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Proposed changes to corporation tax loss relief

04 July 2016

Before the EU referendum purdah began, the Government published the planned consultation document on Reforms to corporation tax loss relief– the aim is to simplify and modernise the tax system. The consultation proposes achieving this by removing many of the existing loss streaming rules, but to limit “undesirable outcomes for the Exchequer” by restricting the amount of loss that can be relieved in percentage terms. The consultation proposes that:

  1. Losses carried forward are restricted to 50% of post-1 April 2017 profits
  2. Post-1 April 2017 losses carried forward can be used against other profits of both the company and the group (subject to the 50% limitation).

The detail

The new rules would apply to all losses carried forward (eg trading, non-trading loan relationship deficit, losses on property trading, management expenses, non-trading losses on intangible fixed assets).

The loss restriction will only apply if a group has taxable profits in excess of £5m a year: where the £5m profit figure is exceeded by the group, carried forward losses can only be used against 50% of the profit. A group would have complete freedom over how the initial £5m ‘allowance’ is allocated between group companies, although it is suggested that using the standard group relief definition for the allowance could result in fragmentation and more than one allowance accruing to the same economic group. Instead, it is suggested that the one allowance is given to a parent company and the companies it controls (with control defined as under IFRS 10).

The transition to the new rules will mean it is often still necessary to divide post-2017 profits between trading and non-trading for calculating the loss set-off for each year, as pre-2017 losses carried forward can only be used against the relevant stream of income in later years. Therefore, the schedular system will remain relevant for pre-2017 losses carried forward (as well as double tax relief and controlled foreign companies). However, post-2017 losses from all sources can be used against all group profits in future (although not where losses are carried back).

Where loss-making companies are acquired, it is the Government’s intention that acquired losses can only be streamed against profits of same trade or business; and equally a loss-making business shouldn’t be able to use the new freedoms to transfer its losses to an acquired profit-making business.

Order of loss setoff

Under the new rules it is proposed that profits made in a year will be relieved by losses as follows:

  1. Losses realised in the same year (eg, group relief)
  2. Pre-2017 losses carried forward then used – subject to 50% restriction and streaming
  3. Post-2017 losses carried forward then used – subject to 50% restriction but no streaming
  4. Loss carry back then used – no restriction on the size of the loss that can be used, but carried back losses can only be used by the loss-making company.

Group relief claims may still be needed for in-year loss relief between companies, notwithstanding the fact that post-2017 losses carried forward can be transferred intragroup. It is also proposed to allow surrender of post-2017 losses carried forward to or from consortium members by reference to their share of the loss-making company in the year the loss arose (provided that the loss recipient is still a member and all members agree).

Loss carry back claims may well be valuable, as losses carried back will be able to cover any profits left in charge because of the loss carry forward restrictions. It is proposed that there will be a new Targeted Anti-avoidance Rule (TAAR) to prevent profit shifting by groups to use up carried forward losses before 2017.

The consultation closes on 18 August 2016 - read the full consultation document.