Changes to corporate capital loss limitation for corporation tax effective April 1, 2020

Who is likely to be affected

Large companies that pay corporation tax and have capital losses carried forward.

General description of the measure

For accounting periods ending on or after April 1, 2020, corporations realizing taxable gains will only be able to offset up to 50% of those gains using carried forward (allowable) capital losses.

A loss of business income restriction (CILR) for loss carryforwards was introduced in 2017, which included an allowance that the first £5m of profit per group could be offset by losses carried forward before the 50% restriction applied. The allowance can now also be set off against taxable earnings.

This will ensure that over 99% of businesses will not be affected by the restriction.

Political objective

This measure will ensure that large companies pay taxes for each accounting period in which they make substantial taxable gains.

Context of the measure

This measure was announced in Budget 2018. The government consulted on the measure from October 29, 2018 to January 25, 2019.

A response to this consultation was published on July 11, 2019, along with a draft law. A technical consultation period ran from July 11, 2019 to September 5, 2019.

Detailed proposal

Effective date

The measure will take effect when capital losses carried forward are used to offset taxable gains accrued from April 1, 2020.

Transitional provisions will apply where an accounting period straddles the above date.

An anticipatory provision was announced in Budget 2018 and came into effect for any arrangement entered into on or after October 29, 2018.

Current law

Part I of the Taxation of Taxable Gains Act 1992 sets out how qualifying losses can be carried forward and used to offset future taxable gains. A company may make substantial taxable gains in an accounting period but pay no corporation tax because it has enough capital losses carried forward to offset those gains, negating them.

The current law on CILR can be found at Part 7ZA of the Corporation Tax Act 2010. This limits a company to offset no more than 50% of its relevant profits using certain carry forward losses.

The current law covering life insurers is found in Chapter III of Part VI of the Taxation of Taxable Gains Act 1992. This law globally isolates all taxable gains and allowable losses arising from an insurer’s basic life and general annuity business (BLAGAB).

Proposed revisions

The legislation will be introduced in the Finance Bill 2020.

From 1 April 2020, the loss limitation will have the effect of limiting to 50% the amount of taxable capital gains that can be deducted together with capital losses carried forward.

The steps for calculating the CILR in part 7ZA of the Corporation Tax Act 2010 will be amended to facilitate this restriction and to allow the sharing of the £5 million relief which forms part of the CILR.

Drafting of life insurers BLAGAB are excluded from the restriction insofar as BLAGAB (kept) losses are offset by BLAGAB earnings. This objective will be achieved by amendments to the BLAGAB rules and specific provision of Part 7ZA of the Corporation Tax Act 2010. This measure also includes several clarifications of the BLAGAB rules to ensure that the restriction works as expected.

The restriction will not apply to businesses with a closing trade in petroleum-related activities where taxable gains accrue in that closing.

Sicafi are subject to a specific tax regime which generally exempts taxable capital gains. This measure will not apply to capital losses that are allocated in respect of property income distributions.

Companies that are insolvent and in the process of being liquidated will be able to set off the capital losses carried forward without restriction against the taxable capital gains during the period of compulsory liquidation.

Businesses that have one-day accounting periods solely due to taxable gains will be able to claim access to the full £5m allowance over a financial year in addition to being able to offset qualifying losses through d other taxable gains accrued in the same fiscal year without restriction. Amendments will be made to the Corporation Tax Act 2010 and the Taxation of Chargeable Gains Act 1992 to facilitate this change.

All companies with accounting periods of one day (due only to taxable gains) and profits over £27,397 will be treated as “large” for the purposes of the Corporations Tax Regulations 1998 (stage payments) (SI1998/3175) . This change will apply to accounting periods beginning on or after March 11, 2020.

An anti-avoidance provision will prevent businesses from obtaining a tax benefit with respect to this provision. An anti-prevention provision was introduced on October 29, 2018 to prevent any arrangement to prevent the effect of this measure and will be legislated as part of the 2020 finance bill.

Summary of impacts

Impact on Treasury (£m)

Impacts excluding exemption for companies in compulsory liquidation

2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025
+30 +130 +170 +165 +150 +140

These figures are presented in Table 2.2 of the 2020 Budget under the heading “Corporate Tax: Restricting the Use of Capital Loss Carryforwards from 2020 to 2021” and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing paper released alongside the 2018 budget.

Impacts for the exemption of companies in compulsory liquidation

2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025
negligible negligible -5 -5 -5 -5

These figures are presented in Table 2.1 of the 2020 budget and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing paper released alongside the 2020 budget.

Economic impact

This measure is not expected to have significant macroeconomic implications.

Impact on individuals, households and families

This measure has no impact on individuals since it only affects businesses.

The measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

This measure has no impact on groups sharing protected characteristics, as it only concerns companies.

Impact on businesses, including civil society organizations

This measure will affect approximately 200 companies each year which will pay additional tax as a result of this measure: mainly large companies in the banking, pharmaceutical, real estate and public services sectors, groups with a large real estate portfolio and companies insurance.

The impact on administrative costs for companies should be negligible.

One-time costs include familiarization with the new rules, as well as modification of existing systems following those carried out for the introduction of CILR.

Ongoing costs include carrying out an annual calculation to determine whether these measures still apply.

The customer experience should remain broadly the same, although this measure imposes an administrative burden on companies who will have to start calculating. This burden has already existed since the CILR measure introduced in 2017 and this measure will only build on those requirements and add a bit more complexity.

It is expected that software vendors will be able to modify their existing software to add the new requirements and this measure has been designed with that in mind. Some details regarding start-up arrangements will add to the complexity of the first accounting period affected by the measure, but clear and detailed guidance will be issued to minimize this impact.

Software developers are expected to design their accounting software packages to help customers meet start-up requirements.

There is no impact on civil society organizations.

Operational impact (£m) (HMRC)

HMRC’s costs, including IT and operational costs to implement the measure, are estimated to be around £1.5million.

Other effects

This will have no impact on climate and fuel poverty targets, nor on air quality targets.

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed by contacting the taxpayer groups concerned.

Additional tips

If you have any questions about this change, contact the Trade, Assets and International Policy team by email: [email protected]

Luisa D. Fuller