HMRC and the Treasury are consulting on the detailed design and implementation of the proposed reforms in corporation tax loss relief legislation, designed to deliver a more flexible regime, along with how to deal with the interactions with other areas of the corporate tax system
At Budget 2016 the Chancellor announced two major reforms to the loss relief rules, arguing that existing rules around the carry forward of corporate losses are not consistent with international best practice, overly restrictive and not reflective of the way in which businesses operate.
The first is that losses arising from 1 April 2017 can be carried forward and set against the taxable profits of different activities within a company and the taxable profits of its group members. Losses that arise prior to this date will remain subject to the existing restrictions over profit that they can be set against.
Secondly, the amount of annual profit that can be relieved by carried-forward losses will be limited to 50% from 1 April 2017, subject to an allowance of £5m per group.
The government has said that the exceptional treatment of banks’ pre-April 2015 carried forward losses should be maintained in the context of the wider changes being made to the treatment of carried-forward losses. The consultation looks at how this exceptional restriction on banks’ historic losses is integrated with the wider loss relief regime legislation being amended.
The consultation also makes clear that there are no plans to change the distinct treatment of capital losses. The reforms under discussion will instead be confined to trading losses, non-trading loan relationship deficits, UK property losses, management expenses and non-trading losses on intangible fixed assets (ie, revenue losses).
The government will also be maintaining the existing rules for computing corporation tax profits by categorising different types of income, sometimes referred to as the ‘schedular system’.
It recognises that the categorisation of profits within the corporate tax system can be complex and inconsistent with how companies calculate and report profit for accounting purposes. It also recognises that enabling companies to set carried-forward losses relating to one type of activity against the profits of another removes one of the principal constraints of the schedular system and one of the principal costs of its reform.
However, the government argues that the categorisation of company profits still has importance in restricting the treatment of carried-forward losses relating to periods prior to April 2017 and thus limiting the cost of reform.
The categorisation of profits is also relied upon in other areas of the corporate tax system such as double taxation relief, Northern Ireland corporation tax and the controlled foreign company rules. As a result, the consultation document states there is no intention to make changes to the schedular system as part of these reforms. Instead the government will be asking the Office of Tax Simplification (OTS) to explore the merits and practicality of reforms in this area as part of their project on the corporation tax computation.
The consultation includes a number of models and worked examples outlining how the new rules on carried forward losses will operate.
This consultation is open until 18 August 2016 and the government will consider responses in the drafting of the legislation for Finance Bill 2017.