Finance Act 2017 introduced important changes in how losses can be group relieved.
Finance (No 2) Act 2017 (ss 18-19 and Sch 4) introduced important changes in how losses can be group relieved. Whilst overall the loss relief reform claims to increase flexibility of how losses are offset in future accounting periods, the application of the new regime is complex due to a number of restrictions.
What is changing?
Previously only current year losses could be surrendered to a group company.
Under the new rules, all losses accumulated from 1 April 2017 can be group relieved. This includes brought-forward losses. For example, if a company has a brought-forward loss of £2m as at y/e 31 December 2019, of which £700k arose from 1 April 2017, it will be able to surrender £700k of the total brought forward loss, to a group company.
How it works
Annual profit is first reduced by all 'in-year losses’ and then group relief which are allocated to pools of trading and non-trading profits in proportion to the relative size of those pools. Only 50% of annual profit in excess of £5m can be relieved by brought forward losses, even where these losses arose before 1 April 2017. The £5m annual allowance applies to the whole group, rather than to each company in the group.
CY trading loss £22m, of which £10m to be surrendered to Company B
Allocate CY loss surrendered from group (co C)
Relevant total profits
Excess over 5m allowance to be restricted
No profits left to restrict
Company B has no excess profits over £5m to restrict. After the group relief, its trading and non-trading profits are available to relieve its own trading and non-trading losses. Out of the £10m trading loss, £3.33m is relieved with £6.67m remaining to be carried forward, out of the £7m NLTR deficit, £1.67m is relieved with £5.33m remaining to be carried forward.
Company C has relieved £10m of its £22m loss, with £12m remaining to be carried forward.
Which post April 2017 carry forward losses can be group relieved
The group-surrendered brought forward loss may include trading losses and non-trading deficits. The changes do not apply to capital losses. For accounting periods straddling 1 April 2017 cut off, losses need to be proportioned.
Change of ownership restrictions
Losses arising up to 1 April 2017 are restricted and cannot be used by against the profit of the claimant company if, within three years of the change of ownership there have been major changes in the nature and conduct of trade of the loss making company.
From 1 April 2017 this time limit is extended. Losses will not be available for group relief, if a major change in the nature or conduct of trade arose in the period from three years before to five years after a change in ownership, as long as both the events (change of ownership and the change to trade) occurred after 1 April 2017. If this condition is not met, the previous three years before and after time limit applies.
Losses brought forward and arising from 1 April 2017 onwards cannot be group relieved against capital gains in another group company, if those gains arise as a result of an election to transfer the gain under section 171A TCGA or as a result of a no gain no loss transfer crystallising, if those events arose within five years of the change of ownership of the surrendering company.
A group can benefit from a group loss surrender only if the surrendering company:
carries on a commercial trade; losses arising from non-commercial, small, negligible or otherwise disallowed trades cannot be group surrendered
is not dormant; losses are only available if the surrendering company has assets capable of producing income at the end of the period
has used its available profits to offset the loss first; the relief is not available to the group if the surrendering company could use the losses against its own total profits first
carries on trade in the UK; where the losses are attributable to a foreign establishment, such losses can only be used in the UK, once they have been relieved against any foreign profits first.
The claiming company needs to use its own losses before it can use losses surrendered by a group company.
How to claim
The government has simplified how carried-forward losses can be claimed by a group.
Previously both the surrendering company and the claiming company had to make a claim and only large groups could agree a simplified arrangement with HMRC to make the administration of their group claims easier.
Simplified arrangements for group relief for in-year losses which allowed an authorised group company to make group relief claims have been extended from 30 January 2018 and now apply also to carried forward group losses. The authorised company should submit a written statement consolidating the group relief claims and surrenders, alongside information required to amend the relevant company tax returns.
This is a welcome simplification measure reducing the administrative burden of filing separate amended tax returns but will mostly benefit large groups only and is unlikely to make up for the ever increasing complexity of corporate loss relief legislation.