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New government reforms to corporation tax loss relief

Peter Legge Peter Legge

The UK Government has made changes to the corporation tax loss relief rules in order to modernise the regime and increase flexibility over the profits that, future carried forward losses can be relieved against.

These new rules are effective for accounting periods ending on or after 1 April 2017, with transitional arrangements for those accounting periods straddling that date.     

However, whilst intended to ‘simplify and modernise the tax regime’ the new rules are complicated and may require groups of companies to consider modelling the potential impacts, alongside the new rules limiting interest deductibility, (which also apply from 1 April 2017). 

The two key changes to the rules are:

  • losses arising from 1 April 2017 may be carried forward and set against taxable profits of different activities generated by both the loss-making company and any fellow group members; and
  • the annual profits relieved by brought forward losses will be limited to 50%, to the extent that those profits exceed an allowance of £5 million per group.

The changes to these rules should be a positive change for many companies and unincorporated associations in Northern Ireland. The flexibility over how losses are utilised, should provide a benefit to a large number of companies, (predominantly those with profits of less than £5 million, which is relevant to a significant majority of businesses operating in Northern Ireland). 

Whilst the rules for 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.

One other significant change is that Terminal Loss Relief will be extended to permit a company’s carried forward trading losses to be used to offset its profits of the 36 months prior to cessation (but not profits before 1 April 2017) without applying the 50% restriction. 

As with any change to the tax rules the UK government have also introduced various anti-avoidance provisions. These include that:

  • groups buying a loss making company cannot access its pre-acquisition losses for a period of 5 years;
  • the change in ownership rules will be extended to catch changes made in the 5 years after acquisition; and
  • when a company has disposed of all its income-producing assets, it can no longer surrender its carry forward losses.

The above update on these new rules is only a brief summary of some of the key points that will be implemented by the new legislation. It is important that the detailed rules are considered before establishing if a company qualifies for relief under the new corporate tax loss rules. Specialist corporate tax advice should be taken.