Terminal Loss Relief
10 January 2023
Can you outline the most recent changes to relief for terminal loss in a trade, and how the relief works for Irish corporate taxpayers?
Lee Kavanagh, Tax Senior: The recent change was a clarification by Revenue of the timeframe in which terminal loss relief may be claimed. But first, let’s have a quick recap on the relief generally.
Terminal loss relief is a sometimes overlooked relief available to companies who have ceased trading. A terminal loss is a trading loss incurred within the 12 months before the date of cessation. It can be used to reduce the taxable income of the same trade arising in the three years immediately prior to those 12 months.
Section 397 TCA 1997 specifies the conditions and rules for a company making a claim for terminal losses in a trade. It is important to note that a terminal loss relief claim can only be made in instances where the losses cannot otherwise be utilised by the company and terminal loss relief claims must be utilised against income from a later accounting period in priority to an earlier accounting period.
In many cases, accounting periods may fall partly outside of the 12 month period or 3 year period discussed above. Where accounting periods fall partly outside of these periods, losses and income are required to be apportioned for terminal loss relief claims for these periods. For example, where a company ceases to trade on 30 June 2022 and has trading losses for the 6 months ended 30 June 2022 of €75,000 and losses for the 12 months ended 31 December 2021 of €100,000, the losses must be apportioned to calculate the total amount of losses available for terminal loss relief. In this case, the total amount of losses available for terminal loss relief would be €125,000 being the losses of €75,000 for the 6 months ended 30 June 2022 and the €50,000 (€100,000 x 6/12) apportioned losses for the final 6 months of the accounting period ended 31 December 2022. These losses can then be carried back and utilised against the trading profits of the same trade for the immediately preceding 3 years.
The Revenue Tax and Duty Manual was recently updated to clarify that a terminal loss relief claim must be made by a company within 4 years from the end of the accounting period in which the terminal loss was incurred by the company. Previously, the Revenue guidance stated that a claim for terminal loss relief is subject to the 4-year time limit provided for in the provisions of Section 865 TCA 1997. This could have been interpreted so that a repayment of tax paid in the earlier years of the throwback period could be time-barred by the 4-year time limit unless the terminal loss relief claim was made vey soon following the cessation of the company’s trade. The Income Tax guidance is much clearer on the 4-year timeframe for making a terminal loss relief claim for Income Tax purposes and details why amended assessments for earlier assessments are allowed even where they are outside of the 4-year timeframe. The recent update to the Revenue guidance for corporates clarifies that a repayment of tax for the throwback periods should be available for corporates even if the throwback periods are outside of the 4-year timeframe provided that the company has made a terminal loss relief claim within 4 years from the end of the accounting period in which the terminal loss was incurred by the company.
Content adapted from Finance Dublin’s Irish Tax Monitor.