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Budget 2016 - Corporation tax relief from losses carried forward

24th March 2016

The current system for losses that are carried forward is to be updated with effect from 1 April 2017. The final details have not yet been finalised, however the reforms are being designed to give companies more flexibility about how they can use their losses carried forward, whilst also preventing the largest companies from paying no taxes in years when they make large profits.

Currently, the basic rules for losses carried forward are as follows:

  • Trading losses carried forward must be used against the first available profits from the same trade;
  • Non trade loan relationship deficits carried forward can only be used against non-trade profits of the company;
  • Property losses carried forward can be set against total profits of subsequent periods;
  • Management expenses carried forward must be set off against the total profits of subsequent periods before other losses;
  • Capital losses carried forward are only available to be set off against capital gains.

Also, none of the losses carried forward are currently available for group relief.

In their first amendment, the Government has indicated that the restrictions above should be reduced, allowing losses incurred on or after 1 April 2017 to be used more freely against other income streams, and also allow them to be used against profits of other group companies. The exact details are not yet finalised, but should be announced in the Finance Bill of 2017.

This should allow companies more flexibility in how they use their carried forward losses, especially those with both trading and investment businesses. It should also be welcomed by groups of companies as they would have an increased ability to share losses around the group. However, there are likely to still be restrictions in place and the losses already carried forward are likely to remain restricted.

The second amendment is less favourable. Currently companies can use their carried forward losses to reduce their taxable profits in subsequent periods to nil. However, from 1 April 2017 the Government will restrict to 50% the amount of profits that can be offset by brought forward losses. This will only apply to companies with profits of over £5m.

For small and medium sized companies this is unlikely to be an issue as they are unlikely to be making such large profits. However, larger companies should be aware that they may need to restrict the use of their losses after 1 April 2017.

 

The Government will consult on the design of the reforms in 2016, and will legislate in 2017.

Leanne Rozier