Corporation Tax losses – changes and pitfalls

It is now almost 10 years since I passed my exams to become a member of the Chartered Institute of Tax and it seems that the only rules that haven’t changed since then are those in relation to corporation tax losses. It appears that HMRC realised this and decided that another wrinkle would keep tax advisers on their toes!

Utilising corporation tax losses is often taken for granted, however there are numerous pitfalls to be avoided to make sure that companies get tax relief when they need it the most.

The way in which a company utilises its losses depends on the type of loss, the period in which it arises and the type of profits against which it may be relieved. There are often multiple options available to a company so care should be taken to ensure they are offset in the most tax efficient manner.

Reforms to the current losses rules were proposed at Budget 2016. The changes were brought about because the government felt that the rules were both too generous and too restrictive (which on the face of it seems like a bit of a contradiction). So they hoped to refresh them for the modern world.

The main proposed changes are:

  • Trading losses arising from 1 April 2017 can be carried forward and set against taxable profits of different activities of both the loss-making company and fellow group members (older losses will be subject to the current restrictions)

  • Only 50% of annual profit in excess of £5 million can be relieved by brought forward losses. Annual profit is first reduced by all ‘in year’ losses and group relief. The £5 million allowance applies to the whole group

  • Carried back losses are set off against an amount of profit after the above restriction is applied

  • It is proposed to continue with the rules restricting losses on a change of ownership or upon cessation of a trade or property business.

As well as the above changes, it is worth considering common pitfalls that we see in loss planning.

  • Group relief – this can often be missed. Often groups have multiple accountants for their companies, we recommend that these accountants keep a good line of communication with each other

  • Consortium relief – often missed because it is quite uncommon

  • Change in ownership – these rules are complex, if a company holds losses then you need to be extremely careful if any change of ownership is planned

  • Incorrectly defined losses – The type of loss you have is crucial as it can restrict any future offset.  Although this might not be a problem with the new rules we recommend that whenever there is a large loss carried forward that isn’t deemed a trading loss that this is reviewed to find out exactly how the loss occurred and whether it can be reallocated to the correct income stream

As you can see, what at first seems like a simple matter can be quite complicated and needs thought.

For more information on Corporation Tax losses contact your local Armstrong Watson tax consultant

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