A 50 percent cap on the amount of profits that can be reduced by carried forward losses will be introduced from 2017 alongside other changes to allow such losses to be set against profits from different activities, which is not currently allowed.
In 2010 the UK Government announced the objective of making the UK's corporate tax regime the most competitive in the G20, through providing attractive conditions for businesses to "invest, innovate and grow". Accordingly, the UK Government has already introduced various measures, in particular the reduction of the UK's corporation tax rate from 28 percent to 20 percent (with a further reduction to 17 percent by 2020. In 2016 the Business Tax Road Map was published, which outlines an updated strategy for business taxation and various other objectives, including.the simplification and modernisation of the UK's corporate tax system.
To that end, the UK Government has announced changes to the treatment of losses for corporation tax purposes. Consultation is currently taking place and legislation will be included in the Finance Bill 2017.
In broad terms, where a company incurs a loss as a result of its trading activities, it can: (a) relieve that loss against total taxable profits generated in the corresponding accounting period (including profits from other activities); (b) relieve that loss against profits generated in the previous accounting period; (c) surrender that loss to another group company (where it can be relieved against taxable profits generated in the corresponding accounting period).
Moreover, losses that have not been relieved against current or prior year profits (through the methods described in (a), (b) and (c) above) can be carried forward and set off against taxable profits arising in future periods. There is no restriction on the amount of profit that can be relieved by carried forward losses. However, there are restrictions on the type of profit that carried forward losses can be relieved against. More specifically, certain types of carried forward losses can only be set again profits from the activities to which they relate (rather than the profits of other activities in a company or the profits of other group companies).
Under the proposed reforms, a company that incurs losses on or after 1 April 2017 will be able to carry forward such losses and set them against the profits of different activities within the same company. Moreover, under the proposed reforms, losses that arise on or after 1 April 2017 can be carried forward and set against profits of another group company. It should be borne in mind that as the proposed reforms do not include grand-fathering measures, losses that arise before 1 April 2017 will remain subject to the current rules.
In addition, under the proposed reforms, the amount of profits that can be relieved by carried forward losses will (as of 1 April 2017) be limited to 50 percent. This restriction will only apply to companies or groups carrying forward losses of more than GBP5 million in the year in question.
The proposed reforms are intended to apply to trading losses (which includes a company's share of a partnership's trading loss), non-trading loan relationship deficits, management expenses, UK property losses and non-trading losses on intangible fixed assets. The proposed reforms do not change the rules on capital losses.
Other Items to Consider
Computing Income: The proposed reforms will not impact the current rules for computing corporation tax profits by categorising different types of income. These rules will, however, be considered by the Office of Tax Simplification.
Calculation: The UK Government's proposals contain a prescribed model for how taxable profits should be relieved.
Banks: Carried forward losses within the scope of the existing bank loss restriction (which is linked to the financial crisis and subsequent misconduct payments) will continue to be distinguished going forward, with relief limited to 25 percent. In conjunction, carried forward losses that fall outside the existing bank loss restriction will be limited to 50 percent of eligible profit over GBP5 million from 1 April 2017.