The government is to amend the loss relief rules to correct a defect that may lead to excessive relief being allowed, with draft legislation which changes the way in which restricted losses are calculated by all companies, and also how the regime applies to insurers within the Basic Life Assurance and General Annuity Business (BLAGAB)
The BLAGAB-related change, which is included in draft legislation for Finance Bill 2018/19, commences with immediate effect from the date of announcement, while other amendments are effective from 1 April 2019.
The loss reform rules were enacted in sections 18 and 19 and Schedule 4 of Finance (No 2) Act 2017 and apply from 1 April 2017. HMRC says the inclusion of the special BLAGAB rules in the loss reform legislation created an unintended consequence that may result in relief for carried-forward losses being claimed in excess of that intended.
Furthermore, these ‘BLAGAB rules’ do not fully meet the policy objective as they restrict losses using a measure of profit that is in part not subject to corporation tax; this can lead to excessive relief.
Additionally, other aspects of the legislation require changes to ensure that they work as intended. These relate to the deductions allowance; terminal relief; transfer of a trade without a change of ownership; and oil and gas losses.
Amendments are to be made to the computation of ‘relevant profits’ under the BLAGAB rules so that the amount of the deductions allowance used is the full amount to which the company is entitled for the accounting period. HMRC says this will simplify the computation for many and prevent the amount of the relief for carried-forward losses from being inflated.
The BLAGAB rules will be changed so that the computation of ‘relevant profits’ is based on the shareholders’ share of the total profits.
Other amendments introduced in Finance Bill 2018-19 relevant to all companies will be made to the deductions allowance that may be used by a group member. This will be restricted so that where a company is a member of one group and an ‘ultimate parent’ of another, it can only use a share of the allowance from the group of which it is a member - this will prevent groups from acquiring new members to boost the amount of the deductions allowance available.
The terminal relief rules will be changed to ensure that where the three-year period for which relief is due begins part way through an accounting period, the total relief due for that accounting period is restricted to the proportion of the total profits for the accounting period that falls within that timeframe.
Further legislative amendments will be introduced as a consequence of the extension of the rules for the transfer of a trade under common ownership to include new types of loss introduced by Part 7ZA of CTA 2010. There will also be a change to the description of a particular type of loss carried forward by oil and gas companies.
The Treasury says these measures will increase receipts, but does not provide an estimate of tax impact. It says the final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2018.
Policy paper Changes to the Corporation Tax reform of loss relief rules is here.
Report by Pat Sweet
