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Are you ready for corporate loss restriction?

Since Theresa May decided to call a general election in April of this year, the major changes to the UK corporate tax system have been causing me severe headaches – and continue to do so.

Let me re-cap a little. For the best part of two years we’ve had extensive detailed consultation on a three pronged package:

  • The reform of substantial shareholdings exemption (SSE)
  • The corporate interest restriction
  • The corporate loss restriction

These aren’t minor changes, and they aren’t easy to follow, even for a seasoned corporate tax adviser. The changes were complex and the initial explanation of the changes ran for hundreds of pages, some of which wasn’t actually correct or threw up outcomes that should never be.

The operative date for these changes has always been 1 April 2017. The professional bodies; ICAEW and CIOT in particular were concerned these measures were too complex to introduce in 2017 and were not sufficiently well understood by professionals and by HM Treasury alike – in particular the interest and loss restrictions. The changes to SSE were actually very welcome because the changes clarified several areas of debate and doubt and opened up the exemption to more corporates than before.

Historically it has been normal for new legislation to be operative from 1 April and then enacted shortly thereafter in the Finance Bill. Whilst changes between the announcement and the Bill being passed have been possible, any changes have generally been small rather than anything major. Of course this year an extra dynamic was thrown into the mix – a general election – which everyone thought at the outset the Conservatives would win easily. They decided to shelve the three measures above and remove them from the Finance Bill No.1 2017 and reintroduce them in a second bill after the election. The only problem with this was that they didn’t win outright and in doing so created a period of uncertainty during which transactions were being completed in the hope that SSE was available from 1 April, but without any certainty.

More recently, HM Treasury confirmed that all three changes would be enacted in a second Finance Bill due for completion in October 2017 – but with all changes in effect from 1 April 2017. For some, there was a hope that the interest and the loss restrictions would be deferred for another year, to allow people time to adjust to the new regimes and their complexity – but no such luck. That has meant a flurry of activity around accounting and law firms as corporate tax advisers now struggle through the detailed HMRC guidance published in late July – over 120 pages in relation to the corporate loss restriction and nearly 500 pages in relation to the interest restriction.

The stated intention of government was to ensure that these restrictions only affected really large companies, however the de-minimus thresholds set to achieve this are in truth very low and many companies will be sucked into two new regimes which will drive up compliance costs markedly in the first few years of operation.

It’s worth reminding ourselves of the basic thrust of the headlines changes to corporate losses – post 1 April 2017 losses incurred and carried forward can be set off against all group profits (which previously they could not – remaining pre 1 April losses remain subject to these restrictions when carried forward), and a group will have to restrict the use of losses brought forward to 50% of the available profit having taken a £5m deductions allowance into account. Thus those groups with large tax losses brought forward and profits in excess of £5m in the current year will be affected.

The corporate loss restriction guidance itself seems to completely ignore the transitional provisions – i.e. the mechanism that deals with the first year where the accounting period straddles 1 April 2017. You’d have thought that this was reasonably important…and I’m told that HMRC now recognise this and are working on the opening year guidance in much more detail. The changes to the legislation are predicated on the basis that the current rules are too difficult and this is a simplification – but that is somewhat lost in the changeover from the old rules to the new ones, and the increased number of options around priority of offset have the potential to confound. That said, one would imagine the best approach (generally speaking) is to use up pre 1 April 2017 losses before post 1 April 2017 losses because they are less restricted in their use.

In addition, it becomes clear that the anti-avoidance provisions which go with the new loss regime are more widely drawn than the old rules and this will create all sorts of issues, particularly with M&A transactions, with an increased likelihood that losses will be lost or suspended for a period of five years before they can be used. Many people will likely be caught out here because the new rules are much wider than we have been used to hitherto.

Other elements to the rules include the concept of a ‘nominated company’ in respect of the £5m allowance and whether a group has in excess of £5m of losses or profits, a nomination against the deductions allowance will still be needed in the tax computation. Likewise losses will still need to be split pre and post 1 April 2017. Care is also required in the opening period – the £5m deductions allowance will be adjusted pro-rata to fit the period 1 April 2017 to the end of their accounting period – this could catch a few groups out and result in tax due when it was not expected.

For those clients who have a 30 June 2017 year end are straight into the new rules and may encounter the biggest practical headaches. Currently HMRC cannot accept tax returns for any accounting period ending after 31 March 2017. As a result, the corporation tax software houses don’t have any up to date software that we can use to help model the position – this is currently a labour intensive task based upon our current understanding of the new rules as laid out by the HMRC guidance, which we know is subject to change on opening year aspects. In some situations, whilst groups have been aware of the restriction they haven’t considered the impact when determining quarterly instalments. Finally, even when additional tax has been forecast, if the company accounts are being signed off before the Finance Bill No.2 2017 is substantively enacted (i.e. when it reaches the report stage) that additional tax cannot be provided and has to be merely noted in the post balance sheet events review.

Today I have copious supplies of paracetamol in my drawer ready to call upon at a moment’s notice – and no wonder if this is the ‘tax simplification’ that is coming through in our tax system! Going forward, the only saving grace is that we will get proposed legislation in November ready to be enacted and made effective promptly in the spring.

FEATURING: Stuart Rogers
Stuart is a corporate tax partner who specialises in advising fast growing and complex corporate entities, heading up the innovation and technology tax services group… read more
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