Don’t Lose Out! Corporation Tax Losses

Lee Sharpe looks at the new regime for corporation tax losses.

Corporation Tax losses are being radically reformed – in fact, the reform has already started, even though the legislation has not yet been approved by Parliament, thanks to a commencement date of 1 April 2017 and a snap election that forced the removal of most of the ‘unimportant stuff’ from Finance Act 2017. Some of the changes will be welcomed by companies; others less so. 

New losses will not be ‘streamed’ as they have been in the past. Historically, trading losses could be set only against future profits of the same trade, and not against (say) profits from other trades, or investment income. Similar restrictions applied to some non-trading losses. Such distinctions will largely be irrelevant for new losses.

Also, ‘group relief’ for losses will no longer have to be set off only in the period of the loss. Where a company (that is in a qualifying group of companies) makes losses, it has previously been able to surrender them to other companies in the group, for them to use against their own profits. But there were strict rules that said losses could be relieved in this way only against profits made by those other companies during the same loss-making period. This restriction has also been removed so, in principle, losses arising under the new regime may be carried forward, and then group relieved in later periods.

These changes amount to a significant boon to many companies, such as those:

However, there will now be restrictions on the proportion of brought forward losses that may be relieved against current (and future) profits. So, brought forward losses may not reduce current year profits to nil, but only as to 50%. However, it must be emphasised that this applies only to ‘large’ losses, running to millions of pounds. The vast majority of family companies will be completely unaffected by this restriction. 

Please note that this draft legislation may change prior to Royal Assent. The draft legislation runs to an astonishing 150 pages (but, incredibly, is not actually the longest schedule in the Finance Bill). 

Losses arising from accounting periods beginning on or after 1 April 2017 may be carried forward against the company’s total profits, rather than against the same income class as gave rise to the loss. This applies to

Losses may basically be claimed in any order, and in any amount – again, a significant departure from the past. 

There are numerous conditions, such as a trading loss may be carried forwards against total profits only if the trade Is continuing, and has not become ‘small or negligible’ (to prevent companies keeping trades ticking over on a token basis, to maintain losses for use against other income in future years). If the conditions are not satisfied, then the losses will be streamed as before.

Trading losses brought forward from accounting periods commencing before 1 April 2017 will still be streamed so, for example, an ‘old’ trading loss will still have to be set against future profits arising in the same trade.

The rules for group relief have likewise been relaxed, so that losses arising in accounting periods beginning on or after 1 April 2017 may be group relieved in later accounting periods, and not just against profits made in the rest of the group during the period in which the loss arose. 

However, in the later period(s) following its loss, a company must first use up those brought forward ‘new’ losses against its own profits before surrendering its losses to other group members, and the claiming members must first use up their own losses brought forwards before they can claim group relief on brought forward losses from the surrendering company. Unsurprisingly, there are several other conditions.

There are also some administrative changes to group relief claims as well, that most claimants will be happy to take on, given the overall benefit of the changes.

The new regime imposes a 50% cap on using losses brought forwards against profits in later years. It will soon be possible for a company to make profits but not to be able to relieve them in full, despite substantially larger losses brought forward. The government apparently wants to ensure that large initial losses do not prevent big companies from paying tax for many years afterwards. 

This restriction will apply only where a company’s profits in a year exceed £5 million (although the threshold is shared amongst members of a group). It will also apply to pre-April 2017 losses brought forward.

A Ltd is a singleton company in mainstream retail, with trading profits (net of in-year losses) of £14 million and brought-forward trading losses of £20 million. Under the ‘old’ regime, the losses brought forward would simply offset the current profits and leave £6 million losses against the next available profits of that trade.

Under the new regime, it will get:

100% loss relief against the first £5 million, but only

50% loss relief against the balance of profits, of £9 million

So, it will be able to relieve £9.5 million in profits, but £4.5 million profits will still be taxable in the year, with £10.5 million in brought-forward losses still left to use.

Conclusion 

There is much to like in these changes. There will be far greater flexibility going forward than previously. But the rules for dealing with ‘old’ pre-April 2017 losses, as well as ‘new’ losses, are quite involved and enter a new band of complexity if the new corporate interest restriction regime also applies (although, here again, most companies will fall below the relevant threshold).

The new regime is much more permissive and marks a major shift in the government’s attitude towards corporate losses. For the vast majority of UK companies, there is no real downside, as the de minimis threshold at which the restriction part of the new regime starts to apply is £5 million. The restriction will really affect only the very largest of companies, groups, and multi-nationals – essentially, only those companies that might realistically expect to have a future, after making losses of more than £5 million.

However, HM Treasury clearly expects to make more money out of its apparent generosity; the Tax Impact and Information Notice published by the government alongside the new rules forecasts that it will save the Exchequer roughly £1.4 billion in tax revenue, up to and including 2020/21. Note that the beneficial changes apply only to losses made from 1 April 2017, while the restrictive changes apply also to losses made before then. The inference I draw is that some very big companies have made some very large losses that will now take longer to work off, under the new regime.