Amendment to the reform of loss relief rules for Corporation Tax
Published 27 October 2021
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This publication is available at https://www.gov.uk/government/publications/amendment-to-the-reform-of-loss-relief-rules-for-corporation-tax/amendment-to-the-reform-of-loss-relief-rules-for-corporation-tax
Who is likely to be affected
Companies and unincorporated associations that pay Corporation Tax (CT) and have carried-forward losses.
General description of the measure
This measure amends the reform of loss relief rules to ensure the legislation continues to work as intended.
Policy objective
The 2017 CT loss reform increased flexibility over the use of tax losses against profits whilst ensuring that businesses pay tax in each accounting period that they make substantial profits.
This measure makes changes to ensure that the legislation continues to work as intended by continuing to provide an exemption from the loss reform rules for companies in financial distress, enabling them to obtain full relief for carried-forward losses that offset profits arising from lease renegotiations where they adopt International Financial Reporting Standard (IFRS) 16.
Background to the measure
The CT loss reform rules were enacted in sections 18 and 19 and Schedule 4 of Finance (No 2) Act 2017 and apply from 1 April 2017 and were further amended by Finance Act (FA) 2019 and FA 2021. A tax information and impact note was published on 5 December 2016 and gives further information on the background to the rules.
Since 2017, HMRC has continually evaluated the CT loss reform rules to identify where changes are required. These efforts have established that changes to the way leases are accounted for under IFRS 16 mean that companies in financial distress are denied the exemption from the loss restriction for carried-forward losses that are set against profits arising from lease renegotiations.
Where a lease becomes onerous, because the costs of meeting the obligations under the lease exceed the benefits that the company will receive in return, accounting standards require the company to recognise a tax-deductible provision for the net losses arising in respect of the lease. Lease renegotiations that result in a rent reduction or subletting of the property require the reversal of some or all of the onerous lease provision which is treated as a taxable credit. Under normal circumstances, the loss reform rules would restrict the use of any losses arising from the onerous lease provision to 50% of any profits from the reversal exceeding the deductions allowance.
An exemption from this rule was brought in where reversals of onerous lease provisions form part of a corporate rescue. The change in the way leases are accounted for under IFRS 16 means that the narrow wording of that exemption does not apply to companies that are required to adopt the new standard.
Detailed proposal
Operative date
The amendment will apply retrospectively with effect for accounting periods beginning on or after 1 January 2019.
Current law
Current law is included in Part 7ZA (restrictions on certain deductions) of Corporation Tax Act 2010 (CTA 2010) at sections 269ZX and 269ZY.
Proposed revisions
Legislation will be introduced in Finance Bill 2021-22 to ensure that companies adopting IFRS 16 continue to benefit from the exemption from the loss reform in certain circumstances.
Amendments will be made to the legislation that specifically refers to reversals of onerous lease provisions so that it also incorporates reversals of right of use asset impairments and other similar credits provided by the new accounting standard. These will allow companies that are required to adopt IFRS 16 to benefit from an increase in the deductions allowance where they enter into lease renegotiations to avoid insolvency. These amendments will ensure that companies accounting under both the pre-existing accounting standards and IFRS 16 will, in substance, benefit from the same treatment.
Summary of impacts
Exchequer impact (£m)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| nil | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
There is no impact on individuals as this measure only affects businesses.
This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that this measure will impact on groups sharing protected characteristics, as it only affects companies.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on fewer than 100 businesses that pay CT, have carried-forward losses and enter into lease renegotiations resulting in reversals of prior onerous lease provisions primarily to allow the business to continue trading and avoid administration or insolvency. This measure makes a minor technical amendment. One-off costs will include familiarisation with the change. There are not expected to be any continuing costs.
This measure is expected overall to have no impact on businesses and individuals experience of dealing with HMRC as the change doesn’t change any processes or tax administration obligations.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
The operational impact of this measure is negligible as this is a minor technical amendment.
HMRC guidance pages will be updated to reflect the change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Eva Upali on Telephone: 03000 542 465 or email: eva.upali@hmrc.gov.uk.