Reform of corporation tax loss relief – HMRC draft guidance

New carried-forward corporation tax loss relief rules will be included in the Finance Bill to be published this autumn and will apply from 1 April 2017.

HMRC has now published an initial tranche of draft guidance to explain the application of these rules, focusing on core areas and other aspects where guidance has been specifically requested. Amended and further draft guidance will be issued in due course.

HMRC is seeking comments on the draft guidance, by 25 September 2017.

Current rules allow corporation tax losses to be carried forward and set against the first available trading profits of the same company, from the same trade, but without other restriction to the amount (except for banks, where restrictions already apply).

The new rules, which will apply to all companies and unincorporated associations that pay corporation tax (CT) and have carried-forward losses, aim to:

  • Restrict the amount of loss relief available to businesses with substantial profits, and
  • Allow most carried-forward losses arising from 1 April 2017 to be used more flexibly against the total taxable profits of a company and its group members.

Some trading losses carried forward are still only available for set-off against profits of the same trade. This applies for all trading losses incurred in periods prior to 1 April 2017 and to losses of later periods in particular circumstances, for example, if the trade has become small or negligible.

The relaxation of the rules on the use of carried-forward losses is welcome, as the requirement to stream tax losses has long been a frustration for companies, but the practical application of the rules could be complicated. The Tax Faculty responded to the original consultation on these rules in ICAEW REP 125/16.

The effect of the loss restriction will be felt by companies with profits in excess of £5m, which will no longer be able to reduce profits to nil by using relief for carried-forward losses.

Broadly, a company's profits after deduction of any in-year reliefs (such as group relief) and the deductions allowance (£5m) can only be reduced by up to 50% by carried-forward losses. In the example given in the guidance just published, a company with £12m profit remaining after in-year reliefs, which has access to the maximum £5m deductions allowance, will be able to cover only a maximum of £8.5m profits using carried-forward losses (the £5m deductions allowance plus 50% of the remaining profits of £7m of profits). The result of this is that a company will pay tax on £3.5m.

Where a company is a member of a group, the deductions allowance is shared among the group members as they see fit. The allowance is allocated to companies that are members of the group by a nominated company. There is no restriction if a company's profits are below the amount of the £5m deductions allowance and as such, most small companies or groups are unlikely to be affected.

The restriction has effect for profits arising from 1 April 2017 but applies to all losses carried forward, including those carried forward at that date.

The draft guidance also includes comment on:

  • How the relevant profits for the 50% restriction are calculated
  • Administration required by the nominated company
  • Relaxations to the use of post-April 2017 losses and terminal loss relief
  • Loss buying rules restrictions
  • More details of arrangements which could be caught by the targeted anti avoidance provisions.

Comments on the draft guidance should be submitted to HMRC by 25 September 2017. Please email with any comments to be included with the Tax Faculty’s response.