Corporation Tax Act 2010 section 386

Relief for expense otherwise giving rise to carried forward loss

Section 386 deals with how a loss derived from a deemed expense on a qualifying change of ownership can be converted into a deductible expense in the next accounting period, rather than simply being carried forward, so that it becomes available for group relief.

• When a qualifying change of ownership triggers a deemed expense under section 383 and the company makes a loss in the resulting accounting period (or a later one), the portion of that loss derived from the deemed expense is not simply carried forward but is instead converted into a deductible expense for the next accounting period.
• The converted expense is calculated using the formula DL + ((DL × D × R) / 365), which indexes the derived loss to preserve the symmetry between the value of the original charge and the relief, where DL is the derived loss, D is the number of days in the loss-making period, and R is the official interest rate under section 826 of ICTA.
• This treatment can continue rolling forward through successive accounting periods if the company keeps making losses, provided each subsequent period starts within five years of the qualifying change of ownership and is not itself triggered by a further qualifying change of ownership under section 383 or section 425.
• When determining how much of a carried forward loss derives from the deemed expense, the calculation treats that expense as the last item to be deducted, meaning other deductions are set against income first.