Corporation tax losses — CAP2 Tax

Corporation tax losses are mainly about routing. In an exam, do not just say “carry forward the loss”. You must ask: what type of loss is it, what can it be set against, in what order, and is there a group or change-of-ownership issue?

This is CAP2 Tax Topic 2.3, and the uploaded notes describe it as covering current-period set-off, value-basis claims, carry-forward, change-of-ownership anti-avoidance, and the order of claim where multiple reliefs are available.

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1. The basic idea

A company may have a Case I trading loss. That loss is not automatically just carried forward. There are several possible routes.

The key CAP2 ladder is:

1. s.396A — current-period trading loss against current-period trading income of the same company.

2. s.396B — current-period trading loss used on a value basis against CT on the company’s non-trading profits.

3. Group relief, if relevant:

   • s.420A against another group company’s trading income.
   • s.420B on a value basis against another group company’s CT.

4. s.396(1) — carry forward remaining trading loss against future profits of the same trade.

The exam trap is skipping straight to carry-forward or group relief without showing the ladder.

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2. Route 1 — s.396A current-period set-off

Use this where the same company has:

• one trade with a loss, and
• another trade with current-period trading income.

The trading loss is set against current-period trading income of the same company.

Example:

Item	€
Trade A profit	80,000
Trade B loss	(30,000)
Net trading income	50,000

The €30,000 trading loss is used one-for-one against trading income.

Exam point: this is the first call before value-basis relief.

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3. Route 2 — s.396B value-basis relief

If the company has trading losses that cannot be absorbed against its own current trading income, it may use the loss on a value basis against CT on non-trading profits.

This means:

Trading loss × 12.5% = CT credit

That credit reduces corporation tax on non-trading profits, such as Case III, IV or V profits. The uploaded notes emphasise that s.396B is often missed and that candidates should state the formula clearly.

Example:

Item	€
Case I trading loss	(40,000)
Case III deposit income	20,000
CT on Case III at 25%	5,000
s.396B credit: €40,000 × 12.5%	5,000
CT payable	Nil

The loss used is €40,000 because €40,000 × 12.5% = €5,000.

Another way to think about it: a €100 trading loss gives €12.50 tax value.

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4. Route 3 — carry forward under s.396(1)

Any remaining trading loss can be carried forward, but only against:

future trading income of the same trade

This is narrower than students often think.

It is not a general future “company profit” relief. It is against future profits of the same trade.

Example:

Item	€
Trading loss arising	100,000
Used under s.396A	(20,000)
Used under s.396B	(40,000)
Carried forward under s.396(1)	40,000

The €40,000 carried forward can only shelter future income of that same trade.

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5. Group relief interaction

If there is a group, you do not abandon the single-company rules. The notes are clear that single-entity rules are run first, and group relief sits on top.

For group relief, current-period trading losses can be surrendered, but important exclusions apply.

Can be group-surrendered:

• current-period trading losses,
• current-period excess charges,
• current-period excess management expenses,
• current-period excess Case V capital allowances.

Cannot be group-surrendered:

• trading losses brought forward,
• capital losses,
• Case III, IV or V losses.

The group order is:

1. loss-maker uses s.396A first;
2. then group relief may be considered;
3. within the group, s.420A against trading income comes before s.420B value-basis relief;
4. remaining losses are carried forward.

Big trap: brought-forward trading losses cannot be surrendered to the group.

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6. Change of ownership — s.401 anti-avoidance

This is a favourite CAP2 trap.

The rule prevents a profitable buyer from acquiring a loss company and using old losses to shelter new profits.

Under s.401, pre-change trading losses can be disallowed where there is a change of ownership and either:

1. there is a major change in the nature or conduct of the trade within a three-year window; or
2. the trade had become small or negligible before being revived after acquisition.

If s.401 applies:

• losses incurred before the ownership change are disallowed;
• losses incurred after the change remain available;
• the accounting period of change is split into pre-change and post-change notional periods, usually on a time basis.

Exam wording to use:

“There has been a change of ownership, so s.401 must be considered. I would test whether there has been a major change in the nature or conduct of the trade within the three-year window, or whether the trade had become small or negligible before revival. If either limb applies, pre-change trading losses are unavailable; post-change losses remain available.”

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7. Exam skeleton

Use this every time:

Step	What to do
1	Identify the loss type: trading, capital, Case V, charges, management expenses.
2	For trading losses, apply s.396A first against same-company trading income.
3	Consider s.396B value-basis relief: loss × 12.5% against CT on own non-trading profits.
4	If a group exists, consider surrender of current-period eligible losses only.
5	Carry forward any residue under s.396(1), but only against same-trade future income.
6	If there is a share sale/change of ownership, test s.401.
7	State the conclusion and show a loss memo.

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8. Mini worked example

A Ltd has the following for the year:

Item	€
Trade A profit	30,000
Trade B loss	(90,000)
Case III income	20,000

Step 1: Use s.396A against own trading income.

Item	€
Trade B loss	90,000
s.396A against Trade A profit	(30,000)
Remaining loss	60,000

Step 2: Use s.396B against CT on Case III income.

CT on Case III = €20,000 × 25% = €5,000.

Maximum loss needed for s.396B credit:

€5,000 / 12.5% = €40,000.

Item	€
Remaining loss after s.396A	60,000
Used under s.396B	(40,000)
Carried forward	20,000

Final CT:

Item	€
CT on Case III	5,000
Less s.396B credit	(5,000)
CT payable	Nil

Conclusion:

A Ltd uses €30,000 under s.396A, €40,000 under s.396B, and carries forward €20,000 under s.396(1) against future profits of the same trade.

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9. Common CAP2 traps

The biggest traps are:

1. Forgetting s.396B and carrying the loss forward too early.
2. Surrendering brought-forward losses to a group, which is not allowed.
3. Jumping to group relief before showing s.396A in the loss-making company.
4. Ignoring s.401 when a company with losses has been acquired.
5. Using trading losses against any future profits, instead of future profits of the same trade.

The uploaded CAP2 notes flag the order-of-claim weakness directly: run s.396A first, then consider s.396B, then group relief, then carry-forward.

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Quiz — Question 1

A Ltd has the following results for the year ended 31 December 2025:

Item	€
Trade A profit	50,000
Trade B loss	(110,000)
Case III income	24,000

There is no group.

What amount of the trading loss is:

1. used under s.396A,
2. used under s.396B, and
3. carried forward under s.396(1)?

Reply with your workings, and I’ll mark it.

Assuming Financial Reporting, IFRS 15 is the revenue standard. The same core model applies at CAP2 and FAE, but FAE answers need more case consequence, disclosure and advice. The uploaded notes place IFRS 15 in CAP2 FR Part A SR-04 / Part C Chapter 4 and FAE FR Part A SR 02, DF 03 and SK 07.

1. IFRS 15 from scratch

IFRS 15 answers one question: when, and how much, revenue can the company recognise?

The basic idea is:

Recognise revenue when the customer gets control of the goods or services, and measure it at the amount the company expects to be entitled to.

So IFRS 15 is not mainly about cash. It is about performance.

Cash received early does not automatically mean revenue. Invoice issued does not automatically mean revenue. Goods delivered or services performed usually matter more.

2. The five-step model

Every IFRS 15 answer should be built around these five steps.

Step 1: Identify the contract

Ask: is there a real contract with a customer?

You need approval, rights, payment terms, commercial substance, and probable collection. If the contract is not yet enforceable, do not jump to revenue. Cash received may just be a liability.

Step 2: Identify the performance obligations

A performance obligation is basically a promise to transfer a distinct good or service.

Example:

A company sells a machine for €100,000 and includes two years of servicing.

There may be two performance obligations:

1. Deliver the machine.
2. Provide servicing over two years.

This matters because you may not recognise all revenue immediately.

Step 3: Determine the transaction price

This is the amount the company expects to receive.

Start with the contract price, then adjust for things like:

• discounts;
• rebates;
• refunds;
• returns;
• penalties;
• bonuses;
• significant financing components;
• non-cash consideration.

The big exam point is variable consideration. You only include variable amounts to the extent it is highly probable that there will not be a significant reversal later. The FAE revenue framework flags this as a key branch check.

Step 4: Allocate the transaction price

If there is more than one performance obligation, allocate the total transaction price based on relative standalone selling prices.

Simple example:

Item	Standalone selling price
Machine	€80,000
Servicing	€20,000
Total	€100,000

The customer only pays €90,000, so allocate the discount proportionately:

Item	Allocation
Machine	€90,000 × 80,000 / 100,000 = €72,000
Servicing	€90,000 × 20,000 / 100,000 = €18,000

Revenue for the machine may be recognised when control transfers. The servicing revenue is recognised over the service period.

This is a common exam trap: students often allocate using the invoice split, or treat the residual as the service amount. The CAP2 notes flag multi-performance-obligation allocation as a recurring weak area.

Step 5: Recognise revenue when/as performance obligations are satisfied

Now ask: does control transfer at a point in time or over time?

Point-in-time revenue usually applies to sale of goods. Look for delivery, legal title, physical possession, acceptance, and transfer of risks and rewards.

Over-time revenue applies where one of the IFRS 15 over-time criteria is met, such as the customer receiving and consuming the benefit as the entity performs, or the entity creating an asset with no alternative use and an enforceable right to payment. The notes flag over-time service revenue as a common confusion area.

3. The balance sheet logic

IFRS 15 becomes much easier when you separate cash, invoice, and performance.

Situation	Accounting result
Cash received before performance	Contract liability
Performance completed before unconditional right to invoice	Contract asset
Unconditional right to consideration	Receivable
Expected refund / return	Refund liability
Expected returned inventory	Return asset

The FAE fail-safe wording is: cash before performance is a contract liability, performance before unconditional billing is a contract asset, and once billing is unconditional it becomes a receivable.

4. Common IFRS 15 exam patterns

These are the big recurring patterns:

Pattern	Correct route
Bundle of goods and services	Identify separate performance obligations, allocate price, recognise each separately
Warranty	Assurance warranty = IAS 37 provision; service warranty = separate IFRS 15 performance obligation
Right of return	Reduce revenue, recognise refund liability and return asset
Consignment	No revenue until control passes to end customer
Principal vs agent	Gross revenue if principal controls the good/service first; net commission if agent
Repurchase agreement	May be sale, lease or financing depending on control and repurchase terms
Long-term service/construction	Consider over-time recognition and progress measurement

The FAE notes warn that the recurring failure is recognising “this is IFRS 15” but not completing the full chain: standard route, measurement, journal/correction, presentation, disclosure and case consequence.

5. Mini worked example

Scenario

Bright Ltd sells equipment and a 2-year maintenance package for €120,000 cash on 1 January 2026.

Standalone selling prices:

Item	SSP
Equipment	€100,000
Maintenance	€50,000
Total	€150,000

The equipment is delivered immediately. Maintenance is provided evenly over two years.

Step 1: Contract

There is a contract with a customer.

Step 2: Performance obligations

There are two obligations:

1. Equipment.
2. Maintenance service.

Step 3: Transaction price

Total transaction price = €120,000.

Step 4: Allocate price

Item	Calculation	Allocated amount
Equipment	€120,000 × €100,000 / €150,000	€80,000
Maintenance	€120,000 × €50,000 / €150,000	€40,000

Step 5: Recognise revenue

Equipment is delivered immediately, so recognise €80,000 now.

Maintenance is over two years, so recognise €20,000 per year.

If cash of €120,000 is received upfront on 1 January 2026:

Initial entry

Dr Cash €120,000 Cr Revenue €80,000 Cr Contract liability €40,000

At 31 December 2026:

Dr Contract liability €20,000 Cr Revenue €20,000

Closing contract liability = €20,000.

6. How this appears in an exam answer

An exam answer should not be a textbook essay. It should be a case-applied route.

Exam-ready answer structure

Use this skeleton:

1. Identify IFRS 15 issue.
2. Apply the five-step model.
3. Calculate revenue / liability / asset.
4. Give journal or adjustment if asked.
5. State presentation and disclosure.
6. Conclude clearly.

Example exam answer

The arrangement falls within IFRS 15 as it is a contract with a customer for the supply of equipment and maintenance services. The contract appears enforceable as the parties have agreed the goods/services, price and payment terms.

There are two performance obligations: the equipment and the maintenance service. The equipment is distinct because the customer can benefit from it on its own. The maintenance service is also distinct because it is a separately identifiable ongoing service.

The transaction price is €120,000. This should be allocated based on relative standalone selling prices. The total standalone selling price is €150,000, made up of equipment of €100,000 and maintenance of €50,000. Therefore €80,000 is allocated to equipment and €40,000 to maintenance.

Revenue of €80,000 should be recognised immediately when control of the equipment transfers to the customer. The €40,000 allocated to maintenance should not be recognised immediately because the service is provided over two years. It should be recognised over time, likely straight-line if the service is provided evenly, giving €20,000 revenue in the current year.

If the full €120,000 has been credited to revenue, revenue is overstated by €20,000 at year end. A contract liability of €20,000 should be recognised for the remaining service obligation.

The correcting journal is:

Dr Revenue €20,000 Cr Contract liability €20,000

The financial statements should disclose the revenue recognition policy, the nature of the performance obligations, the timing of satisfaction of those obligations, and significant judgements made in allocating and recognising revenue.

7. Main trap to avoid

The biggest IFRS 15 mistake is writing:

“Cash was received, therefore recognise revenue.”

Better exam wording:

“Cash received before the related performance obligation is satisfied is a contract liability, not revenue.”

That one sentence protects a lot of marks.

Great — we’ll use FAE Auditing Part B common traps, one question at a time. The notes emphasise that FAE Audit answers must avoid generic lists and instead route from case fact → risk/evidence/reporting consequence.

Question 1

A client has suffered a cyber incident just after year-end. Management says the issue is “an IT matter only” and that the audit team can continue with the planned substantive testing as normal.

What is the FAE trap here, and what should the auditor’s response cover?

For FAE Advanced Tax — company reorganisation, your route is:

Draw the legal movement first, then apply the relief stack. The big examiner trap is choosing the wrong route, especially mixing up share-for-share and share-for-undertaking. The FAE Tax notes flag this as a high-risk area and say reorganisation indicators appeared in 5 of 8 cycles, with route confusion being a high-severity failure mode.

1. Start with the commercial objective

Open with: “The tax route depends on what the client is trying to achieve and what legally moves.”

Identify whether the purpose is:

Objective	Likely route
Insert a holding company before a future sale	Share-for-share exchange
Move a trade / undertaking to another company	Share-for-undertaking or hive-out
Split business activities but ownership stays the same	Hive-out / group transfer
Change share rights within same company	Same-company share reorganisation
Prepare for future sale of subsidiary shares	Holding-company structure + possible future s626B

The FAE Tax framework says the key inputs are: commercial end-goal, legal movement, ownership percentages, consideration form, residence/trading status, and timing.

2. Classify the legal movement

This is the most important step.

Legal movement	Route	Main reliefs to discuss
Shareholders exchange old company shares for new holding company shares	Share-for-share	s586 CGT deferral; s80 Stamp Duty relief; future s626B if conditions met
Company transfers an undertaking and acquiring company issues shares to shareholders	Share-for-undertaking three-party swap	s587 shareholder relief; s615 company relief; s80 Stamp Duty relief
Company transfers an undertaking and acquiring company issues shares to the transferor company	Share-for-undertaking two-party swap	s631 company relief; no shareholder disposal
Trade/assets move within existing group	Hive-out / group transfer	s617 CGT group relief; s400 loss rules; capital allowances; s79 Stamp Duty relief
Old shares replaced with new shares in same company	Same-company share reorganisation	s584 no-disposal treatment

The notes’ route table says: share-for-share = shareholders transfer target shares for acquiring-company shares; share-for-undertaking = target company transfers the undertaking; hive-out = trade moves under common ownership.

3. Walk every tax head — do not stop at CGT

Use this exam sequence:

A. Shareholder CGT

Ask:

• Are the shareholders disposing of shares?
• Are they individuals or companies?
• Is consideration in shares, cash, loan notes, debt assumption or mixed consideration?
• Is the relief a deferral rather than an exemption?
• Is there boot / cash consideration creating an immediate taxable element?

Typical route:

• Share-for-share: s586 may defer shareholder CGT.
• Share-for-undertaking three-party: s587 may defer shareholder CGT.
• Same-company reorganisation: s584 may treat the exchange as no disposal.
• Two-party undertaking transfer: usually no immediate shareholder disposal because shares are issued to the company, not the shareholders.

B. Company tax / CGT

Ask:

• Is the company disposing of chargeable assets or an undertaking?
• Is there a deemed market value disposal because parties are connected?
• Are there latent gains on goodwill, premises, land, IP or shares?
• Can group or reconstruction relief apply?

Typical route:

• Share-for-share: target company’s assets do not move, so no asset disposal by the company.
• Three-party undertaking transfer: s615 may relieve the transferor company’s asset disposal.
• Two-party undertaking transfer: s631 may relieve CT/CGT and balancing adjustments.
• Hive-out: s617 group relief may apply for chargeable assets.

C. Stamp Duty

Ask:

• Are shares moving?
• Is land/property moving?
• Is an undertaking moving?
• Is this inside an existing group or a reconstruction?

Key distinction:

• s79 SDCA = associated companies relief, usually existing group / 90% association.
• s80 SDCA = reconstruction / amalgamation route where the group is being created or reshaped.

The notes specifically warn that s79 and s80 are not interchangeable: s79 is for associated companies inside an existing group, while s80 is for reconstruction/amalgamation where the structure is being created or reshaped.

D. VAT / property VAT / CGS

Only do this if assets, property or an undertaking moves.

Ask:

• Is there a transfer of a business / undertaking?
• Is VAT outside scope under transfer-of-business rules?
• Is there property in the business?
• Has there been an option to tax?
• Is there a Capital Goods Scheme adjustment?
• Is reverse charge relevant?

The FAE Tax framework says a restructuring answer is incomplete where a business or property moves unless TOB, option to tax, reverse charge and CGS intervals are checked.

E. Losses, capital allowances and clawbacks

Ask:

• Are losses moving or being used after the reorganisation?
• Is there continuity of trade and ownership?
• Are capital allowances transferred?
• Is there a balancing charge risk?
• Could s617 or Stamp Duty relief claw back later?
• Is the future sale date inside any clawback / holding period?

This is especially important in hive-outs and pre-sale reorganisations.

4. Add the future-sale angle

If the facts mention a planned sale, investor exit or sale of a subsidiary, add:

“A holding-company insertion may allow a future disposal of subsidiary shares to qualify for s626B, provided the participation exemption conditions are met.”

But be precise: s626B applies to a corporate shareholder disposing of qualifying subsidiary shares. It does not apply to individual shareholders, asset sales, or cases where the real issue is preserving losses.

5. Exam-ready answer skeleton

Use this in the exam:

The first step is to identify the legal route. The facts indicate that [shares / undertaking / trade / assets] are moving from [X] to [Y], with consideration in the form of [shares / cash / debt]. Therefore, the transaction is best classified as [share-for-share / share-for-undertaking / hive-out / same-company reorganisation].

For the shareholders, the key issue is whether there is a disposal for CGT. [Apply s586 / s587 / s584 / no shareholder disposal]. Any cash or non-share consideration may create an immediate taxable element.

For the company, [state whether assets move]. If assets or an undertaking move, there may be a company-level disposal at market value, but relief may be available under [s615 / s631 / s617], subject to the conditions being met.

Stamp Duty must also be considered. If shares or assets transfer, relief may be available under [s80 reconstruction relief / s79 associated companies relief], but the relevant clawback period and ownership conditions must be checked.

VAT should be considered if a business, undertaking or property transfers. The transfer may qualify as a transfer of a business, but property VAT, option to tax, reverse charge and CGS issues should be reviewed.

The recommended route is [route] because it achieves [commercial objective] while minimising immediate CGT/CT/Stamp Duty leakage. The main conditions to monitor are [ownership %, consideration form, trading status, holding period, clawback risk, future s626B conditions].

6. Main trap to avoid

Do not write a generic list of reorganisation reliefs.

The answer must say:

1. What legally moves
2. Who is taxed
3. Which relief applies
4. Which tax heads remain
5. What conditions / clawbacks must be monitored
6. Why the alternative route is wrong

The dominant FAE trap is choosing the wrong reorganisation route and then applying reliefs for a different legal movement.