Significant changes have been made recently to the regime for the utilisation of carried forward corporate trading losses. Although the legislation is contained in Finance Act No 2 2017 passed in November 2017 the changes apply to losses arising after 1 April 2017 (where a company’s accounting period straddles 1 April, for loss purposes, it will be treated as having two separate accounting periods).
The changes increase the flexibility of carried forward losses which can now be set against taxable profits of the company and where applicable other group members. The changes are part of the modernisation of the UK corporate tax regime. The changes are expected to be tax positive and contain provisions to restrict the utilisation of losses to 50% of profits. However, this is subject to a £5m annual allowance and as such is unlikely to affect SMEs and is not considered further in this article.
Prior to the changes carried forward losses could only be used by the company which incurred the loss, and, in a group, situation could not be used by other group companies. In addition, certain types of losses could only be set against certain types of income notably, as we shall explore later, non-trading loan relationship deficits.
The changes effect;
- Trading Losses – these can be carried forward against future total profits and /or group relieved in the later year.
- Management Expenses – as currently these can be carried forward against total profits but can now in addition be group relieved (group relief for carried-forward losses).
- UK Property Losses – as currently these can be carried forward against total profits and can be group relieved, however, a claim must now be made to utilise the loss which potentially gives greater flexibility.
- Non – Trading Losses on Intangible Fixed Assets – as currently these can be carried forward against total profits and can be group relieved, however, a claim must now be made to utilise the loss which potentially gives greater flexibility.
- Non – Trading Loan Relationships – prior to the changes a deficit could only be carried forward against future non- trading profits including capital gains. The new rules allow carried forward losses to be set against future total profits and / or group relieved in a later year (group relief for carried- forward losses).
It might be useful to remind ourselves of the difference between a trading and a non-trading loan relationship. In summary a trading loan relationship relates to a money debt incurred for a trading activity whereas a non-trading relates to a money debt incurred to finance an acquisition of a capital nature.
Dealing with SMEs, in practice the significance of the difference is most commonly seen where a non-trading holdco is put in place, say following a reorganisation, to act as the acquisition vehicle for a new trading subsidiary and incurs significant interest costs on borrowing to finance the purchase. Another typical example is a venture capital investment which often take the form of part equity and part loan stock with typically a high coupon. Prior to the changes if the non-trading deficit (interest) could not be group relieved in year (perhaps as a consequence of a poor trading performance or possibly an R & D claim) it could only be carried forward against non-trading loan relationship credits and was often effectively stranded.
Enterprise Tax Consultants can advise on corporate tax relief
Where the loss is less than £5m the changes represent a significant relaxation of the rules and enable losses to be used more flexibly. However, as an election as to the utilisation of the losses has to be made practitioners will have to carefully consider the loss allocation to obtain an optimum position. Additionally, pre and post 2017 losses will have to be streamed until pre-2017 losses have been utilised, potential adding a further layer of complication.
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