On 26 May 2016, the Government published a consultation document on reforms to corporation tax loss relief. This follows the announcement at Budget 2016 of two proposed changes to the way the loss relief rules currently apply for corporation tax purposes. To increase flexibility it will be possible for losses arising from 1 April 2017 to be carried forward and set against future profits arising from different activities within the company itself and against future profits made by other members of the same group. However, many larger companies and groups may find they are worse off as a result of the changes, because from the same date it is proposed to restrict the losses (whenever generated) which can be offset in each period to 50 percent of profits, subject to an allowance of £5 million per group. The consultation document seeks views on the detailed design and implementation of these new rules.
Some key features of the proposals are:
- The amounts affected are trading losses, non-trading loan relationship deficits, management expenses, property business losses and non-trading losses on intangible fixed assets. The treatment of capital losses will not be affected;
- For the purposes of the 50 percent limit, amounts which are offset against total profits (including group relief) would be allocated proportionately to trading and non-trading profits;
- Brought-forward amounts which arose before April 2017 would be offset before other brought-forward amounts, in accordance with existing rules but subject to the 50 percent limit;
- Each group will have an allowance of £5 million of profits which could be relieved in full by brought-forward losses. The allocation of this allowance among group companies, and among types of profit within each company, will be at the group’s discretion;
- The group definition for the purpose of the £5 million allowance would be wider than the normal group relief group although specific proposals have not been put forward at this stage;
- For groups which include banking companies, the £5 million group allowance would be available only for losses which are not subject to the banking loss restriction. Relief for losses subject to the bank loss restriction would be limited to 25 percent of banking companies’ profits, but this relief could be topped up to 50 percent by any available non-restricted losses;
- Brought-forward losses surrendered to a bank by a non-banking company would be disregarded in calculating the bank surcharge;
- Brought-forward losses arising from April 2017 would be able to be surrendered to or by group companies on the same basis as group relief, and to or by consortium companies on the basis of the consortium membership at the time when the losses arose;
- As now, trading and property business losses would expire when the activity ceases;
- Existing anti-avoidance and change of ownership rules would continue to apply and consideration is being given to a rule to protect against profit-shifting designed to accelerate use of losses.
The Government’s desire to maintain some existing restrictions and to limit potential avoidance has meant that the proposals are more complex than might have been expected, especially while losses are still being carried forward from before April 2017. Groups may find themselves having to make detailed calculations in order to maximise their use of relief.
This consultation is open until 18 August 2016, and draft legislation will then be published at the Autumn Statement followed by a period of technical consultation ahead of its inclusion in the 2017 Finance Bill. Groups which may be affected will want to consider carefully how the proposals are likely to impact them and may wish to respond to the consultation document.