From 1 April 2017 the government has introduced changes to the way in which corporation tax losses carried forward can be utilised. The reform has two aspects:
- A company will now have more flexibility in how they use their losses, with losses incurred from 1 April 2017 being available for offset against a company’s total taxable profits (including chargeable gains). Previously, losses arising within the different business activities of a company were restricted when carried forward and could only be set against certain types of income or profits of later years.The new rules also allow carried forward losses to be surrendered to other group members where previously only current year losses were available. The increased flexibility is, therefore, good news for companies.
- For all carried forward losses held at 1 April 2017 and beyond, a restriction will be placed upon the value of losses which can be relieved. The restriction is as follows:
- Full relief against the first £5m of taxable profits
- 50% of the excess over the £5m threshold.
Previously no such cap was in operation and a company returning to profitability could reduce their eligible taxable profits to nil with carried forward losses, regardless of the level of profits achieved. The £5m threshold will apply to single companies and should be apportioned between group companies.
The government has predicted that the £5 million annual allowance should be large enough to ensure 99% of companies will be unaffected by the new 50% restriction.
Whilst the new rules do not relax the use of trading losses arising before 1 April 2017, companies will have the flexibility to choose whether or not to use these earlier trading losses before using other available ‘flexible’ losses. Where a company’s accounting period straddles 1 April 2017, a careful review of a claim and provisions is advised.