Corporate capital loss restrictions from 1 April 2020

Wed 12 Feb 2020

This note is a reminder that restrictions on carried forward capital losses realised by companies are being restricted in the UK from 1 April 2020. The full version of this article provides brief details of the upcoming changes.─

For a discussion of the implications of this change for your business, please get in touch with a member of the Mazars Corporate Tax team.

What does the change mean?

• HMRC estimates around 200 companies will pay extra tax from corporate capital CF loss restrictions. 
• Accounting periods straddling 1 April 2020 will need to be divided into two notional periods, with the restriction only applying to gains arising in the notional period from 1 April 2020.
• Oil & gas ring fence businesses and REITS are excluded (outside scope of restriction)

Generally, in-year capital gains and losses must be aggregated before accessing carried forward losses. However, a claim can be made for clogged losses (from transactions with connected persons) to replace an equivalent amount of other current year losses for the purposes of offset against gains.

• Similarly, use of pre-entry losses will take priority over an equivalent amount of other current year losses
• The consultation indicated the Government is considering specific provision for insolvent companies.  We have heard through our contacts with the industry insolvency R3 group that HMRC has drafted some legislation to implement this.  The first draft seen was limited in scope and R3 has responded accordingly.

Anti-forestalling rules

• The potential risk of the application of anti-forestalling rules is something we should bear in mind  when carrying out compliance, due diligence and other areas of work. Anti-forestalling counteracts arrangements entered into on or after 29 October 2018, as a result of which:

• a tax advantage arises; and
• a main purpose of the arrangement was to obtain the advantage
• The condoc indicated the following three main areas of potential avoidance:
  • Delaying realisation of a capital loss to a later period
  • Refreshing an existing capital loss (converting a CF loss into a current year loss)
  • Ensuring capital gains are recognised before 1 April 2020

HMRC examples of no anti-forestalling

• Commercial disposal to an unconnected party
• Sale and leaseback (consider terms of agreement?)

HMRC examples where anti-forestalling applies

• Sale and re-acquisition (bed and breakfasting) to realise a gain
• Entering into the contract pre 1 April 2020 but delaying completion and no commercial purpose for delay
• Sale to a connected person if contrived
• Entering into a contract with a connected person for eventual external disposal