Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
The Summer Finance Bill has arrived and one of the biggest changes concerns relief on corporation tax losses that are carried forward. As it stands, loss rules are very restrictive, however, the new measures look set to provide companies with far more flexibility in this regard.
HMRC has already published draft legislation and guidance online, and is inviting comments until 25th September 2017. Below we provide an overview of the changes and explain who can benefit from them.
What losses can be offset?
The changes relate to corporation tax losses which are carried forward to later years, and will enable companies to offset these losses against most types of taxable profits, irrespective of the activity that the losses relate to. For example, under the new rules carried-forward management expenses could be used against trading profits.
As the legislation was originally due to be implemented in the pre-election Finance Bill earlier this year, the changes will retrospectively affect losses arising from 1 April 2017 onwards. Accounting periods that straddle this date will be subject to commencement provisions.
Who is affected by the changes?
The rules apply to any company or unincorporated association that pays corporation tax and has carried-forward losses. This excludes charities, whilst specific rules are applied to losses made by companies in certain sectors, including creative industries and oil and gas.
HMRC has also ensured that businesses continue to pay tax in accounting periods where they make substantial profits by preventing companies from using the relief to reduce their profits to nil.
Instead, the amount of taxable profit that can be relieved by carried-forward losses will be capped at 50%. This is once the company in question has exceeded the £5m annual loss allowance set by the taxman.
How the rules apply to…
Trade losses and non-trading loan relationship deficits (NTLRDs)
Current rules on trade losses mean that a brought forward trade loss is automatically set against any available profits from the same trade. The same applies to NTLRDs, which are currently offset against future non-trading profits. However, the changes will provide firms with more flexibility, enabling them to determine whether or not profits are reduced in this way.
Trade losses and NTLRDs sustained from 1 April 2017 can be carried forward and relieved against the company’s total profits, whilst a company can even determine the portion of a particular loss that is relieved. For example, a company may decide to relieve 50% of a loss against its 2018 profits, and the remainder in the following year.
However, there are exceptions where the relief isn’t available. Notably if trade activities have become small or negligible or if the trade isn’t carried out on a commercial basis.
Non-trading losses on intangible fixed assets (NTLIFAs)
Also, applicable for management expenses and UK property business losses the changes introduced to these types of expenses are less significant but still important. All of the above are already automatically relieved against total profits or group relieve, and the method of relief remains unchanged for losses of these sorts. However, the significant change is that a company will now be required to make a claim in order to secure this type of relief, whilst firms will be able to choose how much of the loss to relieve.
Navigate the changes to corporation tax loss relief with Hillier Hopkins
The additional flexibility that the new legislation permits will no doubt be a welcome change for firms, but the changes could present some minor complications in the short-term.
If your firm has an accounting period which straddles 1 April, HMRC’s guidance says your company will need to be treated as having separate notional accounting periods for the purpose of determining which profits and losses are eligible for relief under the new regime. You will need to adopt a time basis to apportion the profits and losses for your financial year within the periods before and after 1 April according to CTA10/S1172.
For assistance with this, or for further guidance and advice regarding the tax relief changes, get in touch with Meeten Nathwani or Liam Henry.
This article is written for general interest only and is not a substitute for consulting the relevant legislation or taking professional advice. The authors and the firm cannot accept any responsibility for loss arising from any person acting or refraining from acting on the basis of the material included herein.
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