Corporation tax loss relief changes

Our handy comparison table explains the 2017 reforms

The legislation

Reform was introduced in schedule 4 of the Finance (No.2) Act 2017. It applies from 1 April 2017. Accounting periods that began before and end after 1 April 2017 follow commencement provisions.

The reform applies to corporation tax, not income tax.

Companies and associations within the charge to corporation tax are affected.

Difference between pre- and post-2017 rules

The following table summarises how a company can offset or utilise its losses against other incomes for pre- and post- 1 April 2017 periods.

Difference in

 Pre-1 April 2017 rules Post-1 April 2017 rules

Carried-forward losses

Some carried-forward losses are set only against profits of a particular type:

  1. Trading losses carried forward are set only against profits of the same trade.
  2. Non-trading loan relationship deficits carried forward are set only against non-trading profits.

The reform of Corporation Tax loss relief affects the following carried-forward losses:

  1. Trading losses
  2. Non-trading loan relationship deficits (NTLRDs)
  3. Management expenses
  4. UK property business losses
  5. Non-trading losses on intangible fixed assets.

Capital losses are not affected.

Group relief

No group relief for carried-forward losses.

Relaxation:

  1. Applies only to losses that a company makes on or after 1 April 2017 and carries forward to later accounting periods.
  2. Relief against total profits for most carried-forward trading losses and NTLRDs, if they arose on or after 1 April 2017.
  3. A new kind of group relief for carried-forward losses of any of the five affected types, if they arose on or after 1 April 2017.

Relief restriction

Even companies with very large profits could potentially reduce those to nil using carried-forward losses

Restriction:

  1. Applies to relief against profits arising from 1 April 2017.
  2. Only restricts relief where companies or groups have profits over a certain level (broadly £5m). Above the £5m allowance, there will be a 50% restriction in the profits that can be covered by carried-forward losses whether from pre- or post-1 April 2017.

Loss buying – anti-avoidance

 

For loss buying, new rules apply when a company changes ownership from 1 April 2017. Any carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years. (CTM 06700)

Timeline

 Accounting periods ending before 1 April 2017 are unaffected.

Accounting periods that begin before and end after 1 April 2017 follow commencement provisions.

Terminal losses

 Losses carried forward to the period of cessation under s45 or s45B, against profits of the same trade, can likewise only be relieved against profits of the same trade under s45F.

Losses carried forward to the period of cessation under s45A, against total profits, can be relieved against total profits under s45F of CTA10.

Losses that expire cannot be carried forward to any future periods.
Flexibility

Pre-April 2017 trade losses could only be offset against the profit of the same trade.

There is greater flexibility over the types of profit that can be relieved by post-1 April 2017 carried-forward losses. Most post-1 April 2017 trading losses and non-trade deficits on loan relationships can now be set against total profits.

  1. From 1 April 2017, companies can use claims to choose whether to relieve carried-forward losses in part or in full, for each of the five affected types of loss.
  2. This applies regardless of when the loss arose.
  3. Companies can claim to use all or part of a loss carried forward for relief against total profits.
  4. Companies can claim not to use all or part of a loss carried forward against a particular type of profit only.
  5. Claims must be made within two years of the end of the accounting period in which relief would be given.

The above relaxation will be removed in the following circumstances:

  • The relaxation is removed for trading losses where the trade becomes non-commercial, or the trade becomes small or negligible.
  • The relaxation is removed for non-trading loan relationship deficits, management expenses, UK property business losses and non-trading losses on intangible fixed assets where an investment business becomes small or negligible.

Examples

HMRC has produced the following examples to explain the changes in loss relief:

Example 1

  • A company has an accounting period from 1 April 2017 to 31 March 2018.
  • Any losses that the company has carried forward from previous periods must have arisen before 1 April 2017, so can’t benefit from the relaxation.
  • The profits of this period are all post-1 April 2017, so this period could be affected by the restriction.
  • Any losses that the company makes in this period are post-1 April 2017 losses. If the company carries any of these forward to later accounting periods, the relaxation may increase the ways it can use them.

Example 2

Company A Ltd

31 March 2017

31 March 2018

 31 March 2019

Trade loss

(£50,000)

Trade loss

(£30,000)

Trade loss

(£30,000)

UK property income

£25,000

UK property income

£20,000

UK property income

£75,000

(£25,000)

(£10,000)
(moving to right-hand column)

£45,000

£0

£0

 

(£10,000)

£35,000

(£25,000) pre-1 April 2017 losses may be carried forward to later periods for relief against profits of the same trade.

Record-keeping

The relaxation means that different relief is available for carried-forward losses incurred pre- and post-1 April 2017. Companies’ records need to track these losses separately so that they can:

  • know which amounts might benefit from the relaxation
  • avoid deducting reliefs that are still not allowable.

Companies also still need to track different types of loss separately: for example, property business losses, non-trading loan relationship deficits, management expenses and losses of different trades.

More information

Read HMRC's guidance.