United Kingdom Government Releases Consultation Document on Reforms to Corporation Tax Loss Relief
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On May 26, 2016, the UK government released a consultation document in respect of the delivery of the proposed reforms to corporation tax loss relief. An outline of the proposals was previously announced by Chancellor George Osborne in his Budget speech on March 16, 2016, and the consultation document considers how best to deliver the proposed reforms in legislation, together with how to deal with interactions with other areas of the corporate tax system.
The consultation will run until August 18, 2016. Draft legislation will then be published at the time of the Autumn Statement 2016 to allow for a period of technical consultation, prior to enactment of the new rules in Finance Bill 2017.
On March 16, 2016 Chancellor George Osborne announced the United Kingdom’s 2016 Budget. At the heart of the Chancellor’s speech was a business tax road map designed to take the economy to 2020 and beyond. The road map reinforces the UK government’s desire for a competitive and stable business tax regime, which would support small business and lower tax rates to drive growth, maintain a level playing field by countering tax avoidance and aggressive tax planning, and simplify and modernize the tax system. As part of the modernization program, reform to the corporation tax loss regime will be enacted.
Current Corporation Tax Loss Rules
Under the current regime, where a UK company incurs a trading loss, it is able to:
- Use that loss against its other taxable profits arising in the same taxable period;
- Carry the loss back to the prior year for use against its total profits in that prior period; and
- Surrender that loss to another group company as “group relief,” to the extent that the receiving group company has taxable profits available for offset in the same period.
Unrelieved trading losses that are not used as described above are then carried-forward indefinitely for offset, but only against profits arising from the same trade in the company that incurred the loss. Certain other types of losses incurred by a UK company are also similarly restricted, and are only available for carry-forward to offset profits arising from the same activity in the same company that incurred the loss. This restriction often leads to “trapped” or otherwise unrelievable losses.
In order to modernize the UK’s corporation tax loss relief rules, two major reforms are proposed:
Increased flexibility for use of carried-forward losses
Losses incurred from April 1, 2017, can be carried-forward and offset against future profits arising from different activities within the same company, and against the taxable profits of other group members.
Cap on use of carried-forward losses
The amount of annual profit that can be relieved by carried-forward losses (whenever those losses arose) will be limited to 50 percent from April 1, 2017. This is subject to an annual GBP five million allowance per group.
Losses incurred prior to April 1, 2017 will continue to be available for use under the old, more restrictive carry-forward rules, subject to the new 50 percent limitation.
Losses incurred on or after April 1, 2017, will also be subject to the 50 percent limitation, but there will be much more flexibility as to how those losses can be used when carried-forward to future years.
Any losses carried-forward and unused because of the 50 percent cap in any year will continue to be carried-forward to future years for offset, again subject to the 50 percent limitation.
Capital losses remain ring-fenced and so are not included in the reform.
To prevent loss-buying (i.e. the acquisition of a company for its unused losses), existing restrictions that seek to prevent this will remain. Further, the new flexible carry-forward rule will not apply. This means that carried-forward losses of an acquired company continue only to be available for use against profits arising from the same trade/business, and are subject to the usual forfeiture rules that apply to acquired losses in certain circumstances.
The reforms are not intended to apply to carried-forward losses relating to ring-fenced oil and gas activity, nor excess Basic Life Assurance and General Annuity Business expenses, both of which are covered by separate tax regimes.
Certain losses incurred by banks prior to April 1, 2015, are already restricted under current UK tax law to 25 percent of eligible profits (50 percent prior to April 1, 2016). Any losses not falling within the current 25 percent bank loss restriction (e.g. certain building society losses and losses arising to certain “new-entrant banks”) will be treated in the same way as losses arising to any other UK company, i.e. subject to the 50 percent restriction over GBP five million.
Areas of Consultation
The consultation document requests input from interested parties on certain detailed design points, including the definition of group for the purposes of the GBP five million allowance, how consortia should be dealt with, and what targeted anti-avoidance measures should be included in the new rules to prevent companies from manipulating, for example, the time when profits or losses arise.
- Companies should welcome the increased flexibility for the use of carried-forward losses, which should help relieve the incidence of trapped and unused losses. However, as the rules only apply to losses incurred on or after April 1, 2017, it may be some time before the groups begin to see the benefit. On the other hand, the restriction on the use of losses carried-forward to 50 percent of profits over GBP five million may have a more immediate impact for larger groups that were hoping to use brought-forward losses more quickly.
- Responses to the consultation are due by August 18, 2016, with draft legislation expected to be published at the time of the Autumn Statement 2016. The new rules are expected to be enacted in Finance Bill 2017.
- For further information, please contact Ingrid Gardner or your usual BDO tax advisor.
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