Katherine Ford explains the changes to corporation tax loss relief, which are due to come into effect retrospectively from 1 April 2017.
Consultations and draft law
HMRC has been consulting since mid-2016 on more generous options for relieving corporation tax losses which are carried forward. Currently, carried forward losses can generally only be used against the same type of profits, eg trading losses against profits of the same trade.
Draft legislation was published on 13 July 2017, and some initial draft guidance (for HMRC’s Corporation Tax Manual) was published on 31 July covering the core areas. HMRC has invited comments on this draft guidance by 25 September 2017. Additional guidance is expected to be published by HMRC later.
The draft law to introduce these changes to corporate loss relief was originally included in, and then removed from, the pre-election Finance Bill. But the provisions are still expected to come into effect from 1 April 2017 as they will be included in a second Finance Bill later this year (see notes on Finance Bill resolutions no.16).
Who can benefit?
Charitable companies are specifically excluded from relieving their carried forward losses under these rules. All other companies, including non-resident companies within the charge to corporation tax, can benefit.
Specific rules cover losses made by companies with insurance business, companies with investment business, those operating in creative industries (such as films, TV, video games, theatres and operas) and those with oil and gas-related activities.
The changes affect corporation tax losses arising from 1 April 2017 onwards which are carried forward to later years. If the accounting period straddles 1 April, the company is treated for loss relief purposes as having two separate accounting periods, one up to 31 March and the other from 1 April 2017. Profits and losses should be time-apportioned between the two periods (in accordance with CTA 2010, s1172) unless another basis can be shown to be “just and reasonable”.
Relief for a carried forward loss that arose before 1 April 2017 will continue to be given in the same way as present.
How the new rules work
Any carried forward losses arising from 1 April 2017 onwards will be allowed to be group relieved, or set against the company’s own total profits arising in later years. There is a £5m cap, see below.
The proposals affect the following carried forward amounts:
Currently, a brought forward trading loss is automatically set against the first available profits from the same trade. Under the new rules a company can elect that post-April 2017 profits are not reduced in this way, ie the set-off of any brought forward loss (whether pre- or post-April 2017) can be wholly or partly disclaimed.
The post-April 2017 part of a carried forward loss can be relieved against the company’s future total profits (or group relieved), and the company can specify how much of the loss is relieved in this way. If the loss is only partly relieved against, say, 2018 profits, the balance carried forward can be relieved in the same way in subsequent years.
However, this new relief is not available if:
- the trade activities have become small or negligible;
- the trade is not carried on, on a commercial basis; or
- the trade is carried on wholly abroad.
There will also be a form of terminal loss relief for brought forward losses and there are anti-avoidance provisions affecting disincorporation.
Where there is a transfer of trade without a change in ownership (a “succession”), the successor can claim the new loss reliefs for the predecessor’s carried forward losses. The predecessor will not be able to claim terminal loss relief.
2.Non-trading loan relationship debits
At present, such losses are set against any future non-trading profits including capital gains. The company can choose how much is offset in this way. The new rules permit the post-April 2017 carried forward loss to be wholly or partly set against total profits.
3.Management expenses of an investment business
These expenses are currently treated as a management expense of the later period and are automatically relieved against total profits or group relieved.
Under the new rules, which apply to both pre- and post-April 2017 losses, the method of loss relief is unchanged, but a company will now have to make a claim to relieve the brought forward loss in this way and it can now choose how much of the loss to use.
4.UK property losses
These expenses are currently treated as a property loss of the later period and are automatically relieved against total profits or group relieved.
As for management expenses, the new rules apply to pre- and post-April 2017 losses and the method of loss relief is unchanged. However, a company will now have to make a claim to relieve the brought forward loss in this way, and it can now choose how much of the loss to use.
5.Non-trading losses on intangible fixed assets
These expenses are currently treated as non-trading debits of the later period and are relieved against total profits or group relieved.
The new rules mean that all such losses will now be treated as carried forward losses. Loss relief will still effectively be given in the same way unless the £5m cap (see below) applies.
Companies and groups of companies will have a total annual allowance of £5m of carried forward losses which can be relieved against total profits. Groups can allocate the allowance between the group companies as they choose. If the brought forward losses arising from 1 April 2017 onwards are over £5m, only 50% of the excess loss over £5m can be relieved in this way. The balance of any post-April 2017 losses will continue to be relieved as they are now, typically by set-off against profits of the same source.
The definition of what constitutes a tax-avoidance arrangement is extended to cover “loss-related tax advantages”.
These changes also need to be reflected in the existing anti-avoidance provisions, such as the “loss refresh” rules (CTA 2010, Part 14B), which aim to convert carried forward losses into current year losses. These provisions now cover UK property losses and non-trading intangible losses.
The ability to choose how much of a brought forward loss to relieve and to offset it against total profits are welcome changes.
However, they will require pre- and post-April 2017 losses to be segregated and for tax advisers to maintain their knowledge of both the existing and new loss relief provisions.
Katherine Ford is the manager of the direct tax telephone helpline team at Abbey Tax Protection and is also the author of the Tax Losses (Claritax Books).