The way companies use losses can be key to managing their taxable profits for corporation tax purposes. The Chancellor has announced two measures that 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. These changes mirror the loss restrictions already applied to banks,for further details on which click here.

Detailed guidance on these measures and draft legislation is not yet available, with the government proposing a consultation and intending to legislate in 2017. While these measures appear generally attractive and business friendly, it is telling that the government forecast that these changes will increase tax revenue by more than £1.3 billion by 2021.

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