Lee Sharpe looks at the government’s proposals for capital losses incurred by companies.
Budget 2016 saw a significant overhaul of the rules for corporate losses generally, which basically took effect from 1 April 2017, and were reflected in sweeping amendments to CTA 2010, Pt 4 (trading losses) and CTA 2009, Pt 5 (loan relationships).
Smaller companies should broadly have welcomed that regime change, given that they largely enhance flexibility for loss relief, particularly with regard to trading losses and amongst fellow members of a corporate group. But larger groups will see their scope for prompt relief of substantial losses being heavily curtailed over the years to come.
Note that the projected impacts of the measures – sold on their enhanced flexibility – reveal their true intent, as they were forecast to save the Exchequer well over £1 billion over the first four years of their introduction.
This article considers proposed changes to company capital losses, which are intended to apply in a similar vein, from 1 April 2020. Readers should note that, at the time of writing, the measures were subject to consultation, and the rules as finally adopted may differ to the regime as set out below.
Capital gains: current rules
The current rules for corporate capital gains mimic those for capital gains tax itself: surplus capital losses are carried forward to the next available capital gain, whenever that might be.
Corporate capital losses may also effectively be shared among eligible group members.
Government proposals
Having changed the rules for corporate income losses, it has now dawned on the government that the rules for corporate capital losses are by comparison far too generous, and they must be ‘aligned’.
The government seems to perceive that it is unfair for a business to make substantial capital gains over many years and pay no corporation tax, even though that can happen under the existing rules only if the company had made even bigger capital losses beforehand (and this is a justification for the new measures, given in their October 2018 consultation document).
This means that corporate capital losses will in future be subject to a 50% cap, so that only 50% of current year capital gain can be offset by capital losses brought forward (although there is a £5 million threshold for smaller companies and groups – see below).
Could be worse?
There is an annual ‘deductions allowance’ of £5 million, within which losses may be fully relieved and the 50% restriction will not apply. However, note:
The annual deductions allowance is available to singleton companies, but must be shared out among members of the same group (although how it is to be shared is at the group’s discretion).
There is only one deductions allowance – there is not a separate allowance for capital losses. This means in effect that the existing deductions allowance, which has applied since April 2017 for corporate income loss relief purposes, is now going to have to work harder, to cover capital losses as well.
The current proposals will allow in-year capital losses to be fully offset as of now, before considering any restriction to relief for capital losses brought forward. However, this brings anti-avoidance measures into play.
Transitions and anti-forestalling, etc.
The new measures are supposed to apply from 1 April 2020. Up to that point, capital losses may be relieved in full as now. Where a company’s chargeable period straddles the operative date:
The company’s chargeable period will be split into two separate notional periods either side of 1 April 2020;
- Gains net of in-period losses in the period before 1 April 2020 may be fully relieved by capital losses brought forward;
- Gains net of in-period losses arising in the notional period from 1 April 2020 will be subject to the 50% restriction for capital losses brought forward, although any excess losses arising in the notional period to 31 March 2020 may be offset first, before the restriction is applied.
I have often said that the government is the main cause of tax avoidance. Measures like these are a classic example, since HMRC now has to look out for unscrupulous companies that might:
Delay realising a capital loss until a capital gain arises, so that it can be offset as an ‘in-year loss’ without risking a restriction.
Refreshing an old capital loss in order that it can again be treated as arising in a period with gains so it can be fully relieved as an ‘in-year loss’.
Bringing capital gains forward, so that they arise before 1 April 2020 and may, therefore, be more fully offset by capital losses brought forward.
Manipulating group structures to try to maximise the annual deductions allowance.
Given that capital gains (and, therefore, losses) orient primarily around disposal events, it remains to be seen how the government proposes to police when a company decides to sell an asset. The consultation paper says that ‘the government does not intend that capital gains arising under normal commercial practice during [the period prior to the commencement of these new provisions] will be subject to an anti-avoidance rule’.
Example: Capital loss restriction
SingleCo, a standalone company, has brought forward capital losses of £10 million, and in its accounting period ended 31 March 2025 has the following results:
Trading profits of £8 million.
In-year capital gains of £8 million.
In-year capital losses of £1 million.
SingleCo has no trading losses brought forward, so the corporate income loss relief regime (as has applied since April 2017) is not in point. This means that the full £5 million deductions allowance is available to cover capital losses.
There are no trading losses or loan relationship deficits to consider either (income losses would be dealt with first – although note that, under the 2017 regime, income losses do not have to be fully utilised at the first available opportunity).
Netting in-year losses against in-year gains leave net gains in the period of £7 million. The first £5 million of capital losses can be fully offset, leaving £2 million that can be offset at only 50%.
After claiming loss reliefs, the results are:
Trading profits £8 million
Chargeable gains £1 million
Unutilised capital losses £4 million (after £5 million + 50% of £2 million used this year)
Conclusion
April 2020 may seem like a long way off, but a company with (say) a 30 April year-end has only a few weeks before April 2019, which will be the last chargeable period before having to worry about the effects of transitional adjustments and notional periods (although companies can generally change their accounting dates if they see fit, subject to some conditions).
The consultation document includes an impact assessment, which forecasts that the Exchequer will raise £565 million in the first five years of implementation of the new capital losses regime. There is no carrot in this, only stick.
It is perhaps worth pointing out that negligible value claims can be made by companies, as well as by individuals. This will potentially allow companies holding relevant assets that are practically worthless to precipitate a claim now, (or at least before April 2020), without having actually to sell the asset in question. In the right circumstances, negligible value claims can be backdated, and can be extremely useful.
