We wrote in the July 2016 edition of tax voice about the changes to the corporation tax loss relief rules. By way of recap, two key changes will be implemented with effect from 1 April 2017.
- Losses arising from 1 April 2017 may be carried forward and set against taxable profits of the various activities conducted by both the loss-making company and by fellow group members.
- To the extent that annual taxable profits exceed an allowance of £5m per group, the profits available for relief by brought forward losses will be limited to 50 per cent of that excess.
The government published original draft legislation in December 2016, followed by further draft clauses on 26 January, the majority of which focussed on anti-avoidance. We summarise these anti-avoidance provisions below and explain their potential application to businesses.
Targeted anti-avoidance rule
The draft clauses include a targeted anti-avoidance rule which seeks to prevent exploitation of the new rules. It is widely drawn and will apply to arrangements aimed at circumventing the intended limits of relief or otherwise exploiting shortcomings in the rules.
For example, this will counteract arrangements entered into by groups to increase the amount of their annual £5m allowance through manipulation of the group structure, or groups seeking to artificially inflate their taxable profits to increase the amount of loss utilisation.
Change of company ownership
To counter loss-buying, there are current rules in place which prevent trading losses in existence at the date of a change in ownership being accessed where there is a major change in the nature or conduct of a company’s trade within three years (before or after) of it being acquired. Equivalent provisions apply to companies with investment business.
The government is concerned that, with the greater flexibility in the use of losses, the potential for loss-buying will increase. It has therefore widened the scope of the loss buying rules so that:
- where there has been a change in ownership of a company and a major change in the business of that company, both occurring on or after 1 April 2017, the maximum time period between these two events within which these rules will apply is increased from three years to five years; and
- group relief for carried forward pre-acquisition losses will be denied for five years following the accounting period of the acquired company in which the acquisition took place.
Where a company’s trade or investment business becomes small or negligible, the use of any remaining trading losses will be restricted to offsetting future profits of the same trade. The use of non-trade loan relationship debits will also be restricted to offsetting non-trading profits of the same company and there are similar restrictions for other types of loss.
Non-trade debits will also expire on the cessation of a company’s investment business. Currently such companies can continue to carry forward accumulated losses (unless there has been a change of ownership). However, the government is concerned about businesses being kept alive purely to access post-April 2017 losses against future profits in the group.
Other anti-avoidance provisions
- The transfer of deductions rules (Part 14A Corporation Tax Act 2010) currently apply where a company with a latent tax loss is acquired and restrict the manner in which that loss, when realised, may be utilised. These rules will be extended so that they also apply to brought forward losses.
- The loss refreshing anti-avoidance rules introduced by Finance Act 2015 will also be extended to cover UK property business losses and losses on intangible fixed assets.
As we noted in July’s article, the increased flexibility for losses incurred from 1 April 2017 will be welcomed by most SMEs as well as larger businesses, particularly as losses will continue to be carried forward indefinitely. However, the new anti-avoidance issues will need to be considered carefully.
The new rules will also add to overall complexity in general, particularly for companies with both pre and post April 2017 losses disclosed in their corporation tax computations.