Loss carry-forward

What it means

A loss carry-forward is the gradual use of a tax loss from earlier years against a later tax base. The loss is never refunded in cash; it only reduces tax that would otherwise fall due.

It is not the accounting accumulated loss shown in the balance sheet. The accounting loss is settled inside equity, while the tax loss lives its own life in the income tax return.

A tax loss does not come straight out of the books. It is derived from the accounting result adjusted by add-back and deductible items, so a company with an accounting loss can have a taxable profit and vice versa. Only a loss reported in the tax return can be carried forward, not a negative figure in the profit and loss statement.

How it works in practice

The loss is deducted over several consecutive tax periods and in each of them only up to a capped share of the base. Older losses are used up before newer ones.

The deduction reduces the tax base, not the tax itself, and is claimed in the return. A large loss is therefore used up only across several profitable years, and it cannot be carried backwards against a year that has already been taxed.

For each client we keep a schedule of losses by year of origin: the original amount, what has been used and what remains. When we take over the books from another accountant, we rebuild it from the returns already filed, because without it the deduction in the next return cannot be filled in correctly.

What to watch out for

Deducting the whole loss where the law allows only part of the base. An audit assesses the difference with interest, and a loss-making company still owes the minimum tax, so a nil tax bill on the strength of a loss does not exist.

A loss that cannot be deducted within the permitted number of periods expires. A company with a longer run of losses therefore considers postponing tax depreciation through a depreciation suspension, so as not to deepen a loss it would not manage to use anyway.