Corporate tax losses: giving with one hand and taking away with the other

Thu 17 Mar 2016

From 1 April 2017, rules for the use of corporate tax losses are to be changed in two ways.  On the positive side, new rules will give companies the ability to use one type of losses against future profits of a different type, and will give groups the ability to use brought forward losses against future profits of the whole group, not just against those of the company with the losses.  But for groups with taxable profits in excess of £5m, the amount of profits that can be offset by brought forward losses is to be restricted to 50%.

To quote from the late, great David Bowie “Ch-ch-ch-ch-changes”.  The rules for the use of corporate tax losses are finally undergoing one of their most major changes for a while.

• Under the current rules, trading losses of a company can be used to offset
• Current year non-trading profits of that company;
• Current year trading or non-trading profits of other group companies;
• Prior year taxable profits (trading and non-trading) of that company;
• Future periods trading profits of that company.

The Budget is to introduce much greater flexibility to the use of tax losses of whatever form.  For losses incurred on or after 1 April 2017, the rules will be amended so that

1. Carried forward losses from one income stream can be used to offset profits of other income streams.  This effectively means that it will be possible to offset non-trading losses (e.g. non-trade debits arising from interest deductions) to offset future trading profits.
2. Carried forward losses can also be used to offset profits arising in other group companies.  This represents a fundamental change to the group relief rules.

Companies might therefore consider extending (or shortening) accounting periods to end on 31 March 2017, particularly if they are anticipating making tax losses in 2017, where the generation of those losses is forecast to be skewed in favour of the period post 1 April 2017.

But everything has a price and the Chancellor is acutely aware that some large groups have been able to avoid paying tax on profits by taking advantage of significant tax losses generated in the past.  To counteract this, from 1 April 2017, where a group has taxable profits in excess of £5m, the amount of taxable profits that can be sheltered with brought forward losses is restricted to 50%.

No mention has been made, however, of placing a time limitation on the period for which tax losses can be carried forward.

We await the details of the changes in the Finance Bill.  It is to be expected that rules will also be introduced to prevent the reintroduction of “loss-buying”, i.e. purchasing companies with material tax losses, so that they can be used to offset future taxable profits of the acquiring group.  We also await details of the rules of priority on the utilisation of pre versus post 1 April 2017 losses.

For more information, contact David Prestwich (david.prestwich@mazars.co.uk)