The Carried Forward Loss Restriction (CFLR) rules introduced in Finance (No.2) Act 2017 aim to make relief for carried forward losses more flexible whilst also ensuring that businesses pay tax at times of substantial profitability. It has two major implications:
1. A relaxation in the restrictions on the profits against which carried forward losses may be set. This means carried forward trading losses will now be available to be offset against total profits of later periods (with a similar change introduced for non-trade loan relationship deficits).
2. A restriction, applied at three separate stages, that now sees relief for carried forward losses in excess of a £5 million allowance restricted to 50 percent of profits.
The relaxation for trading losses and non-trading loan relationship deficits is effective from 1 April 2017 and so carried forward amounts arising before and after this date have to be streamed separately. A period straddling 1 April 2017 is treated as two notionally separate accounting periods for this purpose. Alphatax apportions profits and losses amounts based on the number of days in each period by default, and includes override inputs on each of the relevant losses statement to amend this allocation if required.
Other losses that need to be streamed are UK property business losses, management expenses and intangible fixed assets losses. Although the offset rules won’t affect these losses, streaming will still be required for the purposes of group relief for carried forward losses.
There are also special rules that apply to certain types of losses or companies and these include ring fence trades, trades that become small or negligible, charities, life assurance businesses, and banking companies.
There are a three main changes introduced by CFLR:
- Adjustable loss offset: Relief for trading losses brought forward was previously mandatory and automatic but under the legislation (at s45 CTA 2010) a new sub-section (4A) now allows a company to claim to reduce the amount of the brought forward loss offset. Alphatax has a new input on the trade Losses input statement that allows companies to achieve this, reducing the loss relief applied in report mode, and producing a claim note. For non-trade loan relationship deficits, the legislation works the opposite way round in that companies claim the amount of deficit they want to relieve, as opposed to dis-claiming trade losses.
- Offset against profits: Flexibility has been introduce enabling trading losses and non-trading loan relationship deficits to be offset against total profits (under s45A CTA 2010 in the case of trading losses, and s463G CTA 2009 in the case of non-trade loan relationship deficits).This is accommodated in Alphatax on the Profits chargeable report statement. Offsets are also reflected in two new boxes 263 and 285 that have been added to the Deductions and Reliefs section of the CT600.
- Restrictions on offset: There is a restriction on the amount of carried forward losses that a company may deduct in a period (detailed in Part 7ZA CTA 2010).
Losses in excess of this restriction are not eliminated, but will continue to be available to carry forward to be offset against future profits of later periods. So this restriction affects the timing of loss relief across periods, rather than the overall amount.
There are three main restrictions that apply in CFLR for different types of losses, each of which takes precedent over the loss relief sections and rules in the legislation. They are for trading losses offset against profits of the same trade, non-trading deficits offset against non-trade profits, and losses offset against total profits. The calculation of the amount of the restriction is applied automatically by Alphatax, the details of which are presented on the CFLR report statement, and any impact on loss relief returned on the individual loss report statements.
The restriction limits the deduction of losses to a relevant maximum which is determined from the tax computation by establishing…
- Qualifying Profits – a five step process outlined in the legislation which is performed automatically in Alphatax using the modified total profits of the company and current period deductions to arrive at the company's qualifying trading and qualifying non-trading profits.
- Relevant Profits – taking the qualifying profits less the deductions allowance (which for a stand-alone company is £5 million with that amount shared for a group) the relevant trading profits and relevant non-trading profits can be calculated. Where both trade and non-trade losses brought forward are present, it is possible to create tax efficiencies in performing this allocation, which Alphatax will do automatically, with details of the calculation presented on a Breakdown Details statement which is available from the Deductions Allowance input statement.
- Relevant Maximum – the relevant maximum represents the maximum amount of losses that may be deducted under the relevant sections and is defined as 50 percent of relevant profits plus the deductions allowance added back.
The restriction does not amend the normal calculation order of profits chargeable to corporation tax, but rather applies over the top of that calculation to limit any deductions.
In terms of the deductions allowance for a group of companies, the legislation sees the group appoint a nominated company which holds the £5 million allowance on behalf of the group. That company may choose to allocate the deductions allowance to the group as they see fit. The nominated company is required to submit a "Group allowance allocation statement" to HMRC at the end of each accounting period, which is due one year after the company's normal corporation tax filing. To help with this the Alphatax Group module includes a statement which allows the deductions allowance to be allocated from the nominated company to members of the group, and a report statement designed to meet the requirements of the Group allowance allocation statement to be submitted to HMRC.
Group Relief for CFL
The CFLR rules have also introduced group relief for carried forward losses. For these purposes, the existing concepts of Group Relief groups and Consortium Relief are repeated, and minimum and maximum surrenderable amounts can be calculated within these on the same basis as for group relief. The notice of consent to surrender and simplified arrangements rules also remain the same. Support for these is provided with two new statements in the CT600 supplementary forms section of the contents tree in Alphatax.
Losses available for surrender under CFLR include:
- Trading losses,
- UK property business losses,
- Non-trade financial deficits,
- Management expenses, and
- Intangible fixed asset losses
Certain restrictions apply on the amount that can be surrendered. The company is not allowed to surrender where it could use the loss itself (i.e. companies cannot not claim relief for brought forward losses against their own profits, and then surrender those losses to another group company). Where companies do surrender, remaining losses are reduced by the amount surrendered, for which Alphatax will perform a pro-rate calculation.
For the claimant company, there are a number of restrictions that apply i.e. companies may not claim where unused losses exist. The deduction for any claims is applied after normal group relief. Permitted losses feed into the Profits Chargeable report statement within Alphatax. Guidance is also provided on making claims for group relief for carried forward losses in the Group module, including a matrix that will allow for claims and surrenders to be automatically posted down to the relevant companies, and an automatic max claim calculation.
The CFLR provides some welcome flexibility in the way carried forward losses are relieved but the bedding in stage may prove difficult for some, particularly given the complexity that can arise for periods straddling 1 April 2017, which requires the creation of two separate accounting periods for the purposes of applying the loss reform commencement provisions.
Where complexity arises is that apportionment applies only for the purposes of applying the new rules, and therefore it is not the whole corporation tax computation that is split. Alphatax makes it easier to navigate this transition period by providing an automatic flow through to the remaining pro-rated amounts. It accommodates complex issues caused by different loss streams which within the restriction calculation can interact with each other in unexpected ways.
To see more on how such calculations are dealt with in Alphatax, check out our webinar across two videos: Relief for carried forward losses – part 1 and Relief for carried forward losses – part 2. Or if you’d like to receive further training, apply for our ‘New User’ and ‘Refresher’ training courses which now incorporate CFLR by contacting our Professional Services team.