Is this the end of carry-forward loss relief for companies as we know it?
In 2016 the government announced a consultation process on changes to the treatment of losses for corporation tax purposes. With the consultation exercise now completed, we are expecting the draft legislation to be announced in the Autumn Statement, ahead of its enactment in the 2017 Finance Bill.
Current rules on carry-forward loss relief
Currently unrelieved trading losses can be carried forward indefinitely and offset against total income from the same trade. While for many companies this results in a reduction or complete elimination of corporation tax liability in profitable years, for others the restriction of the relief to the same company and the same trade as that which gave rise to the loss may be seen as limiting. This is particularly true in circumstances of corporate reconstructions or turnarounds, where previous loss making trade ceased and was replaced by new or significantly changed commercial activities.
When will the new rules affect your company?
The potential changes are likely to affect companies once losses to be carried forward exceed £5m (total allowance for a company or group). Losses affected by the changes are: trading losses (including the company’s share of partnership profits), non-trading loss relationship deficits, management expenses, UK property losses and non-trading losses on intangible fixed assets. Capital losses are excluded from this regime, and continue to be ring-fenced to be offset against future capital gains only.
What is potentially changing?
Losses arising before 1 April 2017 unrelieved by 1 April 2017 will be offset against the maximum of 50% of income from the same trade.
Losses arising after 1 April 2017 will be offset against the maximum of 50% total income (not necessarily from the same trade as that which gave rise to the loss) of the company or the group. The changes apply only if the amount of losses c/f exceeds 5m.
Impact on companies
Start-ups and small companies
Due to the £5m threshold a significant majority of SMEs will remain unaffected.
Medium and large companies
Bigger companies with profits exceeding £5m will still benefit from full carry forward loss relief, but the benefit of the loss will be spread over more accounting periods before the whole loss is fully relieved.
Anti-avoidance rules are expected to be put in place alongside the legislation, for example to prevent companies from accelerating profits or shifting profits into companies with carried forward losses arising before 1 April 2017 to accelerate carried forward loss use.
Change of ownership
The extent to which a group should be able to benefit from acquired carried forward losses arising after 1 April 2017 may be restricted to profits of the same trade, despite the greater flexibility of the new rules introduced. The lost benefit of losses on cessation is also expected to be unchanged.
Step 1: Calculate the amount of profit to which the restriction applies
- Calculate total profits for the year, dividing them into trading and non-trading profits
- Calculate the proportion of each in total profit
- Calculate any relief available against total profits (for example, non-trading loan relationship deficits or current year group losses surrendered to the company)
- Apply the reliefs to trading and non-trading profit in the proportion calculated.
- Allow up to £5m of profit be relieved by carried forward losses (allowance per group)
Step 2: Allow up to 50% of remaining trading and non-trading profits to be relieved by brought forward losses of the company
- Establish Total Relevant Profit (50% of trading and non-trading profit available after Step 1)
- Use pre-April 2017 b/f trading and non-trading losses subject to streaming rules
- Use post-April 2017 b/f trading and non-trading losses if relevant profits still remain
- Any remaining Total Relevant Profits can be used to offset available management expenses, UK property losses and non-trading losses on intangible fixed assets that were unused during the previous accounting period.
Step 3: Allow post-April 2017 losses to be relieved against the profits of different activities and/or different companies within the group
- Offset any remaining Total Relevant Profit still available after Step 2 by carried-forward losses of any type that have been claimed from other companies in the group
To illustrate the changes, we have reproduced two of the simpler examples from HMRC’s consultation document, to show how the rulesare understood to apply.
As more detail is expected in November, this guidance will be expanded at a later date, to demonstrate the more complex aspects of the new legislation.
Article from ACCA In Practice