Revenue Tax Briefing Issue 51, October 2003

Losses, Charges & Group Relief

Section 420B

This section provides relief for group relief for relevant trading losses (as defined in Section 396B) and relevant trading charges on income (as defined in Section 243B)of a surrendering company for an accounting period which have not otherwise been relieved. This is done by reducing the corporation tax of a claimant company for the corresponding accounting period by an amount determined by applying the corporation tax rate applicable to the relevant trade (10% or16% for 2002) to the amount of the unrelieved relevant trade loss/charges on income available to be surrendered by means of group relief.

Accounting periods straddling 6 March 2001 (Section 55 Finance Act 2002)

Where an accounting period straddles 6 March 2001, the Finance Act 2002 amendment provides that, for the purpose of calculating the relevant losses or charges, the accounting period of the company is divided into two parts, one beginning on the date on which the accounting period begins and ending on 5 March 2001, with the other commencing on 6 March 2001 and ending on the date that the accounting period ends. It is important to note, however, that the splitting of the accounting period only applies for the purposes of determining the amounts which may be relieved under the section. Thus for example the loss available on a value basis is arrived at by apportioning the accounting period between the pre and post 6 March 2001 periods. However the loss relief thus computed may be claimed against the income of the whole accounting period.

Effective Date

The ring fence introduced by Section 90 FA 2001 and the relieving provisions introduced by Section 54 FA 2002 both take effect from 6 March 2001.

Length of Accounting Period

In the case of losses, it is important to note that a company can only shelter liabilities arising in prior periods equal in length to the accounting period in which the loss arose. Where a previous accounting period falls partly within this corresponding period, the corporation tax liability for that period must be apportioned and only that portion falling within the corresponding period can be sheltered under Section 396B(4).

Quantum of Relief

Where relief is being claimed in the prior period under Section 396B it is important to ensure that the correct tax rate is used in the calculation of the relief. For example, where relief is being claimed in 2002 for a loss arising in 2003 the correct rate to be used in the calculation is 12.5% and not 16%.

Order

Section 396Brelief is reduced by amounts already set off under Section 396 or 396A. One would expect Section 396A claims to be made in priority to Section 396Bclaims but this is not compulsory. Equally a company may claim Section 396B(3)(b) relief, i.e., relief at the standard rate, in priority to Section 396B(3)(a) relief, i.e., relief for 10% losses. This will impact on the loss available for carry forward. However relief under Section 396B is to be claimed in priority to relief available in respect of non-trade charges, expenses of management or other amounts claimable against profits with the exception of excess Case V allowances.

Losses in a leasing trade

It is also important to note that relief cannot be claimed under Section 396B in respect of a loss subject to the ring fence provisions of Section 403(4).

Order of Offset

The order of set-off of the relief is (i) Section 243B charges, (ii) Section 396B losses and (iii) Section 420B group relief.

Claims

How the losses, etc., on a value basis may be claimed in 2001 is dealt with in Tax Instruction 12.3.6. This instruction covers the situation in 2001 where the underlying computer programme applies the Finance Act 2001 ring-fence to relevant trade losses, charges and group relief but does not reflect the option for relief on a value basis introduced retrospectively by Finance Act 2002.

For 2002 the Form CT1 provides, at Part 8, for the option of claiming losses, charges and group relief on a value basis, i.e., Section 396B, Section 243B and Section 420B, and the underlying computer programme is fully compatible with this.

The operation of Section 54 FA 2002 is best illustrated by means of examples:

Example 1

A Ltd. Results as follows:

12 months ended 31/12/2002

Case V	125,000
excess Manufacturing trade charges	(25,000)
excess “relevant trade” charges	(275,000)

CT Computations

Case V @ 25%	31,250
S. 243B(3)(a) relief (25,000 @ 10%)	(2,500)
S. 243B(3)(b) relief (179,687 @ 16%)	(28,750)
Net CT liability	Nil
Loss forward (300, 000 - (25,000 + 179,687))	95,313

Example 2

C Ltd. Results as follows:

12 months ended 31/12/00

Case 1 (non-manufacturing)

50,000

12 months ended 31/12/01

Relevant trade losses

(48,000)

CT Computations:

Option 1 (S. 396A)

12 months ended 31/12/01

Case I Nil:

Liability

Nil

12 months ended 31/12/00

Case I	500,000
S. 396(2) relief (48,000 x 2/12)	(8,000)
S. 396A relief (48,000 x 10/12)	(40,000)
Net	2,000
CT due @ 12.5% (Section 22A)	250
Loss forward (48,000 - (8,000 + 40,000)	Nil

Option 2 (S. 396B)

12 months ended 31/12/01

Case I Nil:

Liability

Nil

12 months ended 31/12/00

Case I	500,000
S. 396(2) relief (48,000 x 2/12)	(8,000)
	42,000
Liability after S. 396(2)relief
(Section 22A applies) 42,000 @ 12 ½ %	5,250
S. 396B relief 26,250 @ 20%	(5,250)
Liability	Nil
Loss forward (48,000 - (8,000 +26,250))	13,750

Note: Because this is a company to which Section 22A relief applies a S. 396B claim may be preferred to a S. 396A claim and some of the loss may be preserved as a loss forward.

Example 3

C Ltd. Results as follows :

12 months ended 31/12/00

Case I (non-manufacturing)

500,000

12 months ended 31/12/2001

relevant trade losses

(48,000)

CT Computations:

Option 1 (S. 396A)

12 months ended 31/12/01

Case I Nil:

Liability

Nil

12 months ended 31/12/00

Case I	500,000
S. 396(2) relief (48,000 x 2/12)	(8,000)
S. 396A relief (48,000 x 10/12)	(40,000)
	452,000
Liability 452,000 @ 24%	108,480

Loss forward

(48,000 - (8,000 + 40,000))

Nil

Option 2 (S. 396B)

12 months ended 31/12/01

Case I Nil:

Liability

Nil

12 months ended 31/12/00

Case I	500,000
S. 396(2) relief (48,000 x 2/12)	(8,000)
	492,000
Liability after S. 396(2) relief 492,000 @ 24 %	118,080
S. 396B relief 40,000 @ 20%	(8,000)
Liability	110,080

Loss forward

(48,000 - (8,000 + 40,000))

Nil

Note: It can be seen that in a “full-rate” company S. 396B relief is unlikely to be preferred to S. 396A.

Example 4

X Ltd. results as follows:
12 months ended 31/12/02
Relevant Trade Loss	(400,000)
9 months ended 31/12/01
Relevant Trade Profit	100,000
Case III	60,000
12 months ended 31/3/01
Relevant Trade Profit:	20,000
Case III	75,000
CT Computations:
12 months to 31/12/02	Nil
9 months to 31/12/01
Case I	100,000
Section 396A relief	100,000
Case III liability: 60,000 @ 25%	15,000
Section 396B relief 93,750 @ 16%	15,000
12 months to 31/3/01
Case I	20,000
Section 396A relief 20,000 x 3/12	(5,000)
Taxable Case I	15,000
Liability @ 12.5% (Section 22A)	1,875
(Note: No S. 396B relief claimed)
Case III liability: 75,000 @ 25%	18,750
Relief under section S. 396B 1s8,750 x 3/12	(4,687)
Net Case III Liability	14,063
Total liability (1,875 + 14,063)	15,938
Notes:
Full relief is not available in respect of 12 months to 31/3/01 as only 3 months fall within preceding period of corresponding length to the period in which loss arose i.e., 31/12/02.
Loss Summary
Loss 12 months to 31/12/02	(400,000)
Used 9 months to 31/12/01
Section 396A	100,000
Section 396B	93,750
Used 12 months to 31/3/01
Section 396(A)	5,000
Section 396B (4,687/16%)	29,294
Loss forward	171,956

Example 5

F Ltd. Results as follows
12 months ended 31/12/03
Relevant trade (non-10%) loss	(500,000)
Case III	250,000
Non-trade charges	200,000
CT Computation:
Case I	Nil
Case III	250,000
Non-trade charges	(200,000)
Taxable Profits 50,000 @ 25%	12,500
S. 396B relief 100,000 @ 12.5%	12,500
CT Payable	Nil
Relevant trade loss forward (see over)	Nil
Loss summary
S. 396B relief claimed	100,000
However, in accordance with Section 396B(5)(c)(ii), the amount of losses treated as used will be the amount which would have been treated as used if there were no non-trade charges i.e.
Case III 250,000 @ 25%	62,500
(500,000 @ 12.5%	62,500)
Loss treated as used: 500,000
Loss forward	Nil

Example 6

H Ltd. Results as follows:
12 months ended 31/12/02:
Relevant trade (non-10%) Profit	225,000
Case III	180,000
Trade charges	(75,000)
12 months ended 31/12/03
Relevant trade (non-10%) loss	(450,000)
Case III	180,000
Trade charges	(75,000)
CT Computation:
Year ended 31/12/2002
Case I	225,000
Trade charges	(75,000)
Net	150,000
Relief S. 396A	(150,000)
Case III	180,000
Taxable Profits 180,000 @ 25%	45,000
S. 396B relief 360,000 @ 12.5%	(45,000)
CT payable	Nil
Year ended 31/12/03
Case I	Nil
Case III	180,000
Taxable Profits 180,000 @ 25%	45,000
S. 396B relief 15,000 @ 12.5%	(1,875)
CT payable	43,125
Loss Summary
Loss 2003	(450,000)
Trade charges 2003	(75,000)
	(525,000)
Used S. 396A 2002	150,000
Used S. 396B 2002	360,000
Used S. 396B 2003	15,000
Total	525,000
No loss forward

Example 7

Year ended 31/12/01
Loss in a manufacturing trade	(240,000)
Case V	10,000
Apportion the Manufacturing Loss
1/1/01 - 5/3/01: 240,000 x 2/12	(40,000)
(Ring-fenced: Section 455)
6/3/01 - 31/12/01: 240,000 x 10/12	(200,000)
(Relevant trade loss: S. 396A & S. 396B)
CT Computation:
Case V 10,000 @ 25%	2,500
S. 396B relief 25,000 @ 10%	(2,500)
CT Payable	Nil
Loss Summary
Total Loss	240,000
Used S. 396B 2001	(25,000)
Balance Loss	215,000
Ring-fenced to 10% trade	(40,000)
Relevant trade loss available for carry forward under S. 396(1) or for carry-back to previous accounting period on value basis (S. 396B(3)) = (175,000)

Example 8

Year ended 31/12/01
Relevant Trade Loss (100,000)
Chargeable gain: 200,000

Regross 200,000 x	20%
	20%

200,000*
Apportion
1/1/01 - 5/3/01: 100,000 x 2/12	16,667
6/3/01 - 31/12/01: 100,000 x 10/12	83,333
CT Computation:
Chargeable gain: 200,000 @ 20%	40,000
S. 396(2) relief	(16,667)
S. 396B relief (83,333 @ 20%)	(16,667)
Tax payable	6,666
Loss forward	Nil
**Regrossed at standard rate of CT in accordance with Section 78 TCA 1997***

Example 9

Period 1/9/00 - 31/8/01
Case V	60,000
Relevant trade (non-manufacturing) loss	(24,000)
CT Computation:
Case V	60,000
S. 396(2) relief (period 1/09/00 - 5/03/01)
24,000 x 6/12	(12,000)
Taxable	48,000
CT 48,000 @ 25%	12,000
S. 396B relief (period 6/3/01 - 31/8/01)
24,000 x 6/12 @ 20%	(2,400)
Tax Payable	9,600
Loss Summary:

Used S. 396(2)	12,000
Used S. 396B	12,000	(2,400 x 100/20)
	24,000