The government is closing loopholes in an effort to combat avoidance among companies, with the announcement of key measures which take immediate effect – including amendments to the corporation tax (CT) rules to prevent contrived loss arrangements
Currently UK CT rules require companies to calculate a separate tax profit or loss for each of several activities and where a loss arises in an activity, it can provide relief from tax either only against income for that activity or more generally against income from all activities.
Within the year that losses arise there is significant versatility in how a loss arising from one activity can be used against profits from another.
Where a loss cannot be used in a given year (because the group overall is loss making, so has no capacity to use all the losses), it is confined to the company that generated it and, in most cases, can only be used against future profits of the activity in which it arose.
Changes announced in Budget 2015 will affect companies that carry forward reliefs and enter complicated tax avoidance arrangements so as to benefit from the reliefs into a new and more versatile form within in-year deductions.
The Treasury said the measure would sever to level the playing field between businesses that enter such arrangements and those who keep within the spirit of the law.
The measure covers corporation tax trading losses carried forward, non-trading loan relationship deficits, and management expenses. Where a company enters into arrangements meeting the conditions it will be unable to use these brought forward reliefs against profits created in the relevant company.
Companies affected will need to take note of their taxable profits beginning on or after 18 March 2015.
Any profits of a company with an accounting period straddling 18 March 2015 will be allocated into notional periods falling before and after that date, and the rules will apply to the notional period commencing on 18 March 2015. The apportionment will be proportionate to time or on an otherwise just and reasonable basis.
The measure will apply to arrangements entered into before commencement where these give rise to profits after commencement.
The government expects the measures to bring £95m into revenue coffers by 2016, increasing to £130m by 2019/2020.