HMRC has been consulting on proposed changes to corporation tax loss relief, which would relax the rules for losses that are carried forward. Here at Phebys, Chartered Certified Accountants in Cambridgeshire, we have produced an explanation of what these changes mean and just who they’ll be affecting.
Existing losses, when carried forward, can usually only be set against profits of the same type (i.e. trading losses used against profits from this same trade), but this rule is set to be retrospectively relaxed as of 1st April 2017. A draft of this legislation was first published on 13th July 2017, with some initial guidance then released on 31st July. HMRC has invited comments on the legislation with a deadline of 25th September.
Who will benefit from the changes?
Charitable companies are excluded from the new rules, but all other companies should be able to benefit, including non-resident companies, providing that they are charged corporation tax.
There will, however, be specific rules put in place for losses made by companies with business in insurance or investment, companies in creative industries (e.g. film/TV, video games or theatre/opera), and firms with activities relating to oil or gas.
Which losses will be affected?
All corporate tax losses arising from 1st April 2017 onwards, which will be carried forward to later years, will be eligible. If the relevant accounting period straddles this date, it will be treated as two separate accounting periods for loss relief purposes (i.e. one period ending on 31st March and one commencing on 1st April). Relief for any pre-April losses being carried forward will continue to be given in the same way as present.
How do the new rules work?
Carried forward losses can be group relieved, or set against the company’s own total profits as they arise in later years. There is a £5 million cap on carried forward losses.
The following losses will be affected:
1) Trading losses
Current carried forward trading losses are automatically set against the first available profits from the same trade. Under the new rules, the company will have the ability to choose for their post-April profits to not be reduced in this manner (i.e. the set-off of any carried forward loss can be wholly or partly claimed).
The post-April portion of a carried forward loss can be relieved against the firm’s future total profits and the company is able to specify how much of the loss will be relieved in this manner.
If a loss is only partly relieved, this balance can be further carried forward and relieved in the same way in consequent years.
The relief is not available in the following circumstances:
- Trade activities have become small/negligible
- Trade is not conducted on a commercial basis
- Trade is conducted wholly overseas
Anti-avoidance measures affecting disincorporation will also be put into place.
Where there is a transfer of trade without any change in ownership taking place (a “succession”), the successor will be eligible to claim the new loss relief for their predecessor’s carried forward losses. The predecessor will not be eligible to claim terminal loss relief.
2) Non-trading loan relationship debits
As it stands, these are offset against any future non-trading profits, including capital gains, and the firm chooses how much is offset in this way. The new rules will allow post-April carried forward losses to be wholly or partly set against total profits.
3) Management expenses of an investment business
These expenses are currently treated as a management expense of a later period and are automatically relieved against total profits, or group relieved. The new rules will apply to both pre- and post-April losses and the method of loss relief remains unchanged, except that the firm will now have to make a claim in order to relieve carried forward losses in this way and can now choose how much to use.
4) UK property losses
These expenses are currently treated as property losses of a later period and are automatically relieved against total profits, or group relieved. Just like management expenses, the new rules will apply to both pre- and post-April losses and the method of loss relief remains unchanged, except that the firm will now have to make a claim in order to relieve carried forward losses in this way and can now choose how much to use.
5) Non-trading losses on intangible fixed assets
These expenses are currently treated as non-trading debits of a later period and are automatically relieved against total profits, or group relieved. The new rules state that losses such as these will now be treated as carried forward losses. Loss relief will still effectively be given in the same way, unless the £5 million cap applies.
The annual cap
Companies, or groups of companies, will receive a total allowance, per year, of £5 million’s worth of carried forward losses, which can be relieved against total profits. Groups of companies will be able to spread this allowance between companies, in accordance with how they see fit. If post-April carried forward losses exceed £5 million, only 50% of any excess loss (over £5m) will be eligible to be relieved in this manner.
Phebys – Accountants in Cambridgeshire
These changes, whilst welcome, will require the segregation of pre- and post-April losses and knowledge of both the existing and new systems. If you require any advice on these changes, do not hesitate to contact Phebys on 01480 896267 or email us at firstname.lastname@example.org.