Policy paper

Corporation Tax: reform of loss relief

Published 5 December 2016

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

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.

Policy objective

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

Background to the measure

The reforms were announced at Budget 2016. The government consulted on the measure from 26 May to 18 August 2016, and will publish its official response to the consultation on 5 December 2016.

Detailed proposal

Operative date

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.

Current law

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.

Proposed revisions

Legislation will be introduced in Finance Bill 2017.

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.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
-	+395	+415	+295	+255

These figures are set out in table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.

Economic impact

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

A behavioural adjustment is made to reflect groups finding ways to mitigate the impact of this measure.

Impact on individuals, households and families

The 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 concerns the taxation of companies, which have no protected characteristics in law. As such, it is very unlikely that there will be any impact on equality.

Impact on business including civil society organisations

This measure is expected to have a significant impact on businesses within the charge to UK CT. Affected businesses will incur a one-off cost of £20 million to £25 million as a result of the need for familiarisation with the new rules and updating their systems and processes to cater for the new loss relief rules. The ongoing costs to the approximately 100,000+ businesses affected are estimated as £3 million to £5 million per year.

Loss relaxation: this measure will increase the flexibility in the types of profits that post-April 2017 losses can be set against. Businesses with an accounting period straddling 1 April 2017 will incur a one-off cost to allocate profits or losses 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. Companies also will need to track their carried-forward losses that arose up to 31 March 2017 separately from losses that arose from 1 April 2017. On-going costs include tracking losses, additional reporting regarding how losses are allocated on the CT600 and CT600C returns.

Loss restriction: one-off costs include familiarisation with the new rules. On-going costs include carrying out the loss restriction calculation. Companies in groups will also incur additional on-going costs including: submitting an annual statement to HM Revenue and Customs (HMRC) of how the £5 million allowance has been allocated, carrying out part-accounting period computations and submitting amendments to HMRC if required. This measure will also accelerate businesses’ CT payments, negatively impacting their near-term cash-flow. Civil society organisations will be affected by this measure if they are liable to CT and their annual profits exceed £5 million.

Small and micro business assessment: small companies are within the scope of this measure if they have carried-forward losses. It is expected that these businesses will benefit from the increased flexibility in the way losses can be used. The £5 million allowance will ensure that only those companies with profits in excess of £5 million will be impacted by the new loss restriction rules.

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	20 to 25
Savings	-

Estimated on-going impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	3 to 5
Savings	-
Net impact on annual administrative burden	3 to 5

Operational impact (£m) (HMRC or other)

HMRC will need to make changes to Information Technology systems to deliver this change at an estimated cost of £815,000.

Other impacts

Competition assessment: the £5 million annual allowance will ensure 99% of companies are unaffected by the restriction.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be subject to ongoing monitoring through receipts, information collected in tax returns and disclosure of new anti-avoidance schemes to circumvent the measure.

Further advice

If you have any questions about this change, please contact Claire White on Telephone: 03000 545597 or email: claire.white@hmrc.gsi.gov.uk or Clare Dunne on Telephone: 03000 585961 or email: clare.e.dunne@hmrc.gsi.gov.uk.