It’s Complicated! Corporation Tax And Carried-Forward Losses For Smaller Companies

Lee Sharpe looks at some of the finer detail in the losses regime, and reveals a rather unpleasant surprise. 

 

The new rules for corporate losses have significantly changed the way that losses can be claimed. There is greater flexibility, but it comes at a cost. The detailed rules are to be found in Finance (No 2) Act 2017, Sch 4, which updates the Corporation Tax Acts 2009 and 2010; the amended legislation covers more than 130 pages (i.e. roughly a fifth) of the Finance Act.  

 

This article covers the main implications for smaller companies, and a key point to look out for when claiming losses on a company tax return. 

 

Basically, the main changes to the corporation tax loss reliefs are: 

 

losses will be more flexible, to the extent that they arise after 1 April 2017. For trading losses arising after that date, they do not have to be set only against profits arising from the same trade but against the total taxable profits of the company and, where appropriate, fellow group members. This is a welcome relaxation of the rules, and at first glance might look like a genuine ‘simplification’ (in a way that you, I or anyone outside HMRC or HM Treasury understands the meaning of that word!), although losses will now need to be ‘streamed’ between pre and post- April 2017 losses;  

however, all losses (even pre-April 2017 losses) will now be restricted, so that carried-forward losses will be able to restrict future losses only as to 50% of in-year profits. A company will be allowed a £5 million per year de minimis ‘deductions allowance’, below which brought-forward losses can wipe out 100% of the company’s profits, but above that, loss relief that has been brought forward will be available at only 50%. Where the company is part of a group, that group gets a single £5 million deductions allowance but can allocate it as it sees fit. The deductions allowance is restricted proportionately for chargeable periods of less than a year (CTA 2010, s 269ZW(3); CTA 2010, s 269ZR(4)). 

 

 

  

Example 2: New 50% loss restriction

 

BigCo has the following results:

                                                                                                                                                           Trade

                                                £                    £                      £

                                                                                                                                                          

Year to 31/03/2018                                          (10,000,000)            

                                                                                                                                                         

Year to 31/03/2019            12,000,000

                                                                                                                                                          

Less: Restricted losses b/f -         

Profit in year                             12,000,000                                                       

Less: deductions allowance     ( 5,000,000)  ( 5,000,000)              

Excess profit over allowance     7,000,000                                                        

                                                                        50%                                                    

Restricted proportion:         (3,500,000)              

Maximum permitted loss relief:             (8,500,000)

                                                                                                                                        

Net post-loss position 31/03/2019                              3,500,000

                                                                                                                                                          

Unused losses remaining for carry forward  (1,500,000)              

The net effect of these adjustments is that while the first £5 million of BigCo’s 2019 profits are covered as to 100%, half of the excess of £7 million will now be taxable.  

 

The legislation works to apply the 50% restriction for losses brought forwards to all profits, at any level, unless and until the company specifies its deductions allowance. This is down to the following less-than-conspicuous amendment in in F(No 2)A 2017, Sch 4: 

 

‘CTA 2010 s 269ZZ Company tax return to specify the amount of deductions allowance 

(1) A company’s tax return for an accounting period must specify— 

(a) the amount of the company’s deductions allowance for the period…’ 

 

Elsewhere, the new legislation confirms that the deductions allowance should be treated as nil, where it has not been specified by the company (e.g. CTA 2010, ss 269ZB (7), 269ZC (5)). 

 

The corporation tax return form (CT600) was last updated in April this year, in readiness for a Northern Ireland devolved rate of corporation tax (which, at the time of writing, has not been introduced). But neither the form nor the accompanying guidance makes any reference to the new deductions allowance, which applies already, or that it must in effect be claimed by any company of any size, in order to get full 100% loss relief in any amount – even for companies with profits that will never reach £5 million. 

 

Strictly, a company tax return is not just the form CT600, but includes the computations and statutory accounts (as required in accordance with FA 1998, Sch 18, para 3). So, a statement of the deductions allowance claimed may be made as part of the computations and will, in turn, form part of the company’s tax return. The latest taxonomy for iXBRL online filing does include two new fields for a deduction allowance in the new loss relief restriction calculation section. Therefore, so long as your corporation tax software includes a statement of the deductions allowance when making a claim for loss relief in periods after 1 April 2017 in the computations, it should be processed properly, with 100% loss relief given for up to the first £5 million of losses, as specified (the deductions allowance need not be specified every year, but only when making a claim for relief for losses brought forward). 

 

The new corporation tax loss relief regime may at first seem quite generous – especially to smaller companies – but note that the accompanying Budget documentation forecast that the government would save more than £400 million this tax year alone, thanks to the new rules. 

 

The new legislation covering the changed corporation tax loss relief regime is far more complex than might first appear. Ensuring that the tax return submitted to HMRC includes a formal declaration of the amount of deductions allowance to which a company is entitled when claiming under the new loss rules is only one of many points that may need to be considered.