Reform for corporation tax loss relief rules

07 December 2016

Please note: the tax proposals described below may not now take effect from the date stated – read more on the tax changes dropped from Finance Bill 2017 as a result of the snap General Election.

Finance Bill 2017 contains clauses implementing the proposed new regime for carry forward of tax losses, effective from 1 April 2017. 

This is broadly as set out in our earlier article:

The draft legislation contains a number of amendments to the current regime, including:

  • All post-April 2017 losses carried forward (whether trading or non-trading) can be used against total profits, rather than having to be streamed as now.
  • Post-April 2017 losses can be used in priority to pre-April 2017 losses. The latter still have to be streamed, unless a company elects to forgo them.
  • Companies will be able to make a claim (akin to s458 CTA 2009 for non-trade deficits) to decide whether to defer use of pre-April 2017 trading losses in favour of other loss reliefs (eg in-year group relief or post-April 2017 loss transfers).
  • A simplified calculation will be allowed for companies who have no pre-2017 carried forward losses (or elect to forgo them). They will no longer have to apportion profits between trading and non-trading for loss offset. They cannot however use a simplified calculation simply because they believe they would fall within the £5m annual allowance. 
  • The legislation confirms that losses and profits of a period straddling 1 April 2017 are to be split on a time apportionment basis, subject to a ‘just and reasonable’ override.
  • The £5m annual allowance for a ‘group’ will be based on the existing group relief definition, but amended to minimise scope for avoidance. In particular, the decision not to use the IFRS 10 consolidation test as the basis will be welcomed by private equity-backed groups who could otherwise have found themselves aggregated. The fixed £5m allowance will be allocable at a group’s discretion – so for example a company with £7m of post-April 2017 trading profit may be able to set off £6m of its pre-April 2017 trading loss. 
  • Terminal loss relief will be extended to permit a company’s carried forward trading losses to be used to offset its profits of the 36 months prior to cessation (but not profits before 1 April 2017) without applying the 50% restriction.

Various anti-avoidance provisions are being introduced into the new rules:

  • Groups buying a loss making company cannot access its pre-acquisition losses for a period of 5 years
  • The change in ownership rules in part 14 CTA 2010 will be extended to catch changes made in the 5 years after acquisition
  • Where a company’s trade or business becomes ‘small or negligible’, its carry forward losses will be streamed and this will also apply for the first time to non-trade debits which will henceforth expire on cessation of the company’s investment business
  • When a company has disposed of all its income-producing assets, it can no longer surrender its carry forward losses
  • The ‘transfer of deductions’ provisions in part 14A (which target latent losses) will be extended to catch loss carry forwards
  • The loss refresh provisions in part 14B will be extended to encompass all losses
  • New TAAR eg targeting fragmentation of a ‘group’ for the £5m allowance and artificial inflation of profits to frustrate the 50% restriction.

Groups should model the impact of the transition to the new loss regime and in particular the interaction with the new rules limiting interest deductibility which will also apply from 1 April 2017.  For example paying off deferred interest before April 2017 may mitigate an interest limitation, but result in a loss carry forward limitation.  

read more on the finance bill