Changes to Corporation Tax loss relief were first proposed in the 2016 Budget with the objective of providing more flexibility for UK businesses. Following a period of consultation, the Government has now issued draft legislation and guidance on which it is seeking comments.
The proposed reforms were part of a raft of legislation dropped from the Finance Bill ahead of the General Election. However, it is anticipated that the legislation will be included in the upcoming Summer Finance Bill and apply from 1 April 2017 as originally proposed.
Current regulations restrict how carried forward losses can be used i.e. only against the same type of profits of the same trade. The new legislation offers more flexibility in that losses arising can be carried forward and set against the taxable profits of different activities within a company and the taxable profits of its group members.
Subject to certain constraints, the company will be able to decide how much of the loss to relieve and, if the loss is only partially relieved, the balance can be carried forward and relieved against profits in fture years.
These new options have been welcomed by businesses and professionals alike but it’s not all good news. The reforms also include proposals to cap the amount of annual profit that can be relieved by carried-forward losses to 50%, subject to an allowance of £5 million per group. In addition, charitable companies are excluded from the new rules and restrictions also apply to investment businesses, those in the creative industries, insurance companies and businesses with oil or gas related activities.