The second Finance Act of 2017 includes two important changes to the way losses arising in companies will be able to be used going forward. The changes are quite a departure from the well-established rules which we all understand, the rules can get complex but the key points are set out below.
Key points to know
- There are TWO changes both of which will come into force for periods after 1 April 2017.
- If a company’s year-end straddles 1 April 2017 then it may be necessary to split losses between pre and post 1 April 2017 losses.
- Both new rules apply to ALL corporate losses (trade, non trade deficits, management expenses, property losses etc) but do NOT apply to capital losses.
- The first change is relaxing the way losses can be used in later years – this ONLY applies to post 1 April 2017 losses.
The second change is potentially restricting the amount of losses that can be offset in later years – this applies to ALL unused losses whenever they arose.
What are the key steps to consider
in respect of the potential restriction of the offset of losses?
Change 1: Relaxation (the good change)
This change should only be beneficial and will benefit any company with different streams of income and groups with losses irrespective of the size of the company/group. This ONLY applies to losses arising AFTER 1 April 2017.
Under the old rules different types of losses arising in a company were ‘streamed’ and if not used in the year in which they arose they could be carried forward but only offset against income of a certain type in future, e.g. trade losses could only be offset against trading profits from the same trade.
Furthermore group relief of losses was only available in the period in which the loss arose. Losses could therefore get ‘trapped’.
Losses arising after 1 April 2017 can be carried forward and offset against TOTAL profits of the company in the next period(s). Total profits includes all profits and capital gains.
In certain circumstances losses brought forward can also be group relieved in the later year(s). There is a new term in the legislation ‘group relief of carried forward losses’. Group relief of carried forward losses will broadly be available if the surrendering company cannot use the losses itself in the later period AND the claimant company has no losses of its own which it could use instead.
Losses that arose before 1 April 2017 are still subject to the old rules with the exception that an election can now be made so the offset of these losses is not automatic.
Pre and post 1 April 2017 losses may therefore need to be streamed in companies but companies will have more choice as to how these losses are utilised.
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Change 2: Restriction (the not so good change)
The second change is potentially restricting the amount of losses that can be offset in later years. This applies to ALL unused losses whenever they arose.
Historically companies (except banks/building societies) have been able to carry forward and offset losses against future profits without any restriction in the amount of losses that could be utilised. It was therefore possible to reduce future profits to nil by the offset of losses arising in prior years.
From 1 April 2017 each UK company (or if part of a group all UK group companies combined) has an annual limit in respect of the profits which can be reduced by losses brought forward from earlier years. After this limit is exceeded it will only be possible to reduce the remaining profits by 50%. Any unused losses will continue to be carried forward so it is a timing issue but companies could end up with large unexpected tax liabilities if they don’t realise this change impacts them.
This annual limit is £5 million. Therefore for companies to be affected they would need profits in excess of £5 million with unused losses of £5 million or more brought forward from earlier years.
This change is therefore perhaps likely to impact larger companies/groups.