Changes to the Corporate Capital Loss Restriction for Corporation Tax from 1 April 2020
Published 11 March 2020
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Who is likely to be affected
Large companies that pay Corporation Tax and have carried-forward capital losses.
General description of the measure
For accounting periods ending on or after 1 April 2020 companies making chargeable gains will only be able to offset up to 50% of those gains using carried-forward (allowable) capital losses.
A Corporate Income Loss Restriction (CILR) for carried-forward income losses was introduced in 2017 which included an allowance that the first £5 million of profits per group could be offset with carried-forward losses before the 50% restriction is applied. The deductions allowance can now also be set against chargeable gains.
This will ensure that over 99% of companies are unaffected by the restriction.
Policy objective
This measure will ensure that large businesses pay tax for each accounting period in which they realise substantial chargeable gains.
Background to the measure
This measure was announced at Budget 2018. The government consulted on the measure from 29 October 2018 to 25 January 2019.
A response to that consultation was published on 11 July 2019 together with draft legislation. A period of technical consultation ran from 11 July 2019 to 5 September 2019.
Detailed proposal
Operative date
The measure will have effect where carried-forward capital losses are used to offset chargeable gains accruing on or after 1 April 2020.
Transitional arrangements will apply where an accounting period straddles the above date.
An anti-forestalling provision was announced at Budget 2018 and took effect for any arrangement made on or after 29 October 2018.
Current law
Part I of Taxation of Chargeable Gains Act 1992 sets out how allowable losses can be carried forward and used to offset future chargeable gains. A company can make substantial chargeable gains in an accounting period but pay no corporation tax because it has sufficient carried-forward capital losses to offset those gains, reducing them to nil.
The current law covering the CILR can be found at Part 7ZA Corporation Tax Act 2010. This restricts a company to offsetting no more than 50% of its relevant profits using certain carried-forward losses.
The current law covering life insurers can be found in Chapter III of Part VI of Taxation of Chargeable Gains Act 1992. This broadly ring-fences all chargeable gains and allowable losses arising from an insurer’s Basic Life Assurance and General Annuity Business (BLAGAB).
Proposed revisions
Legislation will be introduced in Finance Bill 2020.
From 1 April 2020, the loss restriction will have the effect that the amount of chargeable gains that can be relieved with carried-forward capital losses will be restricted to 50%.
The steps for computing the CILR in Part 7ZA Corporation Tax Act 2010 will be amended to facilitate this restriction and enable the sharing of the £5 million deductions allowance which forms part of the CILR.
Life insurers writing BLAGAB are excluded from the restriction so far as BLAGAB (ring-fenced) losses are offset against BLAGAB gains. This will be achieved by amendments to the BLAGAB rules and specific provision in Part 7ZA Corporation Tax Act 2010. This measure also includes several clarifications of the BLAGAB rules to ensure that the restriction operates as intended.
The restriction will not apply to companies with a ring-fence trade from oil-related activities where chargeable gains accrue within that ring-fence.
Real Estate Investment Trusts are subject to a specific tax regime that generally exempts chargeable gains. This measure will not apply to capital losses that are attributed in respect of Property Income Distributions.
Companies which are insolvent and are being liquidated will be able to offset carried-forward capital losses against chargeable gains without restriction during the period of official liquidation.
Companies which have one-day accounting periods purely as a result of chargeable gains will be able to claim to access the full £5 million deductions allowance over a financial year in addition to being able to offset allowable losses against other chargeable gains accruing during the same financial year without restriction. Amendments will be made within Corporation Tax Act 2010 and Taxation of Chargeable Gains Act 1992 to facilitate this change.
All companies with one-day accounting periods (as a result only of chargeable gains) and profits in excess of £27,397 will be treated as ‘large’ for the purposes of applying The Corporation Tax (Instalment Payments) Regulations 1998 (SI1998/3175). This change will apply to accounting periods commencing on and after 11 March 2020.
An anti-avoidance provision will prevent companies from obtaining a tax advantage in respect of this provision. An anti-forestalling provision was introduced on 29 October 2018 to prevent arrangement intended to forestall the effect of this measure and will be legislated within Finance Bill 2020.
Summary of impacts
Exchequer impact (£m)
Impacts excluding the exemption for companies in insolvent liquidation
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| +30 | +130 | +170 | +165 | +150 | +140 |
These figures are set out in Table 2.2 of Budget 2020 as “Corporation Tax: restrict use of carried forward capital losses from 2020 to 2021” and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
Impacts for the exemption for companies in insolvent liquidation
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| negligible | negligible | -5 | -5 | -5 | -5 |
These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects businesses.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure does not impact on groups sharing protected characteristics, as it only affects companies.
Impact on business including civil society organisations
This measure will impact on about 200 corporates each year that will pay additional tax as a result of this measure: mainly large corporates within the banking, pharmaceutical, property investment and utilities sectors, groups with a large property portfolio, and insurance companies.
The impact on business administrative burdens is expected to be negligible.
One-off costs include familiarisation with the new rules, as well as modification of existing systems following those made for the introduction of CILR.
On-going costs include making a calculation annually to determine if this measures still applies.
Customer experience is expected to stay broadly the same, although there is an administrative burden from this measure on companies who will need to engage with calculations. This burden already exists from the CILR measure introduced in 2017 and this measure will only build on those requirements and add a little more complexity.
It is expected that software companies will be able to amend their existing software to add in the new requirements and this measure was designed with this in mind. There are some details around the commencement provisions which will add to the complexity in the first accounting period affected by the measure, but clear and detailed guidance will be issued to minimise this impact.
It is expected that software developers will design their accounting packages to assist customers with the commencement requirements.
There is no impact on civil society organisations.
Operational impact (£m) (HMRC)
HMRC costs including both IT & operational costs to implement this measure are estimated to be approximately £1.5 million.
Other impacts
This will have no impact on Climate and Fuel Poverty targets, nor on Air Quality Targets.
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, contact the Business, Assets and International policy team by email: reform.capitalloss@hmrc.gov.uk.