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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: transition to exemption provisions: transitional rule: opening negative amount

How to calculate the “opening negative amount”

The transitional rule looks back to see what net losses have arisen in all the foreign permanent establishments of the company in the 6 years prior to the first accounting period for which the election for exemption has been made. Where there are net losses that have not been matched by subsequent profits in that period there will be a “loss carried forward” at the end of the accounting period just prior to the first accounting period for which the election for exemption has been made. Chargeable gains and losses are ignored in arriving at that amount. It is called the total opening negative amount.

It does not matter whether the net PE losses in question have been set-off sideways (e.g. against profits of the UK part of the company) carried back or surrendered as group relief. The computation proceeds as if they are always carried forward.

For example, if profit / (loss) figures in the year of election and the preceding 5 years were:

Year Profit / (loss) Loss cf (if any)
-6 100  
-5 (100) 100
-4 300  
-3 (500) 500
-2 100 400
-1 100 300

then the total opening negative amount is 300.

There is an exception to the 6 year look-back period where the losses are ‘large’ in an accounting period beginning within the period of 6 years ending with the day before the 2011 Finance Bill containing the branch exemption legislation is passed. A ‘large pre-commencement loss’ is defined as exceeding £50m in any one territory (i.e. the net losses of all the PEs in a particular state). Where there has been such a relevant losses amount then the period that is considered is not limited to 6 years. Instead, all accounting periods are considered that begin within the 6 year period mentioned above. This will have an effect when an election for exemption is made in later years.

Where the trade of the company has not commenced prior to the first accounting period to which exemption applies, there cannot be any claw-back of expenditure incurred as it will not have been relieved, even when it is treated as incurred on the first day of trading. This is most likely to be the case when the company is engaged in hydrocarbons exploration activity. Then the trade starts when the company has made a discovery and takes a positive decision to press forward to development. If the election for exemption is made before the trade commences e.g. before the decision for development is taken, the affected prior accounting period in CTA09/S18J(3) will not be one in which the losses are relieved because the commencement of the trade will trigger the start of a new accounting period.

Other matters that potentially give rise to a CT loss even in the absence of a trade, e.g non-trade loan relationship debits, need to be clawed back if they have been relieved in a relevant prior accounting period.