Are Losses Now Good News?

Originally announced in Budget 2016, the Government has confirmed the changes it is making to the way companies can benefit from the use of losses brought forward from an earlier period.  There are two reforms that are coming into force with effect from 1 April 2017:

• ‘Loss relaxation’ which increases the way losses carried forward can be used
• ‘Loss restriction’ which restricts the amount of losses carried forward that can be used

Fortunately the loss relaxation rules apply to all companies, while the loss restriction rules apply only to those companies generating profits in excess of £5m, so the changes are expected to have a positive effect for 99% of all companies.

Loss relaxation                                                                               

Currently when a company incurs a loss that cannot be relieved in the same period, the loss is automatically carried forward but can only be used to offset certain types of profit.  For example trading losses carried forward can only be set against future profits arising from the same trade.

The changes mean that certain losses arising from 1 April 2017 that are carried forward into a future accounting period can be used to offset total taxable profits without restriction.  A further relaxation means that the losses carried forward are also now available for relief against profits arising in other group companies.  The loss restriction will apply to the following:

• trading losses
• non-trading deficits on loan relationships
• management expenses
• UK property losses
• non-trading losses on intangible fixed assets

Losses incurred prior to 1 April 2017 remain unaffected, although companies will have the flexibility on whether to use their pre-April 2017 losses in advance of other losses.

Anti-avoidance legislation has been introduced to prevent companies being acquired which contain losses carried forward and also to prevent arrangements being entered into where the main purpose is to obtain a benefit from these loss reform rules.

Loss restriction

The Government want companies who make substantial profits to ensure they cannot reduce their corporation tax to nil by utilising brought forward losses.  The new rules mean that companies will only able to offset losses equivalent to 50% of their profits, although each company or group will be entitled to a £5m annual allowance of unrestricted profit ensuring that only larger companies are affected.