The Finance (No. 2) Act 2017 has introduced changes to the corporation tax loss regime. The rules are now more flexible for carried forward losses but restrictions to the amount of losses that can be carried forward have also been introduced. The changes apply to accounting periods beginning on or after 1 April 2017. If an accounting period straddles that date, the periods before and after are treated as separate accounting periods and its profits and losses for that period are time apportioned.
What was the position before the changes?
For periods before 1 April 2017, a company could set losses against profits of any description in the same accounting period and against profits of any description of an accounting period in the 12 months immediately preceding the period of the loss. If a trading loss had not been used in this way then the loss would be automatically carried forward and set against profits of the same trade in future periods.
What has changed?
Now, for trade losses arising in accounting periods beginning on or after 1 April 2017, they can be carried forward and set against a company’s total profits (including capital gains) in the next accounting period, subject to certain conditions being met (for example, that the trade did not become small or negligible in the accounting period in which the loss arose). The claim to set the loss against the total profits needs to be made within two years from the end of the later period. There are also similar changes to the loan relationships non-trading debit rules and the losses on intangible fixed assets rules, where the losses can now be set against total profits where they could not previously. All carried forward losses will also be available for surrender by way of group relief.
The new regime also introduces a restriction so that, from 1 April 2017, companies are only able to set losses against 50% of total profits exceeding an annual deductions allowance of £5 million. There is no restriction if profits are below the deductions allowance, so HMRC expect most small companies or groups to be unaffected. There are specific rules for single companies and groups of companies in relation to how the restriction and deduction are applied.
A targeted anti-avoidance rule (“TAAR”) has also been introduced to prevent abuse of the corporation tax loss rules. The TAAR enables HMRC to make such adjustments as are just and reasonable to prevent a “loss related tax advantage” arising from “relevant tax arrangements”.
Furthermore, the various relaxations described above (and indeed, a company’s ability to carry forward losses at all) are subject to particular limitations following a change in ownership of that company. Specialist advice should always be sought in these circumstances.
If you would like more information on how any of the changes or proposals affect you or your business or how they may apply in specific circumstances, please contact a member of the team.