The proposals, which were originally announced at Budget 2016, will be included in legislation in Finance Bill 2017 and will come into effect from 1 April 2017.

HMRC says the reforms are designed to provide for a more flexible loss relief regime, by allowing losses arising from 1 April 2017 to be set against profits of different activities within a company and against profits across a group. They also restrict the amount of profit that can offset through carried-forward losses to 50%, subject to a group-wide allowance of £5m.

Draft legislation was originally published on 5 December 2016 and subsequently updated on 26 January, to include provisions catering for group relief for carried forward losses in the context of companies owned by a consortium and various anti-avoidance provisions.

At that point, specific rules for insurance companies and creative industries were also included. Following Budget 2017, additional revisions have been made to include provisions for oil and gas companies and oil contractors.

When the reforms were first outlined at Budget 2016, accountancy firms expressed concerns they would add considerable complexity to loss relief calculations.  For example, it had been proposed that pre April 2017 losses would have to be used in priority to post April 2017 losses.  Also, there were requirements for pre and post April losses to be set against particular types of income, apportionment between trading and non-trading income.

The updated rules have taken these views into account, so that companies will now have total flexibility over how any current year reliefs are set off against trading and non-trading profits for post April 2017 losses. Thus all post April 2017 losses, be they trading losses, property business losses and loan relationships deficits, can be set off against total profits.

The original proposal was that the definition of the group for the purposes of the £5m annual allowance would be based on the accounting definition in IFRS 10 Consolidated Financial Statements. As a result of representations made, the definition of ‘group’ will now be aligned with the group relief definition.  However, in order to prevent any abuse, such as fragmenting groups to claim additional £5m allowances, there will be additional anti-avoidance rules.

Amongst these are a rule that on a change of ownership, pre-acquisition carried-forward losses cannot be surrendered into the new group for a period of five years. The existing loss buying rules will continue to apply so if there is a change of ownership and one of the loss buying conditions are met (e.g. a major change in the conduct or nature of a trade or investment business), any pre-acquisition losses of the relevant trade or investment business will be forfeit. The time limit for considering whether the loss buying conditions have been met will be extended to five years after the change of ownership.

If there is a change of ownership and in the subsequent five years there is a change in the nature or conduct of any trade or business against which post-April 2017 carried-forward losses could otherwise be set, pre-acquisition carried-forward losses will not be allowed against profits of the trade or business the nature of which has changed.

Rules which currently apply to prevent the transfer of latent losses (transfer of deduction rules) will also be extended to prevent such a loss from being set off against total profits or group relieved.

In its Budget 2017 analysis, Deloitte said: ‘The increase in flexibility of the use of corporation tax losses is a welcome change to the tax system, which should reduce the amount of losses that become ‘trapped’ in companies that are unable to offset them.

‘This increase in flexibility is more than funded by the slowdown in offset of brought forward losses for larger groups, which could represent a real acceleration in tax cost for companies.’

HMRC’s tax impact assessment makes the point that the time-shifted methodology now in operation for loss relief brings the measured yield forward, with a relatively large effect in 2017-18 relative to the cash costing at the expense of future years.

It suggests that the new measures will bring in £495m in 2017/18 and £355m in 2018/19, falling to £305m in 2019/20 and £255m in 2020/21 before dropping to £215m in 2021/22.