ACCA Advanced Taxation (ATX) Practice Exam

If a company's profit exceeds £5 million, what is the limit on capital loss offset?

1. The total capital losses can be fully claimed

2. £5 million plus 75% of excess gains over £5 million

3. £5 million plus 50% of excess gains over £5 million

4. £5 million, with no further allowance

The correct answer is: £5 million plus 50% of excess gains over £5 million

In the context of the UK Corporation Tax regime, when a company's profits exceed £5 million, there are specific limits on how capital losses can be offset against those profits. The correct answer — which indicates a capital loss offset limit of £5 million plus 50% of excess gains over that £5 million threshold — reflects the structured approach that the tax legislation employs to limit the amount of capital losses that can be utilized in high-profit scenarios. When a company's profits are above this limit, it is generally intended to prevent excessive capital loss utilization, which aligns with tax policy principles aimed at ensuring that businesses pay their fair share of tax based on their profits. Therefore, allowing 50% of excess gains beyond the threshold provides a balance — enabling some relief for capital losses while safeguarding tax revenues. This mechanism is significant because it creates a threshold that prioritizes profits up to £5 million for loss offset, beyond which, only a portion of additional gains can be considered for offsetting losses. This structure emphasizes an incremental approach rather than a blanket application of losses against all profits. The other choices suggest various forms of capital loss offsets that either overestimate the allowable deductions or do not accurately reflect the legislative framework, ensuring that the correct application of capital loss offset rules is