Corporation Tax Losses

Here's something that catches almost every first-time loss-making director off guard: a bad year can generate an actual cash refund from HMRC, sometimes within a matter of weeks, on tax you already paid in a better year. A loss isn't just the absence of profit. Handled properly, it's a genuine tax asset — one that far too many companies simply let sit unused, or claim in the least valuable way available, because nobody walked them through the options.

I've had this conversation with a client mid-way through a genuinely difficult year, expecting nothing but bad news from their accounts. Instead, we worked through a carry-back claim, and six weeks later a repayment landed in the company's bank account — real cash, at exactly the point it was needed most. This guide walks through how corporation tax losses actually work, and how to make sure yours are put to their best possible use.

What Happens If My Limited Company Makes a Loss?

Loss Relief Isn't Automatic — You Have to Claim It

This is the detail that catches people out more than any other in this whole area: a trading loss doesn't automatically reduce your tax bill or generate a refund. It has to be actively claimed, in the right way, within a set time limit — generally within two years of the end of the loss-making accounting period. Miss that window, and the relief can be lost entirely, however genuine and significant the loss was.

Setting a Loss Against the Same Period's Profits

A trading loss can first be set against your company's other profits arising in the very same accounting period — investment income, property income, or chargeable gains sitting alongside the trading loss in the same set of accounts.

The Different Types of Loss

Not every loss is treated identically. Trading losses, the most common type, have the most flexible relief options. Property losses and capital losses follow their own, somewhat different rules — worth flagging specifically to us if your company's loss isn't a straightforward trading one.

Your Three Options Once a Loss Arises

Broadly, once a trading loss exists, you can set it against profits of the same accounting period, carry it back against profits of an earlier period, or carry it forward against profits of a future period — and in many cases, a company can genuinely choose the combination that delivers the best outcome, rather than being forced down a single fixed route.

Can Corporation Tax Losses Be Carried Forward?

Carrying Forward Against Total Profits Since 2017

Yes, and since April 2017, the rules became considerably more flexible. Losses arising from that date onwards can be carried forward and set against your company's total profits in a future period — not just profits from the same specific trade, as was the case under the older rules.

The £5 Million Deductions Allowance

For most owner-managed companies, this next point is largely academic, but it's worth knowing regardless: a £5 million annual deductions allowance applies to carried-forward losses. The first £5 million of profit in any given year can be fully sheltered by carried-forward losses without restriction; above that, only 50% of the remaining profit can be relieved this way. For the overwhelming majority of small and medium-sized companies, profits never come close to testing this limit, so the restriction simply doesn't bite in practice.

How Long Can Losses Be Carried Forward?

Trading losses can generally be carried forward indefinitely, provided your company continues the same trade — there's no expiry date on genuinely unused losses, which means even a loss from several years ago can still be sitting there, available to offset against a strong profit year now, if it was properly recorded and claimed at the time.

Group Relief for Carried-Forward Losses

If your company is part of a group structure, carried-forward losses can sometimes be surrendered to other group companies, letting a loss in one part of the group shelter profit in another. It's a genuinely valuable option for groups running more than one active trading company, though it needs proper structuring and documentation to work correctly.

Can I Carry Back a Company Loss?

The Standard 12-Month Carry Back

A trading loss can generally be carried back against your company's total profits of the previous 12 months, provided the company was carrying on the same trade during that earlier period. This is what generates the genuine cash refund I mentioned at the start of this guide — tax you already paid on last year's profit, refunded because this year's loss effectively wipes some of that earlier profit out retrospectively.

Why Carry Back Can Beat Carry Forward

Carrying a loss forward only delivers value once your company is profitable again — which, depending on how the following years play out, could be a long wait, or might never fully materialise if the business doesn't recover as hoped. Carrying back, where it's available, converts the same loss into cash now, at exactly the point a struggling business is most likely to need it.

Making the Claim

The claim is made on your Company Tax Return, specifying that the loss is being carried back and against which earlier period. Get this right, and the process moves relatively quickly — HMRC processing a genuine, well-evidenced carry-back claim within a matter of weeks is entirely normal, not an exceptional outcome.

Corporation Tax Losses When Closing a Company

Terminal Loss Relief — Extended to Three Years

Here's where the rules become genuinely more generous, specifically for a company that's permanently ceasing to trade. Instead of the standard 12-month carry back, terminal loss relief allows losses made in the final 12 months of trading to be carried back a full three years, against profits of the same trade in each of those years, working backwards from the most recent.

A Worked Example

Take a company that's traded profitably for years, paying corporation tax throughout, before a genuinely difficult final 12 months pushes it into a loss ahead of closure. Under standard rules, that final loss could only be carried back one year. Under terminal loss relief, it can reach back across all three of the preceding years, potentially unlocking a repayment of tax paid in a year the standard rules would never have touched — often turning what felt like a disappointing final chapter into a genuinely meaningful cash recovery at exactly the point a director needs it most.

Anti-Avoidance Rules Worth Knowing About

HMRC has specific rules aimed at contrived loss arrangements — particularly where there's been a major change in ownership combined with a significant change in the nature of a company's trade within a short window, which can extinguish previously available losses entirely. None of this affects a genuine trading loss arising from ordinary business conditions, but it's exactly why any loss claim tied to a change in ownership or a significant restructuring is worth reviewing with us properly before it's made, rather than assumed to be straightforward.

A loss year doesn't have to mean a wasted year from a tax perspective. Whether it's worth carrying back for immediate cash, carrying forward against a recovery you're confident is coming, or — in the case of a genuine closure — claiming the more generous terminal relief, the right answer depends entirely on your company's specific circumstances. If your company has made a loss, or you're anticipating one, get in touch with the team at Cannon Accountants before your filing deadline, not after — the claim options available often depend on decisions made earlier than directors expect.

For the wider picture of how loss relief fits alongside corporation tax more broadly, and everything else covered in this series, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.