Sadly the use of losses to reduce corporation tax is becoming more common in the current climate.
Just as a recap, a company may set a trading loss against all income and gains taxable in the previous 12 months. Exceptionally for losses arising in accounting periods ending in the two years to 23 November 2010, £50,000 of losses arising in each full twelve month period may be carried back for up to three years. The law requires that losses be offset against the latest years first but it can still be useful.
In this year's Budget the Chancellor announced that where a business owed tax from an earlier year but was making losses in the current year it could take the loss into account when agreeing payment of tax liabilities. In principle, this sounded really helpful, unfortunately this is proving difficult to effect in reality. Negotiating such an agreement is taking a long time as, to date, there seems to be some confusion within HMRC as to where the responsibility for agreeing the revised liability actually falls. Sorting this out requires a lot of effort that would probably be better focussed on the business itself.
Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.