Draft Finance Bill 2017: Reform of Loss Relief | KPMG | UK
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Draft Finance Bill 2017: Reform of Loss Relief

Draft Finance Bill 2017: Reform of Loss Relief

Profits above £5m subject to 50% restriction in offset of brought-forward losses from April 2017. Streaming abolished for post-2017 losses.


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Who should read this?

All UK companies and UK branches of overseas companies.

Summary of proposal 

There are two aspects to the reforms originally announced in the 2016 Budget:  

• From April 2017, there will be a new restriction on the amount of profit that can be offset by brought-forward losses.  The use of brought forward losses against current year profits in each standalone company or group will be subject to an annual £5 million allowance.  Above this allowance, there will be a 50% restriction in the profits that can be covered by losses brought forward.  Banking companies are also subject to the new rules, but with a lower threshold of 25% for profits which can be sheltered using losses accruing prior to 1 April 2015; and

• From April 2017, there will be greater flexibility over the types of profit that can be relieved by losses incurred after that date.  So streaming is abolished for trading and other losses (but not capital losses) sustained after the new rules take effect. 

Key Changes since previous proposals

Following a consultation period over the summer, the Government has responded by updating the original proposals to address a number of the unintended consequences identified and simplify the administration of the new rules for companies.  In particular, the Government has stated that there will be more flexibility than originally proposed for the use of post-April 2017 losses carried forward to address some of the concerns raised around the economic impact, for example, on fixed-term investment projects.  A number of industry specific changes have also been proposed following responses received during the consultation process, including the removal of REITs from these reforms.

Companies will now be able to set post-April 2017 losses against total profits without the need to first set these against relevant trading, or non-trading profits.  Companies will also be able to apply in-year reliefs across income streams at their discretion and the requirement to use pre-April 2017 losses before post-April 2017 losses will be removed.

Simpler loss relief calculations, removing the requirement to apportion profits between trading and non-trading profits will be available for companies with neither pre-April 2017 trading losses nor pre-April 2017 non trading loan relationship deficits (or companies who elect not to use pre-April 2017 trading losses or non-trading loan relationship deficits).

Further, when a company ceases to trade, it will be able to carry forward losses without restriction for use against profits of the final 36 months of trading and a company’s losses will not automatically expire when it goes into liquidation.  The Government has not, however, made any amendments to the original proposals for companies in a start-up position (i.e. no special rules will be brought in for companies just starting to trade).

Other notable general changes include the move to change the proposed definition of a ‘Group’ for these purposes which will now be based on the existing group relief definition (with additional criteria) rather than the use of the IFRS 10 definition as originally proposed.


The Finance Bill clauses will take effect from 1 April 2017.  For accounting periods spanning the commencement date, there will need to be an apportionment with the old and new rules applying to the profits and losses either side of 1 April.

Our view 

The Government has an overall objective of making the UK corporate tax regime the most competitive in the G20, providing the right conditions for business to invest, innovate and grow.  The Business Tax Roadmap also set out a strategy aimed for a competitive and stable business tax regime.

We support these overall objectives and therefore support the freeing up of the current rules on streaming losses, allowing losses of any sort carried forward after April 2017 to be set against profits of any sort.  This excludes capital losses and we see the merit in this distinction given the different treatment of chargeable gains as compared with income.  This change will be particularly welcome to many small or medium-sized businesses, and also for larger businesses that do not have both profits and brought-forward losses exceeding £5 million in any year.  So there will be a very large proportion of businesses that benefit from the changes.

We nevertheless had serious reservations about the original consultation proposals relating to the restriction of carried-forward losses to 50% of profits above £5 million in any year.  Our concerns centred on both the complexity of the computational steps and the impacts on different types of business. 

Some of these concerns have now been addressed through the intended provision of more flexibility to the calculation of the loss relief restriction, the removal of the need to allocate losses to trading and non-trading profits, the discretion provided to the use of in-year reliefs and by providing some element of choice around the use of pre-April 2017 losses. However, these changes alone will not remove the need to retain parallel computations used solely to calculate the amount of loss available for relief and, by retaining the £5 million allowance above which loss relief will be restricted to 50% of available profits, the concerns raised for more volatile businesses (power/utilities, infrastructure, pharmaceutical and oil/gas sectors) are still relevant where significant investment costs are incurred prior to a return of profits and will economically penalise such companies. 

We still see the timing of these changes as a missed opportunity to align with the work the Office of Tax Simplification (OTS) is doing on simplification of corporation tax computations and note the Government is still relying on the OTS to consider the operation of the schedular system going forwards as part of its review.  Any changes to the schedular system are likely to have an impact on these reforms. 

In terms of industry specific concerns, even after the simplification proposed, the rules are likely to be particularly complicated to apply for banking groups, which also need to apply separate restrictions for losses accruing prior to April 2015 and in determining the relief available for surcharge purposes. The Government has sought to mitigate this to some extent by aligning the ‘relevant profits’ calculation under the two corporate tax loss restriction regimes, but the changes still result in significant added complexity. 

For the Insurance industry, we are disappointed that although the loss reform rules will impact insurers’ regulatory capital, there are no specific rules proposed to address this. The Government has stated that it does not consider the potential options available to address the issue would be “practical, legal, and justifiable from a policy perspective” and that “the impact on insurers’ capital ratios is anticipated to be manageable”.  We are encouraged by the Government’s statement that it “will continue to monitor closely any regulatory consequences of the loss relief reforms”, although more concrete proposals would be welcomed.  Further draft legislation is expected to deal with life assurers’ I minus E profits so that policyholders are not unfairly impacted, whilst shareholder profits are brought within the new regime. 

Chris Davidson

+44 (0)20 7694 5752


Wendy Williams

+44 (0)20 7694 4197


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