The new rules will apply to all losses arising on or after 1 April 2017. Losses arising before that date will remain subject to the existing rules and cannot benefit from the increased flexibility, but they will be subject to the restriction on the amount of profit that can be relieved by carried-forward losses.

The annual costs to the 100,000+ businesses affected are estimated to be up to £5m per year, with a requirement to track losses separately for pre and post 2017 accounting periods as well as additional reporting on loss allocation.

Going forward, losses arising from 1 April 2017 will be able to be set against profits of different activities within a company and against profits across a group. However, they restrict the amount of profit that can offset through carried-forward losses, whenever they arose, to 50%, subject to a group-wide allowance of £5m.

The reforms will have effect for accounting periods ending on or after 1 April 2017. Any profits or losses of a company with an accounting period straddling 1 April 2017 will be allocated into notional periods falling before and after that date on a time apportioned basis.

The loss restriction and loss relaxation will apply to:

• trading losses;
• non-trading deficits on loan relationships;
• management expenses;
• UK property losses; and
• non-trading losses on intangible fixed assets.

If a company’s trade ceases and the company has unused carried-forward losses of that trade, those losses can be set without restriction against profits arising in the final 36 months of the trade.

Post-April 2017 losses can be set against total profits, while pre-2017 trading losses will only be able to be set against profits of the same trade.

Once the new rules are in place, carried-back losses will be limited to those generated from 1 April 2017.

Where a company or group of companies is acquired, any post-April 2017 carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years.

Section 269ZJ of Finance Bill 2017 (clause 1, sch 1) sets out the circumstances in which a revised group allowance allocation statement may be submitted. The time limit for doing so is the later of:

• 12 months from the filing date for the company tax return for the nominee’s accounting period and;
• the time when any enquiry into that return is finalised (s269ZJ(4)).

A revised allocation statement may be submitted at a later time if an officer of HMRC allows.

Avoidance measures

The legislation also contains a targeted anti-avoidance rule to prevent abuse of the loss reform rules.

Paragraph 47 amends section 730F of Corporation Tax Act 2010 (CTA 2010), part of the rules in Part 14B, CTA 2010, known as ‘loss refresh’. Those rules prevent arrangements designed to convert carried-forward losses into ‘in-year’ losses that can be used more flexibly.

Para 47 (2) extends the anti avoidance rules to carried-forward UK property business losses and carried-forward non-trading losses on intangible fixed assets, which were not captured in the past.

The Draft legislation: relief for carried-forward losses is available here