Happy New Tax Year to everyone!
We start the first tax bite of 2018/19 on a positive note, with a look at the new rules for corporation tax (‘CT’) losses. New rules came into effect last year.
Under the previous rules, a company with carried forward losses was often limited in the way it could utilise those losses in future years. For example, trading losses could only be offset going forward against future trading profits. Furthermore, companies were unable to group relief losses going forward i.e. they could only be offset against the lossmaking company’s profits. This often resulted in losses effectively becoming ‘stranded’.
The government introduced some welcome relaxations to the loss relief rules from 1 April 2017. The main headline points are:
There is a slight catch with the above rules, in that at the same time as introducing the above relaxations a new ‘annual cap’ on corporate loss relief was brought in. However, the cap has been set at a relatively high level of £5 million. If brought forward losses arising from 1 April 2017 onwards are over £5 million then only 50% of the excess loss can be relieved. For example, if a company has £10 million of profits and £7 million of brought forward losses, only £6 million of the losses can be used against the profits. Only very large companies will be affected by this change.
The relaxation in rules may give rise to planning considerations in certain circumstances, as it will be favourable to have losses carried forward under the new, more flexible, regime wherever possible.
Company A has a 31 July year end. A significant downturn in trade occurred in the final quarter of 2017 resulting in a large trading loss. If the company does nothing, 8/12ths of the loss will potentially be carried forward under the old rules (the general rule is that losses in periods which straddle the change in law have to be apportioned on a time basis). Possible planning options are:
Company B is part of a group which makes its accounts up to 30 April. A sister company, Company C, incurs a large trading loss in the year to 30 April 2017 which, if carried forward, could become stranded. Company B’s profits are usually sheltered by large capital allowance claims. Planning options:
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