The Chancellor has confirmed that reforms relating to carried forward losses will be implemented from April 2017. No further detail was announced following the recent consultation and we must wait for that in the draft Finance Bill 2017 on 5 December.
The two reforms make significant changes to this long-settled area of tax law.
The first measure is intended to introduce greater fairness and flexibility to the way losses can be used. For losses incurred on or after 1 April 2017, businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group. Currently, losses carried forward can only be set against profits from certain types of income – for example, trading losses against trading profits – and only used by the company that incurred the loss. This has historically resulted in trapped losses or complex arrangements to avoid trapped losses.
However, for businesses with significant profits, the second measure is distinctly less attractive. It is proposed that the amount of profits that can be offset against losses carried forward is restricted. From 1 April 2017, businesses will only be able to offset 50% of any profits in excess of £5 million against losses carried forward. Importantly, the £5m exemption will effectively mean that only larger businesses will be caught, but it will apply across groups and not on a company by company basis. These changes mirror the loss restrictions already applied to banks, for further details on which click here.