Finance Bill 2018-19 – corporate interest restriction and corporate loss relief changes

Thu 19 Jul 2018

This note discusses the draft legislation released on 6 July 2018 on corporate interest restriction and corporate loss relief. Responses to the consultation on the draft legislation are requested by 31 August 2018.  There are a number of changes to the rules, some taking effect from 1 April 2017, some from 6 July 2018 and some at other dates.  For a discussion of these and other corporate tax issues, please get in touch with a member of the Mazars corporate tax team.

Measures effective from 1 April 2017

Corporate interest restriction rules

Amendments are made to the public infrastructure exemption (PIE), so that the amendments are deemed to have effect from 1 April 2017.

The public infrastructure asset test (TIOPA 2010 s433(5)) is amended to take account of assets that are:

• part of a pension scheme for the benefit of employees employed for the purpose of qualifying public infrastructure activities carried on by the company or an associated qualifying infrastructure company (QIC); and
• deferred tax attributable to qualifying infrastructure activities carried on by the company or an associated QIC.

In relation to the grandfathering under the PIE rules for pre-13 May 2016 loans, there is a new exclusion from ‘qualifying infrastructure receipts’. It now excludes receipts relating to reimbursed expenses of the company in relation to qualifying infrastructure activities carried on by another company in which the recipient company has shares or loans (TIOPA 2010 s439(3)(b)).

REITs that have been charged an excessive finance charge under the REIT rules (CTA 2010 s543) are treated as incurring tax interest income in respect of that charge for the purposes of the corporate interest restriction rules (TIOPA 2010 s435(4A)).

Measures effective from 6 July 2018

Corporate loss relief rules  

Amendments are made to CTA 2010 s.269ZB – s.269ZD and new provisions .s269ZFA and s.269ZFB are inserted to modify the calculation of ‘relevant profits’ for determining the amount of profits against which carried forward losses can be offset.

The offset of carried forward losses is restricted to the sum of 50% of the company’s ‘relevant profits’ plus the company’s deductions allowance (its share of the £5m profits deductions allowance). Prior to the changes ‘relevant profits’ was determined excluding any I-E profits of a BLAGAB business.  This was overly generous and the exclusion from ‘relevant profits’ now broadly only includes the policy holders’ share of I-E BLAGAB profits.

The change applies to accounting periods commencing on or after 6 July 2018with straddling periods divided around this date (using a time basis unless this produces an unjust result in which case a just and reasonable amount is apportioned).

Other changes

Corporate interest restriction rules

From the date of Royal Assent to Finance Bill 2018-19, the period in which a company can be nominated as the reporting company (or a nomination revoked) is extended from 6 months after the end of the period of account of the ‘worldwide group’ to 12 months after that date (TIOPA 2010 Sch7A paras 1 and 2). There is also a refinement to the timing of filing date depending on when HMRC appoints a reporting company (TIOPA 2020 Sch7A para 7(5) is amended).

There are a number of technical changes that take effect from 1 January 2019

• amendments to the calculation of net group interest expense (NGIE) and adjusted net group interest expense (ANGIE) figures in respect of capitalised interest (amending TIOPA 2010 ss 410, 413 and 423);
• alignment of the CIR rules with the loan relationship rules in respect of releases of connected party debt (TIOPA 2010 s413);
• employee remuneration unpaid by 9 months after the end of the period of account is excluded from group profit before tax for group EBITDA purposes;
• clarification on how ANGIE and qualifying net group-interest expense (QNGIE) are calculated under the non-consolidated investment election;
• other refinements to the CIR rules for REITs;
• the definition of finance lease is changed so that those lessees adopting FRS101 or IFRS16 are required to determine whether an operating lease accounted for as a ‘right of use asset’ would be a finance lease if it were required to do so.  This retains the pre-IFRS16 treatment of these leases for tax purposes (see draft FB 2018-19 Sch8 para 4).  If amounts are spread under the transitional rules for adoption of leases subject to IFRS16 treatment, those spread amounts are treated as interest for corporate interest relief purposes (FB 2018-19 Sch8 para 17-18).

For interest restriction returns submitted on or after 1 April 2019 HMRC may specify, by notice, additional information to be included in the return.

Corporate loss relief reform

With effect for accounting periods beginning on or after 1 April 2019 (with straddling periods divided around this date):

• an ultimate parent that is also a member of another group is prevented from being allocated a deductions allowance from the group of which it is the parent (CTA 2010 s.269ZV);
• changes to the FA 2012 s124-124E on carried forward BLAGAB losses;
• terminal losses – limiting the amount of relief where only part of an accounting period falls within the 3 year maximum period;
• BLAGAB trade shock losses are included in the types of losses that cannot be surrendered by a Solvency 2 insurance company;
• amendments to the rules on transfers of a trade (CTA 2010 part 14 – s.676, s.676AF and s.676BC) to widen the types of losses subject to restriction and clarify references to CTA 2010 part 22 chapter 1.