The corporate loss restriction for large losses

Since 1 April 2017 a company cannot always use carried forward losses to reduce its profits to nil. Under Part 7ZA of the Corporation Tax Act 2010, carried forward losses can cover profits up to a deductions allowance of £5 million a year, which a group shares between its members, plus only 50% of the profits above that allowance. The rest of the profits are taxed, and the unused losses simply carry forward to later years.

Why was the loss restriction introduced and who does it affect?

The restriction was added by Finance (No. 2) Act 2017 alongside the relaxation that allowed losses made from 1 April 2017 to be set against total profits and surrendered as group relief. The quid pro quo was a cap on how much of a large profit carried forward losses can shelter. HMRC’s manual at CTM05010 notes that there is no restriction where a company’s qualifying profits are below its deductions allowance, so the rule is unlikely to affect most small companies or groups. In practice it bites on groups whose profits in a single year comfortably exceed £5 million and which have substantial losses brought forward, for example after a period of heavy investment. For the basic relief rules see our page on company trading losses.

Which losses are restricted?

CTM05020 lists the losses within the restriction:

carried forward trading losses, whether made before or after 1 April 2017;
carried forward non trading loan relationship deficits;
carried forward UK property business losses;
carried forward management expenses;
carried forward non trading losses on intangible fixed assets;
from 1 April 2020, capital losses carried forward against chargeable gains.

The restriction applies to profits arising from 1 April 2017 (and to gains accruing from 1 April 2020 for capital losses) but catches losses carried forward from any period, including losses that already existed at those dates. It does not apply to relief for losses of the same period, such as a current year section 37 claim or current year group relief, or to losses carried back from a later period. Those reliefs are deducted first as in year reliefs.

How is the cap calculated?

The legislation works out a relevant maximum, which is the most profit that restricted losses can cover. In outline (CTM05030 and CTM05090):

Start with total profits before any losses from other periods (modified total profits).
Deduct in year reliefs, such as current year losses and group relief claimed, to reach qualifying profits.
Deduct the company’s deductions allowance to reach relevant profits.
The relevant maximum is 50% of relevant profits plus the deductions allowance.

Losses that can only be used against particular profits, known as streamed losses, need their own relevant maximum. Pre 1 April 2017 trading losses can only be set against profits of the same trade, so a company with those must calculate a maximum for trading profits as well as for total profits and choose how to split its deductions allowance between them. From 1 April 2020 there is also a separate maximum for chargeable gains, because carried forward capital losses can only be used against gains.

What does that look like with real numbers?

HMRC’s own example at CTM05010 is a company with £12 million of profits after in year reliefs and the full £5 million deductions allowance. Carried forward losses can cover the £5 million allowance plus 50% of the remaining £7 million, so a maximum of £8.5 million. The company pays tax on £3.5 million however large its brought forward losses are.

Illustration only. A group has two members. Company A has qualifying profits of £9 million and £20 million of trading losses carried forward from 2018. Company B has profits of £1 million and no losses. The group’s nominated company allocates £4 million of the £5 million allowance to A and £1 million to B.

A’s relevant profits are £9 million less £4 million, which is £5 million. Its relevant maximum is £4 million plus 50% of £5 million, which is £6.5 million. A pays tax on £2.5 million and carries forward £13.5 million of losses.
B needs no allowance because it has no losses. Allocating the full £5 million to A instead would raise A’s relevant maximum to £5 million plus 50% of £4 million, which is £7 million, cutting A’s taxable profit to £2 million.

The allocation is a choice for the group, and getting it right is worth real tax.

How does the deductions allowance work in a group?

A company outside any group has its own allowance of £5 million for a 12 month accounting period (CTM05130). A group has a single group deductions allowance of £5 million, which it shares (CTM05140). For this purpose a group is an ultimate parent and the companies in which it holds 75% of the shares and economic rights, as defined in section 269ZZB (CTM05160). That test is close to, but not the same as, the group relief definition covered in our page on group relief.

The procedure has three formal steps:

Nomination. All group companies within the charge to corporation tax nominate one company to allocate the allowance. The nomination is signed for each of them, but is not sent to HMRC unless requested (CTM05180).
Group allowance allocation statement. The nominated company submits a statement for each of its accounting periods, allocating the allowance between named companies. No company may receive more than £5 million for a 12 month period. HMRC’s guidance says that if no statement is submitted, no company in the group has any deductions allowance for that period (CTM05200).
Return entries. Each company specifies its own deductions allowance in its tax return under section 269ZZ.

The statement is due before the first anniversary of the filing date of the nominated company’s return, with later deadlines following an enquiry. A statement is not required for a period in which no group member uses carried forward losses. If a statement over allocates, a revised one must be sent within 30 days or HMRC can amend it (CTM05220).

What about short periods and changes in the group?

The £5 million is reduced proportionately for an accounting period of less than 12 months, and a company that is in a group for only part of its period has an allowance built up from the group and non group parts (CTM05150). The maximum that can be given to a company is limited by the number of days it was a member of the group during the nominated company’s period. Where the ultimate parent changes, for example on an acquisition, CTM05180 explains that the old group ceases to exist for these purposes and any existing nomination ends.

What happens to losses that cannot be used?

Nothing is lost. HMRC’s worked example at CTM05240 shows unused trading losses of £6.5 million carried forward to the next accounting period after the restriction has been applied. The restriction affects timing, which reduces the value of losses to a company that would otherwise have used them immediately, but it does not cancel them. Losses can still be forfeited by other rules, such as those in our page on change of ownership and loss forfeiture.

What goes wrong in practice?

No statement filed. A group that forgets the allocation statement has a nil allowance everywhere, so the 50% cap applies from the first pound of profit.
Allowance allocated to companies without losses. The allowance is only useful where restricted losses are being used.
Forgetting the split for streamed losses. A company with pre 2017 trading losses or capital losses must show how it allocated its allowance between trading profits, non trading income profits and gains, normally in the tax computations.
Applying the cap to carry back claims. Carry back and current year relief are outside the restriction.

Where carried forward capital losses are involved, the interaction with company gains is covered in our page on capital gains and losses in a company.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.