The use of brought forward corporate losses was well established and easy to grasp in principle: losses from an earlier year could only be offset against profits of the same type in the same company. Yes, the rules were restrictive, but we knew where we stood. That all changed on 1 April 2017 when new rules came in for losses incurred after that date.
The change was heralded as providing more flexibility. That’s certainly true, as “new” brought forward losses can be offset against profits of any type (excluding capital gains). New losses brought forward from earlier periods can even be surrendered as group relief for the first time. But this flexibility comes at a cost.
The downside is a restriction on how much profit can be offset by brought forward losses (old or new) once taxable profits exceed £5 million, the “Deduction Allowance” (DA). Only 50% of profits over the DA can be offset by previous years’ losses. That sounds like a very high threshold, but group companies (including where the parent is overseas) only get one DA between them. They can divide it up how they like but if there are a lot of UK companies £5 million won’t necessarily go a long way.
There are also administrative requirements that must be met. Each group must appoint a nominated company to administer its DA allocation. The nominated company is responsible for filing the agreed allocation with HMRC. Additionally the individual companies must disclose their share of the DA in their tax returns. If any of these steps are missed HMRC can conclude that the company has no DA and restrict the loss offset to 50% of total profits.
There are plenty of traps for the unprepared in the new carried forward loss rules, so you need to understand how they will affect your company. For more information please contact a member of the Ensors Corporate Tax team.
