Reforms to corporation tax loss relief
The changes to the corporation tax loss relief rules apply from 1 April 2017 and are expected to be confirmed later this year when the Finance Bill is given Royal Assent.
Under the existing rules, corporation tax losses carried forward:
- can only be used by the company that incurred the loss,
- can only be set against profits from certain types of income e.g. trading losses can only be utilised against the next available profits from the same trade,
- cannot be surrendered to other companies by way of group relief.
The reform has two aims:
- to allow most carried forward losses arising from 1 April 2017 to be used more flexibly against the total taxable profits of a company and its group members, and
- to restrict the amount of loss relief available to businesses with substantial profits.
What does this mean?
Losses arising from 1 April 2017 will have increased flexibility when carried forward and can be set against the total taxable profits of a company rather than having to be utilised against specific types of income. Post 1 April 2017 carried forward losses can also be surrendered as group relief to the extent that the losses cannot be used by the surrendering company. This will remove many of the existing loss streaming rules and accelerate tax relief for many loss making companies.
The amount of profit that can be offset by losses carried forward will be restricted, subject to an annual £5 million allowance. There will be a 50% restriction in the profits that can be covered by carried forward losses whether pre or post 1 April 2017 above the £5 million allowance. Each standalone company will be entitled to a £5 million allowance. Groups of companies will be entitled to a single allowance between the members but will be free to allocate the £5 million allowance as they see fit.
For example, a company with £12 million profit remaining after in year reliefs and that has access to the maximum £5 million allowance will be able to cover only a maximum of £8.5 million profits by carried forward losses (the £5 million allowance plus 50% of the remaining profits of £7 million of profits). The result of this is that a company will pay tax on £3.5 million.
Who is affected?
The rules apply to all companies and unincorporated associations that pay corporation tax and have carried forward losses.
In practice, where a company or a group of companies has profits below £5 million, they will be unaffected by the restriction but will still benefit from the relaxation.
Which losses are affected?
Relief for pre 1 April 2017 carried forward losses, in year losses (such as group relief) and losses carried back from a later accounting period are not affected.
The loss relaxation applies to losses that arise from 1 April 2017. However, the loss restriction applies to all losses carried forward from 1 April 2017, not just those created after 1 April 2017.
If you would like to discuss corporation tax relief in more detail, or you would like to speak with a member of our team, please contact Carolyn Tunstall or call 01772 821021 to be put in contact with a member of our Tax team.