Changes to corporation tax losses
A company can claim relief for a loss, for example, from trading, the sale or disposal of a capital asset, and on property letting, provided that company would normally be liable to pay corporation tax.
Relief is obtained by offsetting the loss against other gains or profits in the same accounting period, or a claim can be made to carry the loss back. Any remaining loss will be carried forward to future accounting periods.
There have been a number of changes to loss relief, most recently in the Autumn Budget.
Corporate capital loss restriction
Companies are charged corporation tax on their chargeable gains, not capital gains tax and there are some differences between the rules for calculating chargeable gains and allowable losses for companies, compared with individuals and trustees, etc.
And losses made when a company sells or disposes of a capital asset, are treated differently from trading losses.
Capital losses arising to a company in an accounting period are set against any capital gains arising in the same period. When capital gains exceed capital losses in an accounting period, the company will have chargeable gains that are subject to corporation tax. Remaining capital losses can be carried forward and set against capital gains (but not income profits) arising in future years.
Companies within a group for capital gains purposes can elect to transfer gains or losses arising in an accounting period to another company within that group.
Major reforms were introduced to corporation tax income losses from 1 April 2017:
- Losses arising from 1 April 2017 can in most cases be carried forward and set against the total profits of a company or another company within the same group; and
- From 1 April 2017, the amount of profit that can be relieved by carried forward losses is limited to 50%, subject to an annual deductions allowance of £5 million per group.
As the April 2017 reforms didn’t cover capital losses, the Government has now published a new consultation to remedy this.
The loss relief rules for income already benefit capital gains by allowing certain carried-forward income losses to be set off against capital gains. And the rules for capital losses already ensure a form of group relief for carried-forward losses and allow carried-forward capital losses to be set against any kind of gains.
However, the Government believes that the absence of any restriction on the amount of capital gains that can be relieved by carried-forward capital losses can have undesirable outcomes for the Exchequer, as businesses making substantial capital gains over many years may not pay any corporation tax due to losses incurred from historic disposals.
So, in order to address this, it has been proposed that the amount of capital gains that can be relieved by carried-forward capital losses will be limited to 50% from 1 April 2020.
The Government intends that the reforms to capital losses will apply to capital gains that arise on or after 1 April 2020 such that the restriction will apply to losses carried-forward from the last accounting period ending before that date.
Where a company has an accounting period that straddles 1 April 2020, it is proposed that the accounting period be split into two, one period ended on 31 March 2020, the other commencing 1 April 2020. The restriction will apply only to gains arising in the notional period from 1 April 2020.
As companies are chargeable to corporation tax on the net amount of gains and losses arising in an accounting period less losses carried-forward from earlier periods, the net amount of gains will need to be established for each notional period. Net gains arising in the notional period ended 31 March 2020 can be offset by carried-forward capital losses without restriction; net gains arising in the notional period commencing on 1 April 2020 will be subject to the restriction.
Where there is a surplus of capital losses arising in the notional period ended 31 March 2020, these are set against capital gains of the later notional period in arriving at the net gains in that period before the restriction is applied.
However, as the allowance of £5 million per group that was introduced for carried-forward income loss relief will also cover capital gains that can be offset with carried-forward capital losses, the Government estimates that fewer than 1% of companies will be financially affected by the restriction due to the availability of a £5 million annual allowance.
The consultation considers how best to achieve this reform in legislation and how to deal with the interactions with other areas of the corporate tax system, including the April 2017 reforms to corporate income loss relief.
The closing date for comments is 25 January 2019. Draft legislation will then be published in Summer 2019, allowing a period of technical consultation ahead of its inclusion in the 2020 Finance Bill.
In the meantime, an anti-forestalling measure has been put in place. It applies for disposals on and after 29 October 2018 to prevent:
- Delaying the realisation of a capital loss so that it will not accrue until a later accounting period;
- Making arrangements that will enable an existing capital loss to be refreshed after this reform comes into force thus converting a carried-forward capital loss into an in-year capital loss which would not be subject to the loss restriction;
- Ensuring that any capital gains are recognised before the loss restriction comes into force.
In the first two scenarios, any tax advantage obtained because the loss restriction has been avoided could only be realised after the commencement of the new rules, even though the relevant arrangements could be entered into prior to that date. So, the Government intends to include relevant anti-avoidance rules to negate any tax advantage from arrangements entered into before the introduction of the restriction, but which give rise to such a tax advantage after.
The Government has said it will counter arrangements that seek to exploit the deductions allowance going forward, such as where there is manipulation of a group structure to maximise the amount of the annual allowance due.
In the third scenario described above, a company (possibly within a group) could either make a disposal or set a time of disposal such that a capital gain on an asset will artificially accrue before this loss restriction comes into force. This may involve the use of losses that are already carried-forward or the use of current period losses that would be restricted as being carried-forward under this reform.
The period between the consultation being announced and 1 April 2020 will be subject to an anti-avoidance rule. Any tax advantage claimed can be denied where arrangements are contrived specifically to avoid the effect of a loss-restriction after the changes have been announced, but before they come into force. The Government has however said that it does not intend this to affect capital gains arising under normal commercial practice during this period.
Amendments to relief for carried-forward income losses
In July this year HMRC has said it would introduce amendments in the 2018/2019 Finance Bill to correct defects in its April 2017 reforms (see above) to carry forward loss relief for companies and to ensure that the legislation works as intended.
- The deductions allowance that can be used by a company that is a member of a group is restricted so that where that company is a member of one group and an ‘ultimate parent’ of another, it can only use a share of the allowance from the group of which it is a member.
- This applies in relation to accounting periods beginning on or after 6 July 2018 (and to amounts falling after 6 July 2018 where an accounting period straddles 6 July 2018) and will prevent groups from acquiring new members to boost the amount of the deductions allowance available.
- The terminal loss relief rules have been amended to ensure that where the three-year timeframe for which relief is due starts part way through an accounting period, the total relief due for that accounting period is restricted to the proportion of the total profits for the accounting period that falls within that three-year timeframe.
This will apply to accounting periods beginning on or after 1 April 2019.
Various amendments have also been made to tighten up the April 2017 extension to the anti-avoidance provisions around where there is a transfer of a trade under common ownership (sometimes known as a hive down).
It was confirmed in the Autumn Budget that these changes would go ahead.
The draft legislation published on 6 July 2018 has also been amended to include changes to the group relief cap on profits. The amendments limit the amount of profits against which group relief for carried-forward losses may, in certain circumstances, be allowed to the “qualifying profits” (instead of “relevant profits”) where these are less than the amount of the deductions allowance. New sections introduce the definition of “qualifying profits” for this purpose. The changes to the group relief cap apply from 1 April 2017.
Where a company has an accounting period that straddles 1 April 2017, the periods falling before and after that date are treated as separate accounting periods for the purposes of applying the restrictions to corporate income loss relief.
HMRC has now published amended guidance looking mainly at how profits, losses and deductions of the straddling accounting period can be apportioned in order to determine how much of these amounts fall before and after 1 April 2017.
Additional rules apply to companies affected by the corporate interest restriction (CIR) and where both sets of provisions require apportionments to be made, HMRC says that it expects consistency. Details can be found in HMRC’s corporation tax manuals at CTM04890.
The CIR rules, which have also applied since 1 April 2017, restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense. Changes are also being made to this legislation, to try to ensure that the rules operate as intended. For general guidance on the corporate interest restriction, see CFM95000.
Please note that this document was prepared by a third party and as such Brewin Dolphin is not responsible for the content or able to answer queries on the topics dealt with. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Therefore you should not rely on this information without seeking professional advice from a qualified tax adviser, who should also be able to assist you with any questions on the content.
This document was prepared as a general guide only and does not constitute tax or legal advice.