UK: Draft guidance on corporate tax loss relief rules

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On 31 July 2017 HMRC issued for public consultation draft guidance in relation to the reform to corporate tax loss relief rules. An amended draft of the relevant legislation on corporation tax loss relief was published on 13 July 2017 and this is to be included in the Finance Bill (No 2) 2017 to be published after the summer recess. The draft guidance is an initial tranche focusing on the core rules and on areas where guidance has been specifically requested. HMRC intends to issue further draft guidance in due course. Comments on the current draft guidance are invited by 25 September 2017.

The reform of corporation tax loss relief aims to restrict the loss relief available to business with substantial profits, while also allowing more flexibility on how carried forward losses may be offset against the total taxable profits of a company and a group rather than only being offset against particular types of profits. The rules apply to companies and unincorporated associations that pay UK corporation tax and have losses carried forward. The revised rules are intended to apply from 1 April 2017.

The guidance emphasizes that the relief given for losses carried back from a later period and relief for losses in the year (such as group relief) is not affected by the new rules. The restriction on offset of losses and the greater flexibility on offset against profits will both apply to trade losses carried forward; non-trading loan relationship deficits carried forward; non-trading losses on intangible fixed assets (NTLIFAs) carried forward; management expenses carried forward; and UK property business losses carried forward.

Restriction on offset of losses carried forward

From 1 April 2017 companies with profits exceeding the deduction allowance (which will be a maximum of GBP 5 million) will not be able to reduce their profits to nil using losses carried forward. The profits (after the deductions allowance and after deduction of losses of the same year such as group relief) can only be reduced by up to 50% by losses carried forward.

The deductions allowance of GBP 5 million would be shared between the members of a group in the manner the group decides. A company will be nominated by the group to allocate the deductions allowance among the group. If the profits are below the level of the deductions allowance there is no restriction on offset of losses brought forward.

Although the restriction is effective from 1 April 2017 it applies to all losses carried forward including those brought forward from before 1 April 2017.

Flexibility of offset of losses

The greater flexibility to offset losses brought forward against total profits rather than a particular type of profits applies from 1 April 2017 to trading losses; non-trading loan relationship deficits (NTLRDs); non-trading losses on intangible fixed assets; management expenses; and UK property business losses.

From 1 April 2017 generally trading losses and NTLRDs may be carried forward and offset against total profits of the company, or surrendered as group relief, but in some situations the company will continue to be more restricted in loss offset. Trading losses for periods before 1 April 2017 will still only be available for offset against profits of the same trade. This also applies to losses of periods after 1 April 2017 in certain situations, for example where the trade has become small or negligible. Also NTLRDs of periods before 1 April 2017 are still only available for offset against non-trading profits, and for periods after 1 April 2017 in cases where the investment business has become small or negligible NLRTDs will still only be offset against non-trading profits.

Management expenses, UK property business losses and NTLIFAs will continue to be available for offset against total profits of the company. From 1 April 2017 they may also be available for group relief for carried forward losses. Carried forward management expenses will no longer need to be deducted in priority to other deductions from total profits.

New claims procedures will allow a company to choose which carried forward trading losses, NLTRDs, management expenses and UK property business losses are relieved in an accounting period.