The restriction on the offset of brought-forward corporation tax losses introduced from April 2017 raises a surprising practical issue. While only the largest companies and groups should actually suffer a restriction under these rules, it is important to note that they introduce new compliance requirements for companies of all sizes, no matter how small they or their losses might be.
Background
Finance (No 2) Act 2017[1] introduced two major changes to the use of corporation tax losses, both of which are effective from 1 April 2017:
- A relaxation allowing carried forward losses to be used more flexibly (the relaxation).
- A restriction on the amount of brought forward losses which can be offset in any one year (the restriction).
The relaxation was the subject of a previous article in Accountancy Age, which can be found here. The focus of this article is the restriction, and in particular the new compliance obligations that it brings.
The restriction operates broadly as follows:
- Brought forward losses can be set off in full up to the level of the company’s deduction allowance.
- Beyond this, profits can only be relieved by up to 50% using brought forward losses.
The deduction allowance for an accounting period is up to £5m, reduced proportionally where that accounting period is less than 12 months. Groups are only entitled to one deduction allowance per group, which can be allocated between group companies as they see fit.
The availability of the deduction allowance means that only the largest companies and groups should suffer a restriction. However, there are compliance implications for companies of all sizes.
Compliance requirements
If any company wants to offset brought forward losses against profits arising from 1 April 2017 they have to do the following:
- specify the amount of their deduction allowance in the corporation tax return for the period; and
- if they have brought forward losses which can only be set against either trading or non-trading profits (a common example will be losses which arose before 1 April 2017), identify a corresponding amount of their deduction allowance as being a trading profits deduction allowance or non-trading profits deduction allowance.
These requirements apply regardless of the size of the company and must be complied with even if the company will not suffer any restriction (for example because its brought forward losses are well below £5m).
Further compliance requirements apply if a company is a member of a group containing at least one other company within the charge to corporation tax. Very briefly:
- A group company has to be nominated as responsible for allocating the single annual £5m group deduction allowance amongst the group members.
- The nominated company has to submit a group allowance allocation statement each accounting period.
Practical considerations
Given the above requirements, any time that a company makes a claim to use brought forward losses, the following questions need to be considered:
- Are any brought forward losses being set off against profits arising from 1 April 2017? If yes, include a figure for the deduction allowance in the return.
- Are any of those brought forward losses only available for offset against trading profits or non-trading profits? If yes, also include a figure for the trading profits deduction allowance or non-trading profits deduction allowance in the return as appropriate.
- Is the company a member of a group with at least one other company subject to corporation tax? If yes, a group company will need to be nominated and a group allowance allocation statement filed.
The CT600 has not been updated for these requirements, and does not have a dedicated box or white space area to state the required deduction allowances or submit the information required in the group allowance allocation statement. Instead a clear summary of the required information in the corporation tax computation accompanying the return. They may also wish to consider explaining what they have done, and why, in any covering letter.
If an accounting period straddles 1 April 2017 then the periods falling before and after that date are treated as two separate accounting periods. A company with profits in a straddling period that wishes to offset brought forward losses, will therefore need to apportion those profits into:
- Pre-1 April 2017 profits (which are not affected by the restriction), and
- Post-1 April 2017 profits (which will be subject to the restriction).
Brought forward losses are set against the pre-1 April 2017 profits first, with any balance remaining carried forward against post- 1 April 2017 profits. Apportionment of the straddling period’s profits should be made on a time basis unless that would produce a result which was not just and reasonable.
The commencement and apportionment rules can be complex, especially where a company has a variety of losses or is subject to the corporate interest restriction (CIR) in the straddling period. More information, including examples, can be found in HMRC’s draft guidance[2].
A lack of awareness?
Until recently, limited guidance has been issued to highlight these compliance requirements and explain how to comply with them. As a result, the ATT are concerned that many small companies and groups with carried forward losses of less than £5m (who may well have concluded that the restriction rules are not relevant to them) will be unaware that they still have compliance requirements.
Importantly, failure to state the trading profits deduction allowance or non-trading profits deduction allowance where needed can, under the strict wording of the legislation, result in only 50% of the company’s profits being offset by brought forward losses. There is therefore the risk that even very small companies could suffer a restriction on their losses merely because they have failed to include a single, arguably irrelevant, figure in their return.
The ATT, alongside the CIOT and ICAEW, therefore wrote to HMRC to request that they act to raise awareness of these compliance requirements amongst all sizes of businesses, and provide further guidance as to how to comply. The full text of our letter can be found here.
In their response to the ATT, HMRC have confirmed that the requirements will be met provided companies include a clear summary of the required information in the corporation tax computation accompanying their return form. For groups, HMRC confirmed that the nominated company can submit the group allowance allocation statement in PDF format alongside their return. HMRC have also indicated that they are working on a template group allowance allocation statement, which should eventually be available to download from the Company Taxation manual.
HMRC have already accepted the ATT’s suggestion that the Company Losses toolkit be updated – this now has specific questions which prompt companies to check that they have stated the necessary deductions allowances and, if they are a member of a group, that a group allocation statement has been submitted. They have also indicated that the CT600 notes, and guidance on GOV.UK will be updated to publicise the compliance requirements and make it absolutely clear how these can be met.
Hopefully these changes will raise awareness of the compliance requirements amongst companies of all sizes, and reduce the risk of smaller companies and groups missing out on the loss relief they are entitled to.
Emma Rawson is a technical officer with the Association of Taxation Technicians (ATT).
[1] s18 and Schedule 4 of Finance (No.2) Act 2017 amend the existing legislation in CTA 2010
[2] The draft guidance on commencement and apportionment can be found here