The new regime for corporation tax losses
6th April 2018
Posted in Articles, Corporation Tax, Featured Articles by Tom Minnikin
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.
Rules prior to 1 April 2017
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’.
New rules from 1 April 2017
The government introduced some welcome relaxations to the loss relief rules from 1 April 2017. The main headline points are:
- Trading losses arising after 1 April 2017 which are carried forward can now be offset against a company’s future total profits, which includes capital gains.
- Non-trade loan relationship debits arising after 1 April 2017 can now be offset against a company’s future total profits (under the previous rules, offset was restricted to future non-trade profits).
- Such losses can now be surrendered as group relief in future periods.
Is there a catch?
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.
Planning tips
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.
Example 1
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:
- If the company can demonstrate that time apportionment this would produce an unfair result (because the loss arose due to a specific event after 1 April 2017) it can opt for an alternative apportionment. This is clearly subject to challenge from HMRC.
- Alternatively, the company could shorten its year end to 31 March 2017, thereby pushing all the loss into the new regime. Trading losses can still be carried back by up to 12 months which should ensure the company does not lose out.
Example 2
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:
- Company B could decide to not to claim capital allowances, and instead claim group relief from Company C. This ensures that Company C’s trading losses are not stranded, and instead Company B carries forward a bigger pool of capital allowances. These allowances may lead to Company B’s making a tax loss in a future period but this will be under the new regime.
