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Article:

Use of brought forward tax losses

05 May 2016

Having already restricted loss relief for banks from 1 April 2015, the Government announced at Budget 2016 that it was extending loss relief restrictions to all other companies from 1 April 2017.  However, greater flexibility in using the relief that is available will greatly simplify loss claims in future years.

The key change will be that for profits arising after 1 April 2017, only 50% of group profit can be sheltered by brought-forward losses. The restriction for banking companies was also increased: from 1 April 2016, only 25% of a bank’s annual taxable profit can be offset by pre-April 2015 brought-forward losses.

This new restriction will not apply where a (non-bank) group’s profits for a year are less than a de minimis of £5m profit. This is likely to mean that the majority of businesses will not be adversely affected by this element of the package and the burden will fall only on ‘large groups’. From the Government’s perspective, the loss restrictions should help to counter public criticism of large corporations paying no tax despite high levels of reported profit.

More flexibility

Tax losses arising after 1 April 2017 will be available for carry-forward against profits from the company’s other income streams and profits of other group companies. The current requirement to stream tax losses has long been a frustration so additional flexibility in the way losses can be used is a welcome change. 

There is no indication that the Government is thinking of moving to full group tax consolidation but the ability to offset a brought-forward loss in one company against a profit of another company will be a significant improvement to the existing group relief system. In the past, loss streaming difficulties have led groups to seek to refresh tax losses - something this Government has only recently clamped down on – but these changes will probably mean that such planning would be redundant for losses arising after 1 April 2017. 

For smaller companies, the changes will bring significantly greater flexibility in the way excess losses can be used in future periods. For larger groups, the greater flexibility may be outweighed by a limitation requiring the group to pay tax on at least half their profit regardless of the level of historic tax losses. 

Detailed rules

A consultation document on the new rules is expected during 2016 with the detailed rules published in the draft Finance Bill (2017) in December 2016. The new restrictions on corporate interest relief will also be included in the draft Finance Bill.

Since 1 April 2013, most tax reliefs available to UK resident individuals are capped in some way to prevent them being exploited for tax avoidance purposes. It remains to be seen whether the Government will take the same approach for larger companies - will it also seek to limit use of capital allowances to reduce taxable profit in future?