Losses arising from 1 April 2017 when carried forward will have increased flexibility and can be set against the total taxable profits of a company and its group members (‘loss relaxation’).
For all carried-forward losses, whenever they arose, companies will be able only to use the losses against up to 50% of profits (‘loss restriction’). Each standalone company or group will be entitled to a £5 million annual allowance. Profits within the allowance will not be restricted, ensuring 99% of companies are unaffected by the restriction.
The reforms will have effect for accounting periods ending on or after 1 April 2017. Any profits or losses of a company with an accounting period straddling 1 April 2017 will be allocated into notional periods falling before and after that date on a time apportioned basis or, if this does not give a just and reasonable result, on a more just and reasonable basis.
Carried-forward losses can only be used by the company that incurred the loss, and not used in other companies in a group. Additionally, certain losses can only be set against certain types of income, for example trading losses can only be used against trading profits.
Companies can currently reduce all their eligible taxable profits to nil with carried-forward losses. This can lead to a company paying no tax in a year that it makes substantial profits.
The loss relaxation will mean that losses arising from 1 April 2017, when carried forward, can be set more flexibility against the total taxable profits, rather than particular types of income, of a company and its group members.
From 1 April 2017, the loss restriction will have the effect that the amount of profit that can be relieved with carried-forward losses will be restricted to 50%. The loss restriction will apply to carried-forward losses incurred at any time. Each standalone company or group will be entitled to a £5 million annual allowance of unrestricted profit, ensuring 99% of companies are unaffected by the restriction.
Both the loss restriction and loss relaxation will apply to:
- trading losses
- non-trading deficits on loan relationships
- management expenses
- UK property losses
- non-trading losses on intangible fixed assets
Whilst pre-April 2017 trading losses will not be relaxed, companies will have the flexibility to choose whether or not to use pre-April 2017 trading losses before other available losses.
If a company’s trade ceases and the company has unused carried-forward losses of that trade, those losses can be set without restriction against profits arising in the final 36 months of the trade. Post-April 2017 losses will be able to be set against total profits, whilst pre-2017 losses trading losses will only be able to be set against profits of the same trade. The profits that losses can be carried-back to will be limited to those generated from 1 April 2017.
The legislation contains loss buying rules which will mean that where a company or group of companies is acquired, any post-April 2017 carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years.
The legislation also contains a targeted anti-avoidance rule which will prevent any arrangements being entered into with a main purpose of obtaining a benefit from the loss reform rules.