Changes to Corporation Tax Loss Relief
The second Finance Act of 2017 introduced some significant changes to the way company losses arising after 1 April 2017 can be used. Whilst the Act has introduced a 50% loss restriction for larger companies, the new regime is much more flexible for smaller companies and groups, as most losses carried forward to be off set against future profits will now be available to either off set against total profits or to be group relieved.
Losses which cannot be used against profits in the year they are created, can be carried forward for future years. Previously, however, they were only available to be used against taxable profits created from the same type of income as the losses. For example carried forward trade losses could only be off set against future profits from the same trade.
In addition, losses could only be group relieved in the year the losses were created. Any unused loss, not group relieved, could only then be used against future profits from the same type of income.
These rules could lead to losses becoming isolated and useable if no profit would ever be made to offset the losses against. For example, if a company ceases one type of loss making trade and cannot use all of the losses carried forward they would be unlikely to every be able to use these losses, unless they started the trade again and made a profit.
Losses created from 1 April 2017 onwards can be carried forward to be off set against the total taxable profits for the company. Meaning, if the losses in the above example where made after 1 April 2017 they would now be useable against other trade profits or non-trading profits.
Losses on cessation can still be carried back to offset profits arising in the 36 months of trade, however were they could previously only be off set against profits from the same trade, they too can be off set against total profits.
Any losses carried forward which cannot be used in the company can now be group relieved, provided, company to receiving the loss has first used its own carried forward losses.
Losses created before 1 April 2017 will continue to be subject to the old rules and so losses will need to be pooled separately. The company can choose which losses it uses and in which order so it will be important to make sure older losses are used up first, leaving the more flexible losses to be carried forward.
The restrictions are aim at larger business with profits in excess of £5 million so most SME’s will not be affected by these rules. Companies will only be able to use losses against 50% of their profits in excess of the £5 million allowance.
The restrictions apply to profits made from 1 April 2017 on wards and will apply to the use of all losses, whenever they were created.
So whilst a company may have more losses carried forward which it can use in future years, it may not end up being able to use all of them if the profits are over this allowance.
For groups, the £5 million deductions allowance must be split between all group companies and one company will need to be nominated to report this spilt to HMRC each year.
There are some anti-avoidance rules within the Act to stop abuse of losses. For example, these new rules will not apply to companies with carried forward losses being acquired. In addition, there could be restrictions on the use of these losses, if there is a major change in the company’s trade within 5 years of the sale. The object of these rules is to stop the sale of companies with nothing but losses in them.
These new rules do not affect the treatment of capital losses carried forward in a company. Any capital losses can still only be offset against capital gains in the same company and not against other profits. Capital losses cannot be group relieved.
Provided the company or groups profits are under £5 million, these changes are very good news and should make most losses useable going forward. Care will need to be taken over the next few years though to ensure that the correct rules are applied to losses carried forward and that they are used up in the most beneficial way.
For further information about these changes, please contact Ian Meaburn at email@example.com.