Finance (No 2) Act 2017 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 rules introduce new compliance requirements which all companies (regardless of size) need to be aware of if they intend to set brought forward losses against profits arising on or after 1 April 2017.

The restriction rules

Under the restriction, broadly:

• 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:

• A requirement to specify the amount of the deduction allowance in the corporation tax return.
• Further requirements for groups to nominate a company to prepare and file a group allowance allocation statement.

Requirement to specify the amount of the deduction allowance in return

Under s279ZZ CTA 2010, if a company wishes to set brought forward losses against profits arising from 1 April 2017, they are required to specify the amount of their deduction allowance in their corporation tax return for the period.  

This requirement applies 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).

By contrast, companies not wishing to set off brought forward losses in the period are not required to specify their deduction allowance in their return.

Further requirements apply if a company has brought forward losses which can only be set against either trading or non-trading profits. Common examples of these will be trading losses or non-trading loan relationship deficits which arose before the relaxation took effect on 1 April 2017. Where this is the case the company will need to identify a corresponding amount of their deduction allowance as being a trading profits deduction allowance or non-trading profits deduction allowance as appropriate and also specify this amount in their return.

If a company fails to specify the amount of their trading profits deduction allowance or non-trading profits deduction allowance, as appropriate, in their corporation tax return then only 50% of their profits can be offset by brought forward losses, even if these fall well below the level of the deduction allowance. The general deduction allowance must still be entered on the return but there is no statutory loss of the allowance where this doesn’t happen.

Group requirements

The restriction imposes further administrative requirements if a company is a member of a group containing at least one other company within the charge to corporation tax. These requirements apply to even the simplest groups structures (including a holding company with a single trading company subsidiary).

As noted above, where a company is a member of a group, only one group deduction allowance of up to £5m is available per group, although this can be allocated between group companies as they see fit. If a group wishes to offset brought forward losses against profits arising from 1 April 2017:

• A group company has to be nominated as responsible for allocating the group deduction allowance amongst the group members.
• The nominated company has to submit a group allowance allocation statement each accounting period.

The nomination must be made by all group companies which are within the charge to corporation tax. It must state the date the nomination takes effect, which may be before the date the nomination is made.

The group allowance allocation statement must contain a number of details (set out in s269ZV CTA 2010) including the total group deduction allowance available and how this is allocated between the various companies in the group. The filing deadline is the first anniversary of the filing date for the nominated company’s return for that accounting period, or such later time as HMRC may allow.

It should be noted that each individual company in the group still has to include their allocated deduction allowance figure in their individual return, as set out above. This requirement is not removed by the submission of a group allowance allocation statement.

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.

As noted earlier, deduction allowances need to be pro-rated for accounting periods of less than twelve months. For commencement purposes, where a company has an accounting period straddling 1 April 2017, the periods falling before and after that date are treated as separate accounting periods. This means that, for the first year the rules take effect, the deduction allowance will often need to be pro-rated. For example, a single company with an accounting period ending 31 December 2017 which is not a member of a group will usually have a deduction allowance for that period of £3.75m (i.e. 9/12 x £5m).

In October 2018 the ATT, alongside the CIOT and ICAEW, wrote to HMRC to request that they act to raise awareness of the new compliance requirements amongst all sizes of businesses, and provide further guidance as to how to comply. This was driven by concerns 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) would be unaware that they still have compliance requirements. 

One point noted in this letter is that the CT600 return form has not been amended to reflect the new compliance requirements, and does not have a dedicated box or sections to state the relevant deduction allowances or submit the information required in the group allowance allocation statement. However, 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 also confirmed that the nominated company can submit the group allowance allocation statement in PDF format alongside their return. HMRC indicated that they are currently working on a template group allowance allocation statement, and that this should be available to download from the Company Taxation manual when it is updated later in 2018.

HMRC also indicated in their response to the ATT that they will undertake the following actions to publicise the compliance requirements and make it absolutely clear how these can be met:

• Issue further guidance on GOV.UK;
• Update the CT600 notes; and
• Update the main loss relief guidance (currently in draft form on GOV.UK) when it is transferred to the Company Taxation manual later in 2018.

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.

(23-10-2018)