advertising 7,000

The 2014 expenditure is not allowable as it was incurred more than three years before X Ltd commenced trading.

The managing director salaries paid out in 2016 and 2017 are allowable. Two years’ salary –2016 and 2017 – gives a deduction of €60,000.

The August 2017 expenditure is not allowable as it would not be allowable even if incurred after X DAC had commenced to trade.

The 2018 expenditure is allowable.

Accordingly X DAC will be treated as incurring deductible expenses of €67,000 on 1 February 2018. The €67,000 can only be set against future profits of the same trade. It cannot be set against other income of X DAC.

5.1.3.Terminal loss relief (Section 397 TCA 1997)

A company may claim terminal loss relief (“TLR”) in respect of trading losses incurred in the whole or part of the twelve month period up to the date of cessation of the trade provided such losses have not or cannot otherwise be utilised i.e. under Section 396(2), Section 396A(3), Section 396B TCA 1997, etc.

Relief for losses incurred in its last period of trading would otherwise be lost if the current and preceding periods income was insufficient to absorb the loss, as the loss could not be carried forward.

The company can claim to set that part of the loss, which falls in the final 12 months of trading against the income from the same trade in the preceding 36 months. In addition to trading losses, excess trade charges paid (i.e. charges wholly and exclusively for the purpose of the company’s trade) in the last year may be carried back against trading income (Section 397(3) TCA 1997).

Where the final 12 months are made up by both the last accounting period and part of the penultimate period then losses arising in part of the penultimate period will be included as the terminal loss (Section 397(2) TCA 1997).

It is not necessary that the results of the final 12 months as a whole should show a loss. A terminal loss may arise if there is a loss in any of the accounting periods, which fall either wholly or partly within the final 12 months up to date of cessation (Section 397(2) TCA 1997).

If the final accounting period is less than 12 months, then the following table sets out how the terminal loss is calculated taking account of the final and the penultimate accounting periods:

If the trade result in the final accounting period is a: And the trade result in the penultimate accounting period is a: Then the terminal loss is calculated based on both periods results:
Loss Loss Add both losses together to get the terminal loss
Loss Profit Take the final accounting period loss only to get the terminal loss
Profit Loss Take then penultimate accounting period loss only to get the terminal loss

TLR should be claimed against trading profits arising in later periods in priority to earlier periods (Section 397(1)(a) TCA 1997).

Where relief has been given for charges (see Chapter 5) in earlier years TLR is limited so as not to interfere with relief for trade charges. Relief for non-trade charges is lost as a TLR claim takes precedence over relief for non-trade charges (Section 397(3) TCA 1997). Remember – Section 243(2) TCA 1997 provides relief for non-trade charges after all other reliefs have been claimed except for group relief (which is covered in Part 3).

Where some of the 36 month period includes part of an accounting period, the trading income of that period eligible for relief is restricted proportionately on a time basis (Section 397(2) TCA 1997).

Example 5.5

Terrible Ltd ceased trading on 31.12.18 and had the following results up to that date:

12 months 12 months 12 months 12 months 6 months
30/06/2015 30/06/2016 30/06/2017 30/06/2018 31/12/2018
Trading profits (loss) 4,000 3,000 6,000 (4,000) (30,000)
Rental income 3,000 3,000 6,000 8,000 6,000
CT computation
12 months 30/06/2015 12 months 30/06/2016 12 months 30/06/2017 12 months 30/06/2018 6 months 31/12/2018
Case I 4,000 3,000 6,000 0 0
S.396A (4,000) (1)
S.397 (2,000) (6) (3,000) (5) (2,000) (4) _____ _____
2,000 0 0 0 0
Case V 3,000 3,000 6,000 8,000 6,000
Income 5,000 3,000 6,000 8,000 6,000
Passive Inc - 25% 750 750 1,500 2,000 1,500
Trade Inc - 12.5% 250
Section 396B _____ _____ _____ (1,000) (3) (1,500)(2)
CT Liability/Refund 1,000 750 1,500 1,000 0

Loss memo

1. Case I loss (y/e 30 Jun 18) (4,000)
S. 396A Set-off against prior year (Case I for y/e 30 Jun 17) 4,000 (1)
0
2. Case I loss (p/e 31 Dec 18) (30,000)
S. 396B CT liability (6 mths to 31 Dec 18) 1,500 / 12.5% 12,000 (2)
S. 396B CT liability (6 mths to 30 Jun 18)
(€2,000 × 6/12 mths / 12.5%) 8,000 (3)
Balance (10,000)
3. Terminal loss relief
Loss in last 12 months trading:
Case I loss (y/e 30 Jun 18) - loss fully utilised 0
Case I loss (p/e 31 Dec 18) 10,000
Available to be carried back 36 months prior to last 12 months 10,000
S. 397 Case I (y/e 30 Jun 17) (2,000) (4)
S. 397 Case I (y/e 30 Jun 16) (3,000) (5)
S. 397 Case I (y/e 30 Jun 15) - can only claim against 6 months - first 6 months outside of last 36 months period (2,000) (6)
Balance (loss unrelieved and lost) 3,000

Example 5.6

Shantalla Ltd ceased to trade on 31.12.18 incurring a loss of €50,000 in the final twelve months trading. The results up to that date were:

18 months 12 months 12 months 12 months
31/12/2015 31/12/2016 31/12/2017 31/12/2018
Case I 4,000 6,000 5,500 (50,000)
Case V 900 2,000 900 1,000

Calculate the terminal loss relief available to Shantalla Ltd and the CT liability for each of the periods.

12 months 6 months 12 months 12 months 12 months
30/06/2015 31/12/2015 31/12/2016 31/12/2017 31/12/2018
Case I 2,667 1,333 6,000 5,500 0
S. 396A (5,500)(1)
S. 397 (1,334)(6) (1,333)(5) (6,000)(4) _____ _____
1,333 0 0 0 0
Case V 600 300 2,000 900 1,000
Income 1,933 300 2,000 900 1000
Passive Inc - 25% 150 75 500 225 250
Trade Inc - 12.5% 167 _____ _____ _____ _____
Section 396B _____ _____ _____ (225)(3) (250)(2)
CT Liability 317 75 500 0 0

Loss memo

1. Case I loss (y/e 31 Dec 18) (50,000)
S. 396A Case I (y/e 31 Dec 17) 5,500 (1)
Balance (44,500)
S. 396B CT liability (y/e 31 Dec 18) €250 / 12.5% 2,000 (2)
S. 396B CT liability (y/e 31 Dec 17) €225 / 12.5% 1,800 (3)
Balance (40,700)
2. Terminal loss relief
Loss in last 12 months trading -
Case I loss unutilised y/e 31/12/18 (40,700)
Loss to be carried back 36 months prior to last 12 months – back to 1/1/15 (40,700)
S. 397 Case I (y/e 31 Dec 16) 6,000 (4)
S. 397 Case I (6 months 31 Dec 15) 1,333 (5)
S. 397 Case I (12 months 30 Jun 15 3 6/12) = 2,667 3 6/12 1,334 (6)
Balance unused / unrelieved 32,033

Task 5.4

T Ltd ceased to trade on 31.12.18 incurring a loss of €11,000 in the final twelve months trading. The results up to that date were:

12 months 31/12/2015 12 months 31/12/2016 12 months 31/12/2017 12 months 31/12/2018
Case I 4,000 4,500 2,500 (11,000)
Case V 900 1,000 1,100 800

Calculate the terminal loss relief available to T Ltd and the CT liability for each of the periods.

5.1.4.Disallowance of certain losses

Restriction on loss relief (Section 1085 TCA 1997)

Where a company submits its corporation tax returns late, claims for the utilisation of certain loss reliefs are restricted. This restriction is in addition to the corporation tax surcharge penalty under Section 1084 TCA 1997.

The reliefs subject to restriction include:

a) Set off relief available in respect of trading losses against trading profits of the current accounting period or immediately preceding accounting period of equal length – Section 396(2), Section 396A(3) as per Section 1085(2)(a) TCA 1997.

b) Relief for relevant trading losses on a value basis under Section 396B TCA 1997 as per Section 1085(2)(ba) TCA 1997

c) Set off of excess Case V capital allowances against total profits of current accounting period or immediately preceding accounting period of equal length (Section 308(4) TCA 1997), covered later in this chapter (Section 1085(2)(a) TCA 1997)

d) Set off of Case V Losses against the taxable Case V income of the immediately preceding accounting period (Section 399 TCA 1997), covered later in this chapter (Section 1085(2)(a) TCA 1997).

As you will learn in your Part 3 studies, group relief may also be restricted where a group member claiming or surrendering losses submits its corporation tax return late.

There is no restriction on relief for losses carried forward.

The losses that can be utilised are restricted as follows:

Return filed after return due date:1) Reliefs at a) – d) above: 2 months or less More than 2 months late
Relief claimed restricted by: 25% 50%
(s. 1085(4) TCA 1997) (s. 1085(2)(a) TCA 1997)
Maximum restriction €31,740 €158,715
(s. 1085(4) TCA 1997) (s. 1085(3) TCA 1997)

The loss relief claims are restricted to 75% or 50% of what they would otherwise have been had the returns been submitted on time. The maximum restriction referred to above is the maximum amount by which each claim for relief is to be reduced.

Step plan for calculating restriction under Section 1085 TCA 1997

1. Set-up a heading for each year (noting if any period is less than twelve months and splitting any periods for longer than twelve months)

2. Insert the relevant income from each source under each year (ignoring at this stage the losses)

3. For each loss open a loss memo on a separate page, identify the relevant legislation and how the loss can be utilised, noting any applicable restrictions for short periods.

4. Note the returns which have been filed late and the effect on the possible claims noted in 3 above.

5. Claim the loss relief in the correct order, this is generally as follows:

A. Claim the loss in the current period (Section 396A TCA 1997)

B. Claim the loss against the prior period (Section 396A TCA 1997) – taking into account the late filing restriction if applicable

C. Claim the loss on a value basis against corporation tax on other profits of the same period (Section 396B TCA 1997) – taking into account the late filing restriction if applicable

D. Claim the loss on a value basis back against corporation tax on other profits of the corresponding preceding period – taking into account the late filing restriction if applicable

E. Carry any unused loss forward (Section 396(1) TCA 1997), noting that the loss restricted is not lost and can also be carried forward

Ensure you quote the relevant legislative section for each claim

6. Calculate any tax payable after utilising all losses available

7. Calculate the corporation tax surcharge arising under Section 1084 TCA 1997 if applicable (see Chapter 14)

8. Note the losses to be carried forward to future periods

Example 5.7

Lazy Ltd had the following results:
y/e 31.12.17 Case I adjusted profit 60,000
y/e 31.12.18 Case I trading loss (70,000)
y/e 31.12.18 Case III 20,000
y/e 31.12.18 Case V 40,000

The company makes a timely claim under Section 396A(3) and Section 396B TCA 1997 to have the trading loss set against the profits and corporation tax on other income of AP ended 31.12.18 and 31.12.17.

However, Lazy Ltd’s tax return for the accounting period ended 31.12.18 was delivered to the Inspector late.

Scenario 1: Return submitted on 10 November 2019 (within 2 months)

AP ended 31/12/2017 AP ended 31/12/18
Case I 60,000 Nil
Loss Relief s. 396A(3) restricted €60,000 × 75% (45,000) 0
15,000 0
Case III 0 20,000
Case V 0 40,000
Taxable profits 15,000 60,000
Tax 25%/12.5% 1,875 15,000
s. 396B (€70,000 − €60,000 × 75% × 12.5%) 0 (938)
Tax payable 1,875 14,062

As Section 396A(3) TCA 1997 is claimed first, the €60,000 claim against 31.12.17 is set off and restricted first and then the balance which would have been available is restricted for the Section 396B TCA 1997 claim.

In this example it is €70,000 − €60,000 = €10,000 3 75% = €7,500, therefore €2,500 is restricted here.

The balance of the loss of €17,500 (€70,000 − (€7,500 + €45,000)) may be carried forward to subsequent accounting periods for set off against trading profits of the company arising from the same trade.

Scenario 2: Return submitted 20 December 2019 (over 2 months late)

AP ended 31/12/2017 AP ended 31/12/18
Case I 60,000 Nil
Loss Relief s.396A(3) restricted €60,000 × 50% (30,000) _____0
30,000 0
Case III 0 20,000
Case V 0 40,000
Taxable Profits 30,000 60,000
Tax 25%/12.5% 3,750 15,000
s. 396B (€70,000 − €60,000 × 50% 12.5%) 0 (625)
Tax payable 3,750 14,375

As Section 396A(3) TCA 1997 is claimed first, the €60,000 claim against 31.12.17 is set off and restricted first and then the balance which would have been available is restricted for the Section 396B TCA 1997 claim.

In this example it is €70,000 − €60,000 = €10,000 3 50% = €5,000, therefore €5,000 is restricted here.

The balance of the loss of €35,000 (€70,000 − (€5,000 + €30,000)) may be carried forward to subsequent accounting periods for set off against trading profits of the company arising from the same trade.

5.2.Conclude on the use of trade charges to create or augment a trading loss and the displacement of trading loss carried forward by non-trade charges

Where a company has paid charges on income in an accounting period which exceed the trading income against which they are deductible and the payments were made wholly and exclusively for the purpose of the company’s trade (i.e. trade charges) then the company may set the excess against other income on a value basis under Section 243B TCA 1997.

Any excess unutilised trade charges may then be carried forward as Section 396(1) TCA 1997 losses (Section 396(7) TCA 1997). Excess non-trade charges may not be carried forward.

Non-trade charges (e.g. interest on qualifying loans under Section 247(2) TCA 1997) will be lost if there are no profits left against which they can be relieved in the accounting period in which they are paid. The exception to this is non-trade charges paid by an investment company (covered in Part 3) that are treated as expenses of management under Section 83 TCA 1997. Therefore, relief for non-trade charges is, in general, a “use it or lose it relief”.

It is important to remember that unrelieved trade charges are used to either create or augment a loss to be carried forward against future trading income under Section 396(1) TCA 1997, but cannot be carried back against income of prior periods (i.e. they are not taken into account in determining relevant trading losses for the purposes of Section 396A TCA 1997 and are not relieved under Section 396(2) TCA 1997).

Example 5.8

Year ended 31st December 2017 2018
Sch D Case I 5,000 8,000
National loan interest 1,000 1,500
Trade charges paid 3,000 1,000
Non trade charges paid 7,000 2,500
Chargeable gain (as adjusted) 500
CT computation
AP ended 31 December 2017 2018
Sch D Case I 5,000 8,000
Trade charges (3,000) (1,000)
2,000 7,000
Sch D Case III 1,000 1,500
Total income 3,000 8,500
Chargeable gain 500 0
Total profits 3,500 8,500
Less: Non-trade charges (3,500) (2,500)
Taxable profits Nil 6,000

Note

(1) The unutilised non-trade charges from 2017 of €3,500 (€7,000 − €3,500) cannot be carried forward and are effectively lost. The non-trade charges are not set against the trade income on a value basis.

(2) For 2018, the non-trade charges are fully utilised. In order to maximise the benefit of those charges €1,500 will be set against the Case III interest income that would otherwise be subject to tax at 25% (see note to Section 5.7). The balance (€1,000) is set against the remaining 12.5% trading income after deducting trade charges.

Remember that the most common trade charge is patent royalties paid wholly for trade purposes. Interest on loans drawn down for any of the purposes set out in Section 247(2) TCA 1997 is the most common non-trade charge.

Example 5.9

Joanne Limited’s results for the year ended 31 December 2018 are as follows:

Year ended 31/12/2017
Case I 50,000
Case V 100,000
Trade charges (100,000)
Non-trade charges (30,000)

Corporation tax computation for year ended 31/12/2018

Case I 50,000
s243A (100,000)
Case V 100,000
Non-trade charges (s243) (30,000)
Taxable profits 70,000

Corporation tax liability

Case V: 70,000 × 25% 17,500
s243B: (6,250) [(€100,000 – €50,000) × 12.5%]
Corporation tax payable 11,250

Trade charges utilisation memo

Trade charges paid 100,000
Utilised s243A (50,000)
Utilised s243B (50,000)
Unutilised

Task 5.5

TC Ltd has the following results:

Year ended to 31st December 2017 2018
Case I tax adjusted profits 3,000 7,000
Deposit interest received gross 1,500 3,000
Trade charges paid 5,000 1,500
Protected interest paid 7,000 2,000
Chargeable gain (as adjusted) 1,500 1,000

Calculate the taxable profits of TC Ltd

Displacement of trading losses carried forward by non-trade charges claimed

Section 396B(5) TCA 1997 requires an amount of any unutilised trade loss that is to be carried forward to be reduced by the amount of trading losses which would have been utilised except that the company claimed relief for non-trade charges, expenses of management or other amounts capable of reducing profits of more than one description. Excess Case V capital allowances which may be offset against total profits in accordance with Section 308(4) TCA 1997 are not deemed to be displaced by this provision.

Therefore if the company made a Section 396B TCA 1997 claim in respect of an accounting period and also used non-trade charges in the same accounting period to reduce taxable profits, it would have to reduce the Case I loss available for carry forward by deeming the reduction in corporation tax by virtue of the claim under Section 396B TCA 1997 to be increased to the amount that would have been claimed if the non-trade charges had not been available. By deeming more of the losses to have been used, the losses available for carry forward are reduced.

Example 5.10

Trade loss available for carry forward after Section 396A and Section 396B TCA 1997 is €100,000.

Non-trade charges also used in the same accounting period as the period in which the Section 396B claim was made are €10,000 (against passive income).

The tax that these charges saved was €10,000 3 25% = €2,500. Therefore Section 396B(5)(c) TCA 1997 states that a notional trade loss of €2,500/12.5% = €20,000 is also utilised and trade losses carried forward are now only €80,000.

It is important to note that this calculation does not affect the CT computation, only the amount of losses carried forward.

Example 5.11

Charges Limited’s results for the year ended 31 December 2018 are as follows:

Case I (100,000)
Case V 10,000
Non-trade charges 5,000
(qualifying interest on loan borrowed to invest in subsidiary)

Corporation tax computation for the year ended 31 December 2018

Case I 0
Case V 10,000
Non-trade charges (5,000)
Profits 5,000
Corporation tax €5,000 × 25% 1,250
S.396B credit €10,000 × 12.5%* (1,250)
Tax payable 0
Loss table
Trading loss 31 December 2018 (100,000)
S.396B claim* (10,000)
90,000
S396B(5)(b) deemed loss usage claim (Note) (10,000)
Trade losses forward s396(1)* 80,000

Note: as the company utilised both non-trade charges and Section 396B TCA 1997 relief in the same period the trade losses carried forward must be reduced by the corporation tax saved in using the non-trade charges in preference to the trade losses.

The non-trade charges of €5,000 utilised saved tax at 25%, a saving of €1,250. The trade loss carried forward is deemed to be reduced by the extra S.396B that would have been utilised but for the non-trade charges, that is €10,000 (€10,000 × 12.5% = €1,250).

The additional restriction does not amend the actual computation for the period, only the amount of losses carried forward.

5.3.Explain the restriction to trading loss relief that occurs on a change in ownership and in the nature or conduct of a trade

Company reconstructions without change of ownership (Section 400 TCA 1997)

The transfer of a trade from one company to another constitutes the discontinuance of that trade.

When a trade is discontinued the tax implications are as follows:

balancing allowances/charges arise in respect of fixed assets which were used in the trade,

any trading losses are not available for carry forward.

However, under the provisions of Section 400(5)(a) TCA 1997, where at the date of transfer or at any time within two years after that date an interest in the trade of not less than 75% belongs to the same persons which it belonged to at some time within a year before that date, the transferor’s trade and the successor’s trade are deemed not to have ceased or commenced for the purposes of balancing allowances/charges and trading losses and the successor is deemed to step into the shoes of the transferor.

It should be noted that the trade must be carried on by a company within the charge to Irish corporation tax throughout the period beginning one year before and ending two years after the transfer of the trade.

An interest in a trade is a beneficial interest in that trade and the 75% test can be satisfied through direct or indirect ownership. The trade of a company is deemed for the purposes of this section to belong to the persons owning the ordinary share capital of the company.

As the successor steps into the shoes of the transferor by virtue of this section, the transferor is not entitled to make a claim for terminal loss relief under Section 397 TCA 1997. However, if the successor ceases to carry on the trade within four years of the date of transfer, part of any terminal loss relief claim that the successor may be entitled to claim may be allocated to the transferor (Section 400(9) TCA 1997).

Section 400 TCA 1997 applies automatically to any transfer of a trade where the ownership condition and the condition that the trade always be within the charge to Irish tax are satisfied.

As Case I losses carried forward may only be offset against profits from the same trade in which the loss arose in the first instance, the successor company will need to identify income and expenditure connected with the transferred trade for all periods following the transfer until the losses have been fully utilised.

Example 5.12

In 2003 Com Reg published a review on RTÉ’s wholesale broadcasting transmission.

The report dealt with how RTÉ operated its transmission network and how it gave its competitors (like Today FM) access to its network. Following this report, and to facilitate the transmission network being operated in a transparent way, RTÉ chose to transfer all associated operations into a new wholly owned company.

Bord Gais also undertook restructuring of its network for similar reasons.

This is an example of the type of commercial reason that gives rise to trades transferring between companies without changing the ultimate owner, and to which Section 400 TCA 1997 could apply.

Disallowance of carry forward of trading losses (Section 401 TCA 1997)

Section 401 TCA 1997 disallows the carry forward of trading losses under Section 396(1) TCA 1997 if

(a) within a period of three years, there is both a change in the ownership of a company and a major change in the nature or conduct of the trade carried on by the company (regardless of which event occurs first; i.e. change of ownership or major change in the trade), or

(b) at any time after the scale of activities of the trade carried on by a company has become small or negligible and before there is any considerable revival of the trade a change in the ownership of the company occurs.

Section 401(2) TCA 1997 provides that in circumstances where the section applies, relief will not be given for any Case I trading losses which arose prior to the change in ownership of the company against any income or profits arising in accounting periods after the change of ownership.

Schedule 9 TCA 1997 details the rules for determining whether or not there has been a change in the ownership of a company. The rules which are detailed are not reproduced here and should be reviewed carefully.

Task 5.6

Read Schedule 9 TCA 1997.

For the purposes of the section, “major change in the nature or conduct of a trade” includes:

a major change in the type of property dealt in, or services or facilities provided in the trade, or

a major change in customers, outlets or markets of the trade.

A major change in the nature or conduct of the trade will be regarded as occurring even if the change is as a result of a gradual process which began outside the three year period referred to in (a) above.

The meaning of the term “a major change in the nature or conduct of a trade” has been the subject of case law.

Case law

Willis v. Peeters Picture Frames Ltd. (1983 STC 453)

This case concerned a company engaged in a trade of manufacturing and selling picture frames. The company was taken over by another group and this resulted in a change in the business operating model of the company. It was decided that, instead of making sales directly to customers, these sales would be routed through distribution companies in the existing group of the acquiring company.

Although this resulted in a substantial change in terms of the number of sales transactions, the volume of sales did not change and therefore, it was not seen as a major change in the conduct of the trade of the company.

As a result, the loss carried forward was allowed to be offset against future profits of the company.

Case law

Pobjoy Mint Ltd. v Lane (1984 STC 327)

This case concerned a company which was engaged in the business of minting coins and other objects from precious metals.

The company changed its purchasing policy such that instead of obtaining gold from another company, the gold would be procured from a wholesaler. This resulted in a significant increase in the value of the company’s trading stock.

The Commissioners made an adjustment on the basis that there had been a major change in the conduct of the company’s trade. This decision was upheld on the basis that the impact on the company was of such significance that it did constitute a major change in the conduct of the company’s trade.

Case Law

Rolls Royce Motors Ltd v Bamford CH D 1976, 51 TC 319; [1976] STC 162.

Originally established for the production of motor vehicles, Rolls-Royce diversified its operations over time which included, amongst others, the manufacture of aeroplane engines. The company ran its operations as a single trade but split into six divisions. The company ran into serious financial difficulties and a receiver was appointed. The receiver transferred four of the divisions to a state-owned company, including the aeroplane engines division which had accumulated substantial trading losses. The remaining two divisions were transferred to a new subsidiary company of Rolls-Royce which claimed relief under the provisions of ICTA 1988, s343(3) for the accumulated unrelieved losses of the aeroplane engine division (equivalent to Section 400 TCA 1997).

The Special Commissioners rejected the claim on the grounds that the relative scale of the two newly-formed companies indicated that the trade of the state-owned company was different from that of the new Rolls-Royce subsidiary. The decision was upheld by the Chancery Division who observed that the aeroplane engine division was now carried on by the state-owned company and all other things being equal, it would have been that company only which would be allowed to relieve the losses in this manner.

5.4.Compare the loss relief available to an Irish company for its Irish trade to that available for foreign trades

We have seen in a previous section that Irish companies incurring a loss in their Irish trades can, under Section 396A and Section 396B TCA 1997, use the loss to reduce taxable profits and corporation tax in the current period and the corresponding previous period.

They can then carry any unutilised losses forward indefinitely against future income from the same trade.

A foreign trade is one which is carried on wholly outside the State by a company resident in the State e.g. a company which is resident in Ireland by virtue of its place of incorporation may have an independent branch exercising a trade wholly in Germany – this would constitute a foreign trade which means that branch profits would be taxable under Case III. It is important to note that if there is any management or activity in connection with the trade carried on in Ireland then the trade will not be treated as a foreign trade and the company will instead be treated as having a foreign branch taxable under Case I. Trades falling within the charge to tax under Case III are very rare. Most trades carried on abroad by Irish resident companies are taxable under Case I, typically as a branch of an overall trade.

Reliefs under Section 396(2), Section 396A or Section 396B TCA 1997 do not apply to foreign trades.

A loss on a foreign trade, which is taxable under Case III rather than being an extension of the Irish trade taxable under Case I, can only be carried forward against future profits of the same foreign trade.

If the foreign trade is merely an extension of the trade carried on in Ireland, then any losses relating to that foreign trade/branch can be fully offset against profits from the Irish trade and the provisions in Sections 396, 396A and 396B will apply.

5.5.Conclude on the relief available for rental losses

5.5.1.Case V losses (Section 399(2) TCA 1997)

To the extent that aggregate deficiencies exceed surpluses as calculated under Section 97 TCA 1997, the company may carry back the amount of the excess against taxable Case V income of the preceding accounting period of the same length. The carry back cannot displace Case V losses carried forward from earlier years (Section 399(2)(a) TCA 1997).

A claim for such relief must be made within 2 years after the end of the accounting period in which the deficiency arises (Section 399(4) TCA 1997).

Unrelieved Case V losses can be carried forward against future Case V income (Section 399(2)(a) TCA 1997).

Case V rental losses are computed by taking account of the following deductions, which are allowable under Section 97(2) TCA 1997:

1) Rent payable i.e. ground rents.

2) Interest on funds borrowed to purchase, repair or improve the let premises. In the case of rented residential property, you must be registered with the Residential Tenancies Board before a deduction for interest is allowed (Section 97(2I)). Section 97(2J) restricts the deduction of interest on loans for residential rental property, see chapter 3.4.2. This restriction is also covered in more detail in the Income Tax manual. Interest on loans for commercial properties is unrestricted.

3) Rates payable.

4) Cost of goods provided or services rendered for the letting i.e. advertising.

5) Cost of general maintenance, repairs, insurance and management of property.

In general pre-letting expenses are non-deductible (except advertising and legal costs re leases etc). However, Section 97A TCA 1997 allows up to €5,000 of repairs and similar costs per property when it is let after having been vacant for at least 12 months prior to the new letting. The allowance is clawed back if the property is not available for letting for at least 4 years after the qualifying letting.

Properties are usually bought without sitting tenants. Any interest on loans to buy such property will be a pre-letting expense until tenants are in situ.

5.5.2.Case V capital allowances (Section 308(4) TCA 1997)

Capital allowances available to lessors i.e. on foot of an industrial building allowance claim are to be treated primarily as deductions from the relevant Case V rental income (Section 308(1) TCA 1997).

Any excess of such Case V capital allowances are usable as follows:

1) Set off against total profits (including chargeable gains) of the same accounting period with any unrelieved amount being offset against the total profits of the preceding accounting period(s) of an equivalent length of the current period (Section 308(4) TCA 1997).

2) Carried forward for offset against future Case V income (Section 308(3) TCA 1997).

Claims for offset against total profits must be made within 2 years of the end of the period in which the excess occurs (Section 308(6) TCA 1997).

Where the excess Case V capital allowances relate to capital expenditure incurred on fixtures and fittings for rented residential accommodation, such excess capital allowances can only be carried forward as an ordinary Case V loss and cannot be set off against total profits (Section 406 TCA 1997).

Where the excess Case V capital allowances relate to plant or machinery which is let with a building, and in respect of which wear and tear allowances (WTAs) are being claimed under Section 298 TCA 1997, Section 403(5) TCA 1997 provides that such excess capital allowances can only be set against income from that lease (i.e. carried forward against future income from that lease) and cannot be set off against total profits.

Step plan for use of excess industrial buildings capital allowances

1. Set-up a heading for each year (noting if any period is less than twelve months and splitting any periods for longer than twelve months)

2. Insert the relevant income from each source under each year (ignoring at this stage the losses)

3. For each loss open a loss memo on a separate page, identify the relevant legislation and how the loss can be utilised, noting any applicable restrictions for short periods.

4. Start in the year with the largest loss claim

5. Claim the loss relief in the correct order, this is generally as follows:

A. Claim the excess Case V capital allowances in the current period (Section 308(4) TCA 1997)

B. Claim the excess Case V capital allowances against the corresponding prior period Section 308(4) TCA 1997

C. Claim the Case V loss against profits of the corresponding prior period (Section 399(2)(a) TCA 1997

6. Carry any unused losses forward under Section 399(2) TCA 1997

Ensure you quote the relevant legislative section for each claim

Example 5.13

Prop Ltd has the following income and allowances:

Year ended 31st December 2016 2017 2018
Case I 5,000 12,000 20,000
Case III 3,000 6,000 6,500
Case V (2,000) 5,000 (4,000)
Case V Industrial Building Allowances - (55,000) -
Chargeable Gain (as adjusted) 10,000 7,000 17,000
CT Computation
Year ended 31st December 2016 2017 2018
Case I 5,000 12,000 20,000
Case III 3,000 6,000 6,500
Case V 0 5000 0
Less: Capital Allowances 0 (5,000) 0
Total Income 8,000 18,000 26,500
Chargeable Gain 10,000 7,000 17,000
Total Profits 18,000 25,000 43,500
Less: Section 308(4) (18,000) (25,000) 0
Taxable Profits Nil Nil 43,500
Loss Memo
1. Case V capital allowances (y/e 31 Dec 17) (55,000)
S. 308(1) Case V (y/e 31 Dec 17) 5,000
Balance (50,000)
S. 308(4) Total profits (y/e 31 Dec 17) 25,000
S. 308(4) Total profits (y/e 31 Dec 16) 18,000
Balance (available for carry forward under s. 399) (7,000)
2. Case V loss (y/e 31 Dec 16) (2,000)
Balance (available to carry forward under s. 399) (2,000)
3. Case V loss (y/e 31 Dec 18) (4,000)
Balance (available to carry forward under s. 399) (4,000)
Total Case V losses available at 31 Dec 2018 to carry forward s.399 13,000

Example 5.14

Very Excessive Ltd has the following income and allowances:

Year ended 30th September 2016 2017 2018
Case I 7,000 10,000 13,000
Case III 2,500 3,000 3,500
Case V 5,500 6,000 10,000
Case V Capital allowances (56,000)
Chargeable gain (as adjusted) 6,000 90,000
CT Computation
Year ended 30th September 2016 2017 2018
Case I 7,000 10,000 13,000
Case III 2,500 3,000 3,500
Case V 5,500 6,000 10,000
Less: Capital allowances (6,000) 0
Less: s. 399 losses forward 0 0 (10,000)
Total income 15,000 13,000 16,500
Chargeable gain 6,000 0 90,000
Total profits 21,000 13,000 106,500
Less: s. 308(4) (21,000) (13,000) 0
Taxable profits Nil Nil 106,500

Loss memo

1. Case V capital allowance (y/e 30 Sep 17) 56,000
S.308(1) Case V (y/e 30 Sep 17) 6,000
Balance 50,000
S.308(4) Total profits (y/e 30 Sep 17) (13,000)
S.308(4) Total profits (y/e 30 Sep 16) (21,000)
Balance (available for carry forward under s.399) 16,000
S.399 Case V (y/e 30 Sep 18) (10,000)
Available to carry forward against future Case V income only 6,000

Once a Section 308(4) TCA 1997 excess capital allowances claim has been fully utilised against current and prior year profits its status for carry forward changes to an ordinary Case V loss (Section 399(2) TCA 1997) and can only be set against future Case V Income, as Section 308(4) TCA 1997 only grants relief for current and prior periods.

Task 5.7

U Ltd has the following income and allowances:

Year ended Case I Case III Case V Case V Industrial Building Capital allowances
31st Dec 2017 2,000 4,000 8,000 3,000
31st Dec 2018 10,000 2,000 2,500 16,000

Calculate the taxable profits of U Ltd for each accounting period.

5.6.Calculate the taxable profits for Irish and foreign properties after claiming loss relief

The legislation governing allowable deductions from Irish rental income is contained in Section 97 TCA 1997 and was covered in your earlier studies at Part 1. The same deductions are allowable for foreign rent, as Section 71(4) TCA 1997 directs that foreign rent should be calculated in the same manner as Irish taxable rental income.

As noted in Section 5.5, an Irish company can set net losses it incurs from the renting of property situated in Ireland against rental income from a previous corresponding accounting period (Section 399 TCA 1997). Any unutilised excess is then carried forward against future Irish rental income until the loss is fully utilised.

Foreign rental income is taxed under Case III. By Revenue concession, Case III rental losses on one property can be offset against Case III rental profits on another property with any unused balance available for carry forward against future Case III rental profits.

There is no provision for setting a Case III rental loss back against similar income of a corresponding period, unlike Irish rental income.

Section 308(4) TCA 1997, as noted above, allows a company to set its excess Case V industrial buildings capital allowances against all profits in the current period and then against the profits of the corresponding prior period. Any excess is carried forward in accordance with Section 308(3) TCA 1997.

Section 268(5) TCA 1997 disallows industrial building capital allowances on foreign industrial buildings where the expenditure is incurred on or after 23 April 1996.

Example 5.15

Building Ltd has three properties located in Dublin, Paris and Berlin. Results for the last two years are as follows:

31/12/2017 31/12/2018
Dublin property 10,000 (15,000)
Berlin property 5,000 6,000
Paris property 8,000 (10,000)

Calculate the company’s taxable profits.

31/12/2017 31/12/2018
Case III Berlin & Paris 13,000 Nil
Case V 10,000 Nil
S. 399 carry back (10,000)
0
Taxable profits 13,000

The Paris loss in 2018 covers the Berlin income (Section 70(2) TCA 1997) but cannot be carried back against the prior years’ foreign income. The balance of €4,000 is therefore carried forward against future rental income. The Dublin loss can be set back against the prior years’ rental income and the balance of €5,000 carried forward against future rental income (Section 399(2) TCA 1997).

5.7.Assess if there are special loss relief rules relating to other sources of income and if relevant, apply these rules to calculate the applicable relief

5.7.1.Capital losses (Section 78(2) TCA 1997)

Capital losses can only be offset against chargeable gains arising in the current accounting period or carried forward against future chargeable gains.

Capital gains on development land can only be offset by capital losses on development land (Section 653(1) TCA 1997). However, it is possible to set off capital losses on development land against capital gains on all types of assets (Section 653(2) TCA 1997). Remember, capital gains on development land are subject to capital gains tax and not corporation tax.

5.7.2.Case IV losses (Section 399 TCA 1997)

Case IV losses may be set against the amount of any other income assessable under Case IV in the same accounting period. In so far as Case IV losses are unrelieved, they may be carried forward (but not back) against Case IV income of subsequent accounting periods.

Example 5.16

Loss Ltd had the following results:

Year ended 31/12/17 31/12/18
Case I 100,000 100,000
Case IV (10,000) 8,000
Capital Gain (100,000) 60,000

What loss reliefs are available to Loss Ltd?

Under Section 399(1) TCA 1997 Loss Ltd can set the €10,000 loss against the €8,000 income and carry the €2,000 forward against future Case IV profits.

Under Section 78(2) TCA 1997 Loss Ltd can set the €100,000 loss against the €60,000 gain and carry the €40,000 forward against future capital gains. The relief is utilised before any gains are regrossed.

Neither of the losses can shelter the Case I income in either year.

5.8.Judge what loss reliefs are available and what restrictions apply. Apply all loss reliefs and restrictions in the correct order and identify any relief to be carried forward

Order of claims for Case I/II losses and charges

1. Section 396(1) TCA 1997 – Losses from a trade in a prior period are carried forward and set off against future income of the same trade.

2. Section 396A(3) TCA 1997 – Relevant trade loss against current and prior period trade income including foreign dividend within Section 21B TCA 1997. Any losses remaining can be used as Section 396B TCA 1997 or carried forward under Section 396(1) TCA 1997.

3. Section 243A TCA 1997 – Relevant trade charges against relevant trade income in the current period; any charges remaining can be used under Section 243B TCA 1997.

4. Section 243B TCA 1997 – trade charges against other income on a value basis (carry balance forward as Section 396(1) TCA 1997 by virtue of Section 396(7) TCA 1997).

5. Section 396B TCA 1997 – Relevant trade loss against corporation tax on other current and prior period income (i.e. relief on a value basis). As per Section 396B(5)(b) TCA 1997 this claim displaces claims against total profits for non-trade charges, expenses of management, etc. for the purposes of calculating the Section 396(1) TCA 1997 loss available for carry forward).

6. Carry any remaining unutilised relevant trade losses and charges forward against future income of the same trade.

Other losses:

1. Section 399 TCA 1997 – Case V rental loss – claim against rental income only in the prior period and carry forward any amount not relieved to future periods

2. Section 308(4) TCA 1997 – Case V excess industrial building allowance – claim against all profits – in priority to Section 396B TCA 1997 (as Section 308(4) TCA 1997 provides for a deduction from profits and Section 396B TCA 1997 provides for a reduction in corporation tax payable)

Example 5.17

R Ltd’s results for the last 3 accounting periods are as follows:

12 months 31/12/2016 6 months 30/06/2017 12 months 30/06/2018
Case I 250,000 100,000 (800,000)
Case III 20,000 50,000 60,000
Case V 25,000 35,000 45,000
Industrial buildings allowances (40,000) (10,000) (20,000)

Calculate its corporation tax liability for each accounting period.

Solution

Note - numbers in bold indicate order of claims

12 months 31/12/2016 6 months 30/06/2017 12 months 30/06/2018
Case I 250,000 100,000 0
S.396A (125,000) (4) (100,000) (3) 0
125,000 0 0
Case III 20,000 50,000 60,000
Case V 25,000 35,000 45,000
IBA (25,000) (1) (10,000) (20,000)
S. 308(4) (15,000) (2) ______ ______
Income 130,000 75,000 85,000
Passive Inc - 25% 1,250 18,750 21,250
Trade Inc - 12.5% 15,625
S. 396B (625) (7) (18,750) (6) (21,250) (5)
CT Liability 16,250 0 0
Loss memo
1. Case V capital allowances (y/e 31 Dec 16) (40,000)
S. 308(1) Case V income (y/e 31 Dec 16) 25,000 (1)
S. 308(4) Total profits (y/e 31 Dec 16) 15,000 (2)
0
2. Case I loss (y/e 30 Jun 18) (800,000)
S396A Set off against Case I (6 mths to 30 Jun 17) 100,000 (3)
Set off against Case I (6 mths to 31 Dec 16) €250,000 × 6/12 125,000 (4)
S. 396B CT liability (y/e 30 Jun 18) €21,250/12.5% 170,000 (5)
S. 396B CT liability (p/e 30 Jun 17) €18,750/12.5% 150,000 (6)
S. 396B CT liability (6 mths to 31 Dec 16) €1,250/12.5% × 6/12 5,000 (7)
Balance (available to carry forward under Section 396(1) (250,000)

Task 5.8

Tolka Ltd’s results for the last 3 accounting periods are as follows:

12 months 6 months 12 months
31/12/2016 30/06/2017 30/06/2018
Case I 125,000 (300,000) 40,000
Case III 20,000 50,000 60,000
Case V 25,000 (10,000) 45,000
Industrial buildings allowances (10,000) (15,000) (20,000)

Calculate the CT liability for each accounting period, claiming the maximum loss relief available in each accounting period to 30 June 2018.

Key Point

As can be seen from the various steps noted in the sections above, while there are differences in the calculation depending on the loss types involved, the main steps regarding layout should be followed for each question. In most cases there may be two or more claim options and each scenario depends on the company involved. For example a company with a trading loss may be willing to not utilise the loss as soon as it is incurred if it has other claims to make, for example Section 308(4) TCA 1997 and it is confident that it will have trading profits in future years to shelter the Section 396(1) TCA 1997 loss carried forward.

Key Point

Claiming a loss back to a prior period will result in a tax refund for the company as it will have already paid that period’s corporation tax.

Example 5.18

Order Ltd’s results for the last 3 accounting periods are as follows:

12 months 31 Dec 16 9 months 30 Sep 17 12 months 30 Sept 18
Case I 100,000 (300,000) 40,000
Case III 15,000 20,000 30,000
Case V 25,000 35,000 (20,000)
Industrial buildings allowances (15,000) (15,000) (15,000)

Solution

Note - numbers in bold indicate order of claims

12 months 31 Dec 16 9 months 30 Sep 17 12 months 30 Sept 18
Case I 100,000 0 40,000
S.396(1) (40,000) (6)
S.396A (75,000) (3)
25,000 0 0
Case III 15,000 20,000 30,000
Case V 25,000 35,000
IBA (15,000) (15,000)
Net Case V income 10,000 20,000
S.399 (20,000) (1)
S.308(4) (15,000) (2)
_____ ______
Profits 50,000 20,000 15,000
CT payable:
Trade Inc – 12.5% 3,125 0 0
Passive Inc – 25% 6,250 5,000 3,750
S.396B (4,688) (5) (5,000) (4) 0
CT Liability 4,687 0 3,750

Loss memo

1. Case V loss (y/e 30 Sept 18) (20,000)
S. 399 Case V income (p/e 30 Sept 17) 20,000 (1)

The carry-back claim is not restricted, even though the accounting periods are of different lengths.

The company could have decided to not off-set the rental losses from 30/9/18 against the rental income for the period to 30/9/17. Instead a further amount of relief under Section 396B could have been claimed, which was available. The unutilised rental losses would then have been carried forward.

2. Case V capital allowances (y/e 30 Sept 18) (15,000)
S. 308(4) Total profits (y/e 30 Sept 18) 15,000 (2)
0
3. Case I loss (p/e 30 Sept 17) (300,000)
S. 396A Set-off against prior 9 months income
(Case I 31/12/16 = €100,000 × 9/12) 75,000 (3)
Balance (225,000)
S. 396B CT liability (p/e 30 Sept 17) €5,000/12.5% 40,000 (4)
S. 396B CT liability (y/e 31 Dec 16) €6,250/12.5% × 9/12 37,500 (5)
Balance (147,500)
S. 396(1) Set-off against future Case I income (y/e 30 Sept 18) 40,000 (6)
Balance (107,500)

Example 5.19

A Ltd’s results for the last 3 accounting periods are as follows:

12 months 31 Dec 16 6 months 30 Jun 17 12 months 30 Jun 18
Case I 250,000 100,000 (500,000)
Case V 100,000 20,000 25,000
Trade charges (50,000) (25,000) (50,000)
Non trade charges (30,000) (20,000) (15,000)

Solution

Note - numbers in bold indicate order of claims

12 months 31 Dec 16 6 months 30 Jun 17 12 months 30 Jun 18
Case I 250,000 100,000 0
S.396A (125,000) (2) (100,000) (1) 0
S. 243A (50,000) (3) _______ ____
75,000 0 0
Case V 100,000 20,000 25,000
Non-trade charges (30,000) (20,000) (15,000)
Income 145,000 0 10,000
Passive Inc - 25% 17,500 0 2,500
Trade Inc - 12.5% 9,375
Section 243B (2,500) (4)
Section 396B (8,750) (5) _____ _____
CT Liability 18,125 0 0

Loss memo

1. Trading loss y/e 30 Jun 18 500,000
S. 396A(3) Used against Case I income for 6 months to 30 Jun 17 (100,000) (1)
S. 396A(3) Used against Case I income for 6 months to 31 Dec 16 (Case I for y/e 31 Dec 16 of €250,000 × 6/12) (125,000) (2)
Balance unused 275,000
S. 396B Used against CT on passive income for 6 months to 31 Dec 16 (€17,500 × 6/12)/ 12.5% (70,000) (5)
S. 396B(5) Deemed loss utilisation through use of non-trade charges for 6 months to 31 Dec 16 (€30,000 × 25%)/12.5%) × 6/12 (30,000) (6)
Balance is available to carry forward as a loss under Section 396(1) 175,000
2. Trading charges y/e 30 Jun 18 50,000
S. 243B Used against CT on passive income for y/e 30 June 18 (€2,500/12.5%) (20,000) (4)
Balance is available to carry forward as a loss under Section 396(1) 30,000
3. Trading charges p/e 30 Jun 17 25,000
Unused so the charges are available to carry forward as a loss under Section 396(1) 25,000
4. Trading charges y/e 31 Dec 16 50,000
S. 243A Used against Case I income for y/e 31 Dec 16 (50,000) (3)
Balance

Task 5.9

T Ltd ceased to trade on 31.12.18 incurring a loss of €11,000 in the final twelve months trading. The results up to that date were as follows:

12 months to 31/12/2015 12 months to 31/12/2016 12 months to 31/12/2017 12 months to 31/12/2018
Case I 4,000 4,500 2,500 (11,000)
Case III 900 1,000 1,100 800
Trade charges paid (1,000) (1,500) 0 0

Calculate the terminal loss relief available to T Ltd and the CT liability for each of the periods.

Task Answers

Task 5.2

L Ltd Loss relief is as follows:

12 months 30.09.18 9 months 30.09.17 12 months 31.12.16
Case I Nil 3,000 4,000
Case III 700 600 400
Case V 2,000 2,400 0
Total profits 2,700 6,000 4,400
Loss relief s. 396(2) (2,700) (6,000) (Note 1) (1,100) (Note 2)
Taxable Nil Nil 3,300

Note 1: There is no restriction where a loss from an accounting period is carried back against profits of a shorter accounting period.

Note 2: Profits arising in the period 1.10.16 – 31.12.16 (i.e. 3 months only as 9 months already utilised in AP 30.9.17): €4,400 × 3/12 = €1,100

Loss memo
Case I loss (y/e 30 Sept 2018) 10,000
S. 396(2) AP 30.09.18 2,700
S. 396(2) AP 30.09.17 6,000
S. 396(2) AP 31.12.16 1,100 (9,800)
Balance 200

Available for carry forward (Section 396(1) TCA 1997) against trading profits of same excepted trade.

Task 5.3

Dunluce Ltd’s loss relief is as follows:

Note - numbers in bold indicate order of claims

12 months 31/12/2016 6 months 30/06/2017 12 months 30/06/2018
Case I 125,000 75,000 0
S.396A (62,500) (2) 75,000 (1)
(62,500) 0 0
Case V 50,000 40,000 24,000
Income 112,500 40,000 24,000
Passive Inc – 25% 12,500 10,000 6,000
Trade Inc – 12.5% 7,813
Section 396B (6,250) (5) (10,000) (4) (6,000) (3)
CT Liability/Refund 14,063 0 0

Loss memo -

Trading Loss 12 mths 30/06/18 400,000
S396A - 6 mths 30/06/17 (75,000) (1)
against previous 6 mths income
S396A - 12 mths 31/12/16 (62,500) (2)
(Case I 31/12/16 – €125,000 × 6/12)
against remaining 6 mths income _____
Balance 462,500
S. 396B €6,000/12.5% (48,000) (3)
S. 396B €10,000/12.5% (80,000) (4)
S. 396B €12,500/12.5% × 6/12 (50,000) (5)
(Passive income CT 31/12/16 –€12,500 × 6/12)
Loss forward – S.396(1) 284,500

Task 5.4

T Ltd

CT computation:

12 months 31/12/2015 12 months 31/12/2016 12 months 31/12/2017 12 months 31/12/2018
Case I 4,000 4,500 2,500 0
S. 396A (2,500) (1)
S. 397 (200) (5) (4,500) (4) ____ ____
3,800 0 0 0
Case V 900 1,000 1,100 800
Income 4,700 1,000 1,100 800
Passive Inc - 25% 225 250 275 200
Trade Inc - 12.5% 475
Section 396B ____ ____ (275) (3) (200) (2)
CT Liability 700 250 0 0

Loss memo

1. Case I loss (y/e 31 Dec 18) (11,000)
S. 396A Case I (y/e 31 Dec 17) 2,500 (1)
Balance (8,500)
S. 396B CT liability (y/e 31 Dec 18) €200/12.5% 1,600 (2)
S. 396B CT liability (y/e 31 Dec 17) €275/12.5% 2,200 (3)
Balance (4,700)
2. Terminal loss relief
Loss in last 12 months trading -
Case I loss unutilised y/e 31/12/18 (4,700)
Loss to be carried back 36 months prior to last 12 months (4,700)
S. 397 Case I (y/e 31 Dec 16) 4,500 (4)
S. 397 Case I (y/e 31 Dec 15) 200 (5)
Balance unused / unrelieved 0

Task 5.5

CT computation

AP ended 31st December 2017 2018
Case I 3,000 7,000
Excess trade charges c/fwd S396(1) (2,000)
Trade charges (3,000) (1,500)
0 3,500
Case III 1,500 3,000
Total income 1,500 6,500
Chargeable gain 1,500 1,000
Total profits 3,000 7,500
Non trade charges (3,000) (2,000)
Taxable income 0 5,500

The unutilised non-trade charges from 2017 of €4,000 (€7,000 − €3,000) are lost to the company and cannot be carried forward. In 2018 the non-trade charges will be initially set against the Case III deposit interest in order to minimise the corporation tax liability for the period.

Task 5.7

U Ltd – Calculation of taxable profits

AP ended 31/12/17 31/12/18
Case I 2,000 10,000
Case III 4,000 2,000
Case V 8,000 2,500
Less: Case V Capital allowance (3,000) 5,000 (2,500) 0
Total Income 11,000 12,000
Less: Excess Case V Capital allowance (1,500) (12,000)
Taxable profits 9,500 0

Task 5.8 - Tolka Ltd

Note - numbers in bold indicate order of claims

12 mths 31 Dec 16 6 mths 30 Jun 17 12 mths 30 Jun 18
Case I 125,000 0 40,000
S.396(1) (40,000) (7)
S.396A (62,500) (3) _______ _______
62,500 0 0
Case III 20,000 50,000 60,000
Case V 25,000 0 45,000
Case V cap allow’s (10,000) (20,000)
S. 399 (7,500) (2) (2,500) (6)
S. 308(4) ______ (15,000) (1) ______
Profits 90,000 35,000 82,500
CT liability:
Passive Inc - 25% 6,875 8,750 20,625
Trade Inc - 12.5% 7,813
S. 396B (3,438) (5) (8,750) (4) ______
CT Liability 11,250 0 20,625

Loss memo

1. Case V capital allowances (p/e 30 Jun 17) (15,000)
Total profits (p/e 30 Jun 17) S. 308(4) 15,000 (1)
2. Case V losses (p/e 30 Jun 17) (10,000)
Case V income (y/e 31 Dec 16) S. 399 7,500 (2)
Case V Income (25,000 – 10,000 3 6/12)
Case V Income (y/e 30 Jun 18) 2,500 (6)
3. Case I loss (p/e 30 Jun 17) (300,000)
Case I (6 mths to 31 Dec 16) €125,000 3 6/12 S. 396A 62,500 (3)
Balance (237,500)
CT liability (p/e 30 Jun 17) €8,750 / 12.5% S. 396B 70,000 (4)
CT liability (6 mths to 31 Dec 16) €6,875/12.5% 3 6/12 S. 396B 27,500 (5)
Balance (140,000)
Case I (y/e 30 Jun 18) S. 396(1) 40,000 (7)
Balance (available to carry forward under s. 396(1) (100,000)

Task 5.9

CT computation

12 months 31/12/2015 12 months 31/12/2016 12 months 31/12/2017 12 months 31/12/2018
Case I 4,000 4,500 2,500 0
S.396A (2,500) (1)
S.243A (1,000) (1,500)
S.397 (1,700) (5) (3,000) (4) _____ ____
1,300 0 0 0
Case III 900 1,000 1,100 800
Profits liable to CT 2,200 1,000 1,100 800
CT liability:
Passive Inc - 25% 225 250 275 200
Trade Inc - 12.5% 163
S. 396B _____ _____ (275) (3) (200) (2) (2)
CT liability 388 250 0 0
Loss memo
1. Case I loss (y/e 31 Dec 18) (11,000)
S. 396A Case I (y/e 31 Dec 17) 2,500 (1)
Balance (8,500)
S. 396B CT liability (y/e 31 Dec 18) €200/12.5% 1,600 (2)
S. 396B CT liability (y/e 31 Dec 17) €275/12.5% 2,200 (3)
Balance (4,700)
2. Terminal loss relief
Loss in last 12 months trading - Case I loss unutilised y/e 31/12/18 (4,700)
Loss to be carried back 36 months prior to last 12 months (4,700)
S. 397 Case I (y/e 31 Dec 16) 3,000 (4)
S. 397 Case I (y/e 31 Dec 15) 1,700 (5)
Balance unused/unrelieved 0