Loss Relief: Simplifying the complexities

Tax Education Series - Episode 3

Loss relief according to the Nigerian Tax Law (S. 31(2)(a) of the CITA CAP. C21. LFN 2004 (As amended)), is an amount of loss that is allowed by the revenue service having satisfied that such loss was incurred by the company in any trade or business during the preceding year of assessment.

Losses arise when a company's aggregate deductions (like expenses) exceeds the total assessable profit or income made. The rules governing loss relief strictly prohibit making a claim for loss when there is actually no loss made.

Key Points 1. Loss relief cannot be granted in the same year in which loss is made. This is because there is no profit from which such loss would be relieved. 2. Loss relief can only be granted against profit from the same business or trade from which the loss was made. i.e loss on a Cheese making business can only be relieved against profit of the same Cheese business. There is an exception to this. 3. Losses to be relieved must be computed on the same basis as that of the assessible profit in any year of assessment. 4. With effect from 2007, losses made on businesses can now be carried forward indefinitely against future profits. In addition , Insurance companies can now carry forward losses indefinitely like every other companies under CITA, according to the Finance Act 2019. 5. Losses cannot be carried backwards. i.e You cannot use a loss from 2007 to relief profit of 2005.

Categories of loss relief There are three main types of loss relief namely; 1. Current year loss relief: The current year loss relief is only applicable to individuals and can be relieved against profit from various business activities i.e losses from a particular business can be relieved against profit from other business source.

2. Carry forward losses relief The carry forward losses relief is available to both individual taxpayers and corporate bodies (companies). This relief is granted on preceding year basis i.e. losses from prior year can only be relieved prospectively on profits in the subsequent year(s).

3. Terminal loss relief According to Nigerian tax law there is no provision for granting relief four losses made by a company in its year of cessation. Any loss incurred in the year of cessation will be assumed to be nil for the assessment year concerned.

Summary - Loss relief can only be enjoyed when an organisation makes profit subsequently after loss. - There are three main categories of loss relief which are; current-year loss relief, carry-forward loss relief, and terminal loss relief. - Losses can be carried forward indefinitely with effect from 2007. In addition, for insurance companies, the Finance Act 2019 has lifted the 4 years loss carry forward restriction, hence losses can now be carried forward indefinitely. - If a business ceases operation and still have unrelieved loss, such loss is deemed to be permanently lost.

PS: CITA means "Company Income Tax Act".