Tax Losses – Recent Changes and their Impact on Recovery

The Government has announced significant reforms relating to loss relief as part of the recent Budget, although the changes will not be implemented until April 2017. It is contended that these changes are necessary to bring the UK into line with international best practice.

Under the current system, losses carried forward can only be used by the company that incurred the loss, and not used in other companies in a group. In addition, some losses carried forward can only be set against profits from certain types of income, for example carried forward trading losses may only be used against trading profits. However, for losses incurred on or after 1 April 2017, companies will now be able to use carried forward losses against profits from other income streams or from other companies within a group.

Additionally, from 1 April 2017, the Government will restrict to 50% the amount of profit that companies can offset through losses carried forward. The restriction will only apply to profits in excess of £5m calculated on a group basis. The current rules enable companies to offset all their eligible taxable profits through losses carried forward and the Government is concerned that this can lead to a situation where a large company pays no tax in a year when it makes substantial profits. To address this, the government will restrict the amount of taxable profit that can be offset through losses carried forward.

The greater flexibility of use of losses is to be welcomed and indeed had it been implemented sooner may have helped reduce the severity of the recession in Northern Ireland. However the restriction on losses carried forward may impinge on rescue scenarios and also on the ability for distressed business to recover. The key point for consideration being that it is now vitally important that groups are efficiently structured.