Amendments to corporate loss relief carry-forward rules
12 November 2018
The Draft 2018-19 Finance Bill clauses include some changes to the reformed corporate loss relief rules that took effect from 1 April 2017. HMRC states that the amendments (that will take effect from 1 April 2019) will ensure that the legislation works as intended and will prevent relief for carried-forward losses being claimed in excess of that intended. The proposed changes include:
- The deductions allowance: the allowance that may be used by a group member will be restricted so that where a company is a member of one group and an ‘ultimate parent’ of another, it can only use a share of the allowance from the group of which it is a member. This will prevent groups from acquiring new members to boost the amount of the deductions allowance available.
- Terminal relief: the rules will be amended to ensure that where the three-year period for which relief is due begins part way through an accounting period, the total relief due for that accounting period is restricted to the proportion of the total profits for the accounting period that falls within the three year period.
- Transfer of a trade without a change of ownership: the restriction of relief for losses arising before a change in ownership will be extended to losses made by a predecessor company.
- Basic Life Assurance and General Annuity Business (BLAGAB) profits: amendments will be made to the computation of ‘relevant profits’ so that:
- The amount of the deductions allowance used is the full amount to which the company is entitled for the accounting period. This will simplify the computation for many and prevent the amount of the relief for carried-forward losses from being inflated.
- It is based on the shareholders’ share of the total profits, to ensure that the amount of restricted carried-forward losses used is consistent with the policy objective.
From 1 April 2020, the proportion of annual capital gain that can be relieved by brought forward capital losses will be restricted to 50%.
In order to ensure the measure applies only to larger companies, as with the earlier change from April 2017, the restriction will not apply to the first £5m of carry forward loss utilisation (whether capital or income-type losses). However, capital losses will continue to be streamed against chargeable gains, with the existing s171A mechanism being retained to transfer gains/losses intragroup.
Companies will be required to split their 2020 accounting period into two notional periods, with net chargeable gains arising in the period up to 1 April 2020 notional period not subject to restriction. Where there is a net chargeable gain in one notional period and a net capital loss in another notional period, these are aggregated before applying the carry forward loss restriction rule to the whole period.
The government proposes anti-forestalling legislation to counteract arrangements designed to defer capital losses beyond the start date, or to accelerate capital gain crystallisation before the start date. Genuine third party transactions should not be caught by this, but artificial de-groupings or uncompleted contracts are likely to be counteracted.
A consultation is open for comment until 25 January 2019, and legislation is intended for Finance Bill 2019-20.