This article summarises the provisions regarding group relief and consortium relief of carried forward losses included in Finance Bill 2017 that was released on 20 March 2017.
Note to the reader: The measures examined in this article have been removed from Finance Act 2017. We understand that the Financial Secretary to the Treasury has notified the House of Commons that these delayed measures are intended to be reintroduced at the earliest opportunity post-election. The expectation is that if the measures are reintroduced, this would occur in a summer Finance Bill soon after the election, and we recommend that business assumes that the start date of these measures remains as 1 April 2017 until there is an announcement by Ministers.
The provisions have been expanded to govern group relief and consortium relief for carried forward losses, as well as the basic rules for group relief for carried forward losses arising after 1 April 2017.
It also includes a number of restrictions. In particular, preventing a company from surrendering carried forward losses via group relief where the company has the capacity to use the losses against its own profits, but has chosen not to so that group relief for carried forward losses is only available to the extent that the losses cannot be used by the surrendering company.
Similarly, a company with carried forward losses of its own cannot make a claim for group relief for carried forward losses of another company unless it has utilised its own carried forward losses as far as possible.
Any losses claimed are offset against the total profits of the claimant company for that period, subject to the limit on relief for losses brought forward to 50% of taxable profits (after any of the £5m deductions allowance allocated to the claimant company). These losses are offset against profits after all other forms of loss relief apart from losses carried back from a later period (s188CK).
Chapter 4 limits the surrender of losses under s188CB to the lower of the remaining carried forward losses available to surrender and the remaining profits of the claimant company that can be sheltered by a group relief claim for carried forward losses.
Where a claim for consortium relief has been made, any claim is further limited to the ownership proportion (the lower of the surrendering company’s percentage interest in the ordinary share capital, rights to profits, rights to assets on a winding up and voting power held in the claimant company) of the claimant company’s relevant profits for the overlapping period.
Where the claimant company under such a consortium relief claim is also the member of a group, its relevant profits in determining the amount of consortium relief for carried forward losses it can claim is reduced by the amount that it could potentially claim via group relief of current year and carried forward losses.
Chapter 5 similarly limits the surrender of losses by a consortium company to a consortium member (or member of the same group as the consortium member) to the lower of the remaining carried forward losses available to surrender, the remaining profits of the claimant company that can be sheltered by a group relief claim for carried forward losses and the amount that could have been surrendered to the claimant company under the “current year” consortium relief rules for the specified loss-making period.
Restrictions on consortium relief claims are applicable by reference to the ownership proportion of the consortium company held by the claimant company in the specified loss-making period, i.e. the period in which the losses arose rather than in the period of the claim/surrender.
Any claim for consortium relief by members of the same group as the link company are limited to the amount the link company could have claimed as a standalone company, assuming it had sufficient profits to claim its full entitlement.
Where the consortium company is also a member of a group, the carried forward losses that it can surrender to a consortium member are also reduced by the amount of group relief for carried forward losses that could have been claimed from it by members of that group.
In an M&A context and practically speaking, in joint venture situations the Shareholders’ Agreement should make it clear how carried forward losses of a consortium company should be shared.