Juggling Your Tax Losses

We are often asked whether it’s possible to offset a loss in one company against the profit in another. 

The answer is that there is no automatic way of offsetting losses and profits between your companies. 

Most people try to manage a situation like this by putting through charges between the companies after year end (for example, a charge from the profit making company to the loss making company for ‘management fees’).   This is not an effective strategy and creates a risk position for you.

Each company is an independent entity for tax purposes and needs to account for its tax position separately.  This could result in one of your companies having a tax liability and the other having a tax loss which will be carried forward.  In this case, the carry forward loss will continue to be available for a future year in which your company derives a taxable income.  Providing there is a continuing majority of ownership of the loss company in both the loss year and the year in which you make a profit and seek to claim the loss, then there is no time limit on carrying forward the losses.

In the event that your loss company never made a profit in future years, then it is possible that the losses would be foregone.

One option available for you is to tax consolidate the two companies. Under a tax consolidation the two companies are dealt with as one for tax purposes.  This allows you to offset profits and losses between the companies.  To tax consolidate the two companies there must be a head company and a subsidiary.  The fact that they are commonly owned by the same shareholders is not enough – you need to have a head company in place.  If this is your situation then you can elect to tax consolidate the two companies for the 2011 year.  If the shareholders are private individuals or held through family trusts then you may need to complete a restructure of ownership first.  In this case, tax consolidation will only be available in a future year.

The decision to tax consolidate brings with it a range of requirements; it is not simply a matter of saying that you are tax consolidated.  The fact that your accounts may be consolidated for accounting purposes does not mean that you are tax consolidated. Tax consolidation is a specific process that you need to go through and will include the resetting of your cost base for tax purposes.

Tax consolidation makes sense in some situations but is not appropriate for everyone. It comes with an initial set up cost and will place ongoing requirements on you. It does, however, provide a number of benefits. If this sounds like your situation, let us advise you on the implications of tax consolidation and determine whether it is advantageous for you.