Corporation tax: amendments to the reform of loss offset rules

Who is likely to be affected

Unincorporated businesses and associations that pay corporation tax and have losses carried forward.

General description of the measure

This measure makes changes to the reform of the loss compensation rules for the purposes of protecting the Exchequer and to ensure that the legislation works as intended.

Political objective

Loss Reform has modernized the UK’s loss compensation scheme by increasing flexibility on the profits against which carried forward losses can be offset while ensuring that companies pay tax in each accounting period in which they make substantial profits.

This measure includes changes to ensure that the legislation works as intended and will protect revenue by preventing relief for carried forward losses from being claimed beyond what was intended. The same amendments also have the effect of bringing the treatment of basic life insurance and general annuity activities (BLAGAB) benefits consistent with the original intent of the policy.

These and other changes made by this measure will achieve the policy objective.

Context of the measure

The Loss Reform Rules were enacted in Sections 18 and 19 and Schedule 4 of the Finance Act (No 2) 2017 and apply from 1 April 2017. An information and d The tax impact was published on December 5, 2016 and provides further information on the background to the rules.

The inclusion of the special BLAGAB the rules of loss reform legislation have created an unintended consequence that may result in relief for claimed carried forward losses beyond what was intended. Moreover, these ‘BLAGAB rules” do not fully meet the policy objective as they limit losses by using a measure of profit which is partly not subject to CIT, this can lead to excessive relief.

Additionally, other aspects of the legislation require changes to ensure they work as intended. These relate to:

  • deduction allowance
  • terminal discharge
  • group relief for losses carried forward
  • transfer of a business without change of ownership
  • oil and gas losses

Detailed proposal

Effective date

Changes to the group allowance for carried forward losses (other than insurance company shock losses) come into effect on April 1, 2017.

Amendments that ensure the amount of relief claimed and the treatment of BLAGAB benefits are in line with policy intent are effective July 6, 2018.

All other changes will come into effect on April 1, 2019.

Current law

Current law is found in Part 7ZA (Restrictions on Certain Deductions), Part 4 (Terminal Relief), Part 5A (Group Relief for Carryforward Losses), Part 22 (Business Transfers without Change of Ownership) and Part 8 (Petroleum Activities) of the Corporation Tax Act 2010 (CTA 2010).

The BLAGAB the rules are in part 7ZA CTA 2010 and Part 2 of the 2012 finance law.

Proposed revisions

Legislation will be introduced in the Finance Bill 2018-19 to ensure the BLAGAB the rules are working as intended and in doing so prevent excessive claims for redress. Changes will be made to:

  • the calculation of “relevant profits” so that the amount of relief for deductions used is the total amount to which the company is entitled for the accounting period – this will simplify the calculation for many and prevent the amount of relief for carried forward losses to be inflated (Section 269ZD and Section 269ZFA of the CTA 2010)
  • the BLAGAB the rules will be changed so that the calculation of “relevant profits” is based on shareholders’ share of total profits – this will ensure that the amount of restricted loss carryforwards used is consistent with the objective of the policy (Section 269ZD and Section 269ZFA of CTA 2010)

Other changes introduced in the 2018-19 finance bill will concern:

  • the allowance of deductions that can be used by a member of the group – this will be restricted so that where a company is a member of one group and the ‘ultimate parent’ of another, it can only use part of the deduction of the group of which he is a member – this will prevent groups from acquiring new members to increase the amount of deduction available (article 269ZV(5A) of the CTA 2010)
  • the final exemption rules to ensure that where the 3 year period for which the exemption is due begins during an accounting period, the total exemption due for that accounting period is limited to the proportion of the total profits of the accounting period that falls within the 3-year period (article 45G of the CTA 2010)
  • increase the cap on the amount of profit that can be offset by group relief for losses carried forward in certain circumstances
  • various legislation following the extension of the rules for the transfer of a co-ownership business to new types of losses introduced by part 7ZA of the CTA 2010
  • the description of a particular type of loss reported by oil and gas companies (Section 304(7) of the CTA 2010)

Summary of impacts

Impact on Treasury (£m)

2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024

This measure supports the Exchequer in its commitment to protect revenue. The Office for Budget Responsibility has included the impact of this measure in its 2018 budget forecast.

Economic impact

This measure should not have significant economic impacts.

Impact on individuals, households and families

This measure should have no impact on individuals, households or family formation, stability or breakdown as it only applies to businesses.

Equalities impacts

This measure should have no impact on the equality of groups sharing protected characteristics.

Impact on businesses, including civil society organizations

This measure will have an impact on companies that pay corporation tax and have losses carried forward. Scope Companies BLAGAB the rules are also affected by the change in the method of calculating the limitation of losses. The impact on administrative costs for companies should be negligible. One-time costs include familiarization with the new rules and may also include the introduction of new processes and/or systems in order to be able to calculate loss compensation under the new rules. There is no impact on civil society organizations.

Small businesses fall within the scope of this measure if they have carried forward losses, although they are unlikely to be financially affected. These companies are expected to benefit from the simplified calculation of “relevant profits”.

Operational impact (£m) (HMRC or other)

Any additional costs or savings to HMRC in implementing the proposed revisions set out in this measure are expected to be negligible.

Other effects

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed through communications with affected taxpayer groups and the disclosure of new anti-avoidance schemes to circumvent the measure.

Additional tips

If you have any questions regarding this change, contact:

Luisa D. Fuller