It may sound counter-intuitive, but a trading loss actually offers certain opportunities. You can offset it against Corporation Tax in the past, present or future. On the other hand you may want to consider re-setting your financial year, or even creating a loss through pension contributions.
An actual trading loss is far from perfect, but in the current climate especially, it's becoming more common for businesses to experience erratic levels of profitability. Handled correctly, you can turn the loss into a tax saving - now or in the future.
The trading loss can be offset against the current year, carried back one year to the previous accounting year (and offset against tax due for that year), or carried forward for an indefinite period.
It's also possible to alter the parameters of your financial year to evade a boom and bust scenario where you're greatly taxed for the successful period and then suffer a weaker period without any compensation.
Pension relief
Pension contributions are usually allowable deductions for corporation tax purposes and because the deductions form part of the company's expenses, any trading loss can get relief under the trading loss rules for a company.
It's possible to create or increase a trading loss by making an employer pension contribution.
Understandably, you may think that making a pension contribution during a trading period when profits are low (or a loss is made) is a futile exercise. However trading losses may be offset against the proceeding year or carried forward to set against future profits, so the net result could be a tax saving.
As long as your company either paid Corporation Tax in the previous period, or will be paying it in subsequent periods, tax relief will be given for pension contributions providing they are exclusively for the purposes of the trade.
It's also worth noting that pension contributions need to be paid before the end of the accounting period.
Example
· ABC Ltd anticipates profits in the trading year ending 31 December 2010 of £10,000.
· They had a £400,000 profit in the accounting period ending on 31 December 2009.
· Annual pension contributions for the directors and other employees are £100,000
Should the payment be made now or delayed?
Possible solution
If the payment is made in the accounting period up to 31 December 2010, the company will have a trading loss of £90,000.
This loss can be set back against the previous year's profits, gaining a Corporation Tax repayment (or saving, if the tax hasn't been paid over to HMRC yet) of £26,775 (29.75% of £90,000), with no tax due for the year ending 31 December 2010.
The total tax saving is £28,875. This means tax will be saved at an overall effective rate of 28.87%.
In this example the pension contribution does not need to be delayed, even though the consequence of the contribution being made is that the company has no profit in the period. To delay the payment until the next accounting period would mean a delay for any Corporation Tax relief for the payment, potentially until 1 October 2012.
An actual trading loss is far from perfect, but in the current climate especially, it's becoming more common for businesses to experience erratic levels of profitability. Handled correctly, you can turn the loss into a tax saving - now or in the future.
The trading loss can be offset against the current year, carried back one year to the previous accounting year (and offset against tax due for that year), or carried forward for an indefinite period.
It's also possible to alter the parameters of your financial year to evade a boom and bust scenario where you're greatly taxed for the successful period and then suffer a weaker period without any compensation.
Pension relief
Pension contributions are usually allowable deductions for corporation tax purposes and because the deductions form part of the company's expenses, any trading loss can get relief under the trading loss rules for a company.
It's possible to create or increase a trading loss by making an employer pension contribution.
Understandably, you may think that making a pension contribution during a trading period when profits are low (or a loss is made) is a futile exercise. However trading losses may be offset against the proceeding year or carried forward to set against future profits, so the net result could be a tax saving.
As long as your company either paid Corporation Tax in the previous period, or will be paying it in subsequent periods, tax relief will be given for pension contributions providing they are exclusively for the purposes of the trade.
It's also worth noting that pension contributions need to be paid before the end of the accounting period.
Example
· ABC Ltd anticipates profits in the trading year ending 31 December 2010 of £10,000.
· They had a £400,000 profit in the accounting period ending on 31 December 2009.
· Annual pension contributions for the directors and other employees are £100,000
Should the payment be made now or delayed?
Possible solution
If the payment is made in the accounting period up to 31 December 2010, the company will have a trading loss of £90,000.
This loss can be set back against the previous year's profits, gaining a Corporation Tax repayment (or saving, if the tax hasn't been paid over to HMRC yet) of £26,775 (29.75% of £90,000), with no tax due for the year ending 31 December 2010.
The total tax saving is £28,875. This means tax will be saved at an overall effective rate of 28.87%.
In this example the pension contribution does not need to be delayed, even though the consequence of the contribution being made is that the company has no profit in the period. To delay the payment until the next accounting period would mean a delay for any Corporation Tax relief for the payment, potentially until 1 October 2012.
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