As announced in the Budget, from April 2017 companies with “large” profits will be subject to restrictions so that only 50% of profits over £5m will be able to be offset against carried forward losses. The better news was that, also from April 2017, all companies would be given greater flexibility as to how they can use any carried forward losses.
On 26 May the government launched a consultation on the introduction of these two reforms, which set out the detail absent in the Budget announcement. The consultation will run to 18 August 2016. Taking each reform in turn:
- greater flexibility: by allowing companies to use carried forward losses against taxable profits arising from different activities, and/or against taxable profits of other group members, the government intends to prevent carried forward losses becoming “stranded”. A “group” for these purposes will take its meaning from the existing group relief regime. The consultation document states that this will have a “significant impact on the Exchequer” and as a result this element of the reform package will only apply to losses arising from 1 April 2017.
It should be noted that, under the proposals, some form of “streaming” of post-1 April 2017 losses would remain. As proposed, it will be necessary from April 2017 to separate out trading and non-trading profits to arrive at a trading and a non-trading proportion. Available losses will only be capable of being used against profits in these proportions
- 50% profit restriction: the stated concern here is that profit-making companies can end up not paying tax for many years due to the availability of historic carried-forward losses. The proposal, it is suggested, is in keeping with the rules in a number of competitor jurisdictions and is described as a restriction on the “timing” of the relief (as any restricted carried forward loss relief can be carried forward indefinitely to periods when it can be used). Unlike the first limb of the reform package (which concerns only post-April 2017 losses), this proposed change will apply equally to pre- and post-April 2017 losses. However in light of the proposal to increase the flexibility of the use of carried forward losses:
- the 50% restriction applicable to pre-April 2017 losses will be by reference to trading profit
- the 50% restriction applicable to post-April 2017 losses will be by reference to profit across the group.
The consultation predicts that over 99% of companies should be unaffected by the 50% profit restriction. This is due to the proposed availability of a £5m annual allowance, per “group”, allowing up to £5m of taxable profits to be fully relieved by available carried forward losses. It should be noted that for the purposes of the annual allowance the government is proposing a definition of group based on “control” or “association”, rather than adopting the existing group relief definition. Groups will be given “full discretion” as to how to allocate the annual allowance within the group.
The consultation also confirms that the new restriction should not push loss-making companies into a tax-paying position. The final legislation will therefore ensure that current year losses can be used against profit otherwise “exposed” to tax by operation of the 50% restriction.
Finally the consultation recognises the possible impact of the 50% restriction on insurers, and seeks views as to the implications of the reform in terms of regulatory capital requirements.
The consultation document can be viewed here.