Policy paper

Changes to the Corporation Tax reform of loss relief rules

Published 6 July 2018

Who is likely to be affected

Companies and unincorporated associations that pay Corporation Tax and have carried-forward losses.

General description of the measure

This measure makes amendments to the reform of loss relief rules for Exchequer protection purposes and to ensure the legislation works as intended.

Policy objective

Loss reform modernised the UK’s loss relief regime by increasing the flexibility over the profits that carried-forward losses can be relieved against whilst ensuring that businesses pay tax in each accounting period that they make substantial profits.

This measure includes amendments to ensure that the legislation works as intended and will protect revenue by preventing relief for carried-forward losses being claimed in excess of that intended. The same amendments also have the effect of bringing the treatment of Basic Life Assurance and General Annuity Business (BLAGAB) profits in line with the original policy intent.

These and other amendments made by this measure will ensure the policy objective is met.

Background to the measure

The 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. A tax information and impact note was published on 5 December 2016 and gives further information on the background to the rules.

The inclusion of the special BLAGAB rules in the loss reform legislation created an unintended consequence that may result in relief for carried-forward losses being claimed in excess of that intended. Furthermore, these ‘BLAGAB rules’ do not fully meet the policy objective as they restrict losses using a measure of profit that is in part not subject to Corporation Tax; this can lead to excessive relief.

Additionally, other aspects of the legislation require changes to ensure that they work as intended. These relate to:

  • the deductions allowance
  • terminal relief
  • transfer of a trade without a change of ownership
  • oil and gas losses

Draft legislation was published for consultation on 6 July 2018.

Detailed proposal

Operative date

The amendments that ensure the amount of relief claimed and the treatment of BLAGAB profits are in line with the policy intention are effective from 6 July 2018.

All other changes are effective from 1 April 2019.

Current law

The current law is in Part 7ZA (restrictions on certain deductions), Part 22 (transfers of trade without a change of ownership) and Part 8 (oil activities) of Corporation Tax Act 2010 (CTA 2010).

The BLAGAB rules are in Part 7ZA CTA 2010 and Part 2 of the Finance Act 2012.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19 to ensure the BLAGAB rules work as intended and in doing prevent excessive claims to relief. Amendments will be made to:

  • the computation of ‘relevant profits’ so that the amount of the deductions allowance used is the full amount to which the company is entitled for the accounting period. This will simplify the computation for many and prevent the amount of the relief for carried-forward losses from being inflated (section 269ZD and section 269ZFA of CTA 2010)
  • the BLAGAB rules will be changed so that the computation of ‘relevant profits’ is based on the shareholders’ share of the total profits, this will ensure that the amount of restricted carried-forward losses used is consistent with the policy objective (section 269ZD and section 269ZFA of CTA 2010)

Other amendments introduced in Finance Bill 2018-19 will be made to:

  • the deductions allowance that may be used by a group member, this will be restricted so that where a company is a member of one group and an ‘ultimate parent’ of another, it can only use a share of the allowance from the group of which it is a member - this will prevent groups from acquiring new members to boost the amount of the deductions allowance available (section 269ZV(5A) of CTA 2010)
  • the terminal relief rules to ensure that where the 3 year period for which relief is due begins part way through an accounting period, the total relief due for that accounting period is restricted to the proportion of the total profits for the accounting period that falls within the 3 year period (section 45G of CTA 2010)
  • various legislation as a consequence of the extension of the rules for the transfer of a trade under common ownership to include new types of loss introduced by Part 7ZA of CTA 2010
  • the description of a particular type of loss carried forward by oil and gas companies (section 304(7) of CTA 2010)

Summary of impacts

Exchequer impact (£m)

2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024
           

This measure supports the Exchequer in its commitment to protect revenue and is also expected to increase receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2018.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to impact on individuals, households or family formation, stability or breakdown because it applies only to companies.

Equalities impacts

This measure is not anticipated to have an equality impact on individuals with protected characteristics.

Impact on business including civil society organisations

This measure will impact on companies that pay Corporation Tax and have carried-forward losses. Companies in the scope of the BLAGAB rules are also affected by changing the way the loss restriction is calculated. The impact on businesses’ admin burdens is expected to be negligible. One-off costs include familiarisation with the new rules and may also include introduction of new processes and/or systems in order to be able to calculate loss relief under the new rules. There is no impact on civil society organisations.

Small and micro business assessment: small companies are within the scope of this measure if they have carried-forward losses although they are unlikely to be affected financially. It is expected that these businesses will benefit from the simplified computation of ‘relevant profits’.

Operational impact (£m) (HMRC or other)

The additional costs or savings for HMRC in implementing the proposed revisions set out in this measure are anticipated to be negligible.

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 and disclosure of new anti-avoidance schemes to circumvent the measure.

Further advice

If you have any questions about this change, please contact Lisa Walker on telephone: 03000 516080 or email: lisa.walker@hmrc.gsi.gov.uk for BLAGAB queries and Clare Dunne on telephone: 03000 585961 or email: clare.e.dunne@hmrc.gsi.gov.uk for all other queries.