ACCA Advanced Taxation (ATX) Practice Exam

Is a company required to use its losses carried forward against its own profits before surrendering those losses to another company?

1. Yes, always

2. No, it can surrender immediately

3. Only if there are no profits

4. Yes, true

The correct answer is: Yes, true

When considering the treatment of losses carried forward in a corporate tax context, it is essential to understand the legislative framework governing loss relief. The correct interpretation here is that a company is generally required to utilize its own losses carried forward against its profits before it can surrender those losses to another company. The rationale behind this requirement is primarily focused on preventing abuse of the tax system. By mandating a company to first offset its losses against its own profits, the legislation aims to ensure that a company cannot selectively choose to surrender its losses and benefit a fellow company without first utilizing those losses to reduce its own tax liability. This approach promotes tax fairness and ensures that companies do not exploit loss relief provisions for competitive advantage. In practice, this means that if a company is in a position to profit from its operations, it must apply any carried-forward losses to reduce its taxable income before considering any surrendering actions. If there are no profits, the company may then consider surrendering the losses to another company as a tax strategy. Hence, while there may be exceptions or specific circumstances under which loss surrendering could take place, the baseline rule affirms that losses should be utilized first to alleviate the liabilities of the originating company. This fundamental principle of utilizing losses before surrendering them effectively