The measure
Under the current rules, corporation tax losses carried forward can only be used by the company that incurred the loss, and some losses carried forward can only be set against profits from certain types of income. Increased flexibility is being introduced, meaning that businesses will be able to use carried forward losses against profits from other income streams, or from other companies within a group.
In addition, companies can currently offset eligible taxable profits against corporation tax losses carried forward from earlier periods. It was announced that the amount of profit that can be offset against losses carried forward will be restricted to 50% of the amount of profits in excess of £5 million. Where the company is in a group, the £5 million allowance will apply to the group.
The government will also reduce the amount of profit that banks can offset with pre-2015 losses from 50% to 25%.
Who will be affected?
The restriction on the use of brought forward losses will affect companies that were previously loss making that become profit making, and have profits over £5m. It should be noted that the £5m is a group wide threshold, with the group having discretion as to how the allowance is applied. These changes will not apply to the North sea ring-fenced corporation tax regime.
Banks with pre-2015 corporation tax losses will be affected by the specific provisions applying to them. This restriction will remain subject to a £25 million allowance for building societies and an exemption for losses incurred by new-entrant banks.
This measure may have tax accounting implications if there is an associated change in the value of deferred tax assets arising on corporation tax losses deemed recoverable.
When?
The increased flexibility in the use of carried forward losses will apply to losses incurred from 1 April 2017.
The 50% restriction on the offset of carried forward losses will also apply from 1 April 2017, and there will be consultation on the measure in 2016.
The restrictions applying to banks will come into force from 1 April 2016.
Any impact of deferred tax re-measurement (for example, a reduction in the amount of deferred tax asset to be recognised) should be recorded when the legislation is substantively enacted for IFRS and UK GAAP purposes, and enacted for US GAAP purposes. Disclosure of the associated impact may be required in financial statements published before then.
Our view
The increase in flexibility of the use of corporation tax losses is a welcome change to the tax system, which should reduce the amount of losses that become 'trapped' in companies that are unable to offset them. This increase in flexibility is more than funded by the slowdown in offset of brought forward losses for larger groups, which could represent a real acceleration in tax cost for companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
