Bank and Building Society Loss Relief Restriction

Wed 03 Dec 2014

All banks and building societies will be taxpaying – even those with tax losses

A new loss relief restriction will require banks with brought forward tax losses, to restart contributing to the exchequer. They will suffer a real cash flow cost and there are accounting issues for deferred tax asset balances being carried on bank balance sheets.

The measure impacts ‘banking companies’ which includes banks and building societies within the charge to UK corporation taxes. Insurance and asset management groups are not impacted.

Significant losses have accumulated in the banking sector, particularly through the financial crisis and also through regulatory costs associated with banks misconduct and misselling scandals. The government considers it inequitable that such losses are used to extinguish tax on recovering profits.

The Chancellor announced that from 1 April 2015 the annual profits against which brought forward losses can be applied will be restricted to half of the bank’s profit. Its other profits of the year will be taxed.

There are transitional rules for years that straddle the 1 April date. The proposed restriction does not apply to ’start-up’ periods being five years from a company’s commencement of banking activity.

There will be targeted anti-avoidance measures neutralising attempts to circumvent the proposed restriction.

The measure as announced in the Autumn Statement 2014 will be legislated in Finance Bill 2015.

The technical note and the accompanying consultation draft will need to be worked through to ensure that the measure works as intended and that the ancillary anti-avoidance machinery is not overly restrictive.

This measure does introduce a further level of complexity to the tax compliance and accounting of banking groups.

The practical and immediate action is for management of banks and their auditors to reconsider the carrying value of any deferred tax asset. This includes financials statements being signed ahead of the formal effective date of 1 April 2015.

Another immediate issue for affected banks is their projections of their future cash assets.  There will be a need to re-forecast future cash flows.  Those with sizeable tax losses will have drawn up their projections assuming nil tax payable until all such time as they used all their tax losses.