The reform of relief for carried forward losses by Finance (No.2) Act 2017 with effect from 1 April 2017 will still be fresh in the minds – or nightmares perhaps – of most corporation tax professionals. As part of this package of provisions, the new concept of group relief for carried forward losses was introduced.
The structure of this relief is very similar to that of existing group relief, however additional restrictions were included for both claimant and surrendering companies. In certain circumstances and in respect of the deductions allowance, the effect of the restriction on claimant companies produced results that limited relief unexpectedly.
Now, following representations made by Tax Systems to HMRC, Finance Act 2019 – which received Royal Asset on 12th February 2019 – has made changes to the legislation which will retrospectively effect the amount of group relief for carried forward losses that may be surrendered by one company to another.
Existing rules
The group relief for carried forward losses rules were introduced as Part 5A CTA 2010 and provide that certain losses carried forward by a company may be surrendered and set against total profits of another group member.
The amount of any claim is subject to a number of restrictions, one of which is that the amount claimed by a company may not exceed a “relevant maximum” which is calculated under s188DD (separate rules apply for amounts attributable to a loss making period, but the effect is the same).
Default relevant maximum calculation
By default, the claimant company’s relevant maximum is calculated as follows:
- Step 1 – Calculate the claimant company’s relevant maximum for the claim period under the carried forward loss restriction rules of s269ZD(4) (which sets the limit on the amount of the company’s own losses that it would be able to use)
- Step 2 – Deduct from Step 1 any losses brought forward that are offset against the company’s profits and are subject to the carried forward loss restriction
- Step 3 – Take the proportion of the claim period included in the overlapping period and apply it to the amount arrived at under Step 2.
Example 1
A company has £20m of trading profits and £10m of its own excess management expenses brought forward. The relevant maximum for the purposes of any group relief for carried forward loss relief claim is calculated as follows:
| Carried forward loss restriction | |
| Relevant profits | |
| Qualifying profits | 20,000,000 |
| Deduction allowance | -5,000,000 |
| 15,000,000 | |
| Relevant maximum | |
| 50% of relevant profits | 7,500,000 |
| Deductions allowance | 5,000,000 |
| Relevant maximum under s269ZD CTA 2010 | 12,500,000 |
| Deductions from profits | |
| Excess management expenses b/f | 10,000,000 |
| Group relief for carried forward losses | |
| Relevant maximum | |
| Step 1 Relevant maximum | 12,500,000 |
| Step 2 Losses brought forward | -10,000,000 |
| Relevant maximum under s188DD CTA 2010 | 2,500,000 |
| Step 3 would require this amount to be apportioned if the accounting period dates of the surrendering company were not coterminous with the claimant. |
In this example, the amount of group relief for carried forward losses that the company may claim is equal to the amount of its s269ZD restriction that remains unused after offsetting the company’s own brought forward losses.
Amended relevant maximum calculation
The legislation includes a specific sub-section at s188DD(3) which amends the calculation outlined above where a company’s relevant profits do not exceed the deductions allowance it has available. In this case, the reference to the relevant maximum at Step 1 is replaced with relevant profits. This subtle difference has a significant effect on the results of the calculation and produces a less favourable result for the company compared to using its own losses.
Example 2
A company has £1m of trading profits and £700k of its own excess management expenses brought forward. The full £5m of deductions allowance is allocated to this company in anticipation that this will assist the company in relieving profits as far as possible. The relevant maximum for the purposes of any group relief for carried forward loss relief claim is calculated as follows:
| Carried forward loss restriction | |
| Relevant profits | |
| Qualifying profits | 1,000,000 |
| Deductions allowance (restricted to profits) | -1,000,000 |
| nil | |
| Relevant maximum | |
| 50% of relevant profits | – |
| Deductions allowance | 5,000,000 |
| Relevant maximum under s269ZD CTA 2010 | 5,000,000 |
| Deductions from profits | |
| Excess management expenses b/f | 700,000 |
| Group relief for carried forward losses | |
| Relevant maximum | |
| Step 1 Relevant profits | – |
| Step 2 Losses brought forward | -700,000 |
| Relevant maximum under s188DD CTA 2010 | nil |
In this example, the company may not claim any group relief for carried forward losses, even though it has profits remaining and ostensibly sufficient deductions allowance to create capacity. In fact, the presence of the deductions allowance has inadvertently limited the amount of relief claimable.
The deductions allowance available to a group cannot be eliminated and so must be allocated somewhere. The group would be free to reallocate this amount to other group members, but doing so would have an adverse effect on the use of the company’s own losses.
Amendment in Finance Act 2019
The unexpected result outlined above was identified by our tax development team who raised this with HMRC. Finance Act 2019 Schedule 10 includes a number of technical amendments to the carried forward loss relief provisions, and these include a change to the wording of s188DD(3) in order to remove this problem. The reference to relevant profits is to be amended to say “qualifying” profits, which has the following effect on example 2:
| Group relief for carried forward losses | |
| Relevant maximum | |
| Step 1 Relevant profits | 1,000,000 |
| Step 2 Losses brought forward | -700,000 |
| Relevant maximum under s188DD CTA 2010 | 300,000 |
The Act applies this change with retrospective effect, for accounting periods beginning on or after 1 April 2017.
Changes to Alphatax
The group relief carried forward claims input statement in Alphatax presents the calculation of the claimant company’s relevant maximum according to the legislation as it currently stands. A diagnostic is displayed where group relief carried forward claimed exceeds this amount.
We will be amending our calculation to reflect the updated wording used in the legislation for the V19.0 edition of Alphatax which is due for release in Q2 2019. Users should be aware that the amount of group relief for carried forward losses that may be claimed will be increased as a result of this change.
