One of the most significant compliance challenges to corporate taxpayers and advisers in the last few years has been the reformed Corporation Tax loss rules, which apply to losses arising from April 1, 2017.
These reforms have two main aims, according to guidance issued by HMRC:
- Restricting the amount of loss relief available to businesses with substantial profits
- Allow most carried-forward losses arising from April 1, 2017 to be used more flexibly against the total taxable profits – rather than particular types of profits of a company and its group members
The reforms impact all companies and unincorporated associations which pay corporation tax and have carried forward losses meaning that companies within these categories (regardless of size) will likely have to fulfil some administrative requirements to stay compliant with the changes.
According to HMRC, the restrictions and relaxations within the new guidelines apply to those losses defined as “relevant deductions” and include:
- Non-trading loan relationship deficits (NTLRDs) carried forward
- Trade losses carried forward
- Non-trading losses on intangible fixed assets carried forward
- Management expenses carried forward
- UK property business losses carried forward
Under the new rules, other losses will only be subject to restrictions:
- Pre-April 1, 2017 trading losses
- Post-April 1, 2017 trading losses that can only be set against trading income
- Pre-April 1, 2017 NTLRDs and those arising at any time to a charity
- Post-April 1, 2017 NTLRDs that can be set only against non-trading profits
While most companies will be below the new £5m limit – above which their loss relief claims for brought forward losses are restricted – the updated guidelines do introduce some potential pitfalls which companies need to be aware of.
For instance, they will have to explicitly specify their deductions allowances on their return if they do wish to claim loss relief for brought forward losses.
The restrictions also introduce administrative requirements for companies which are members of a group containing at least one other company within the charge corporation tax.
According to HMRC, these requirements apply even to simple group structures including a holding company with a single trading company subsidiary.
It means that as well as having to specify deduction allowances for the group – even if the groups of companies are below the £5m limit – they will also have to nominate a group company to allocate that group’s deductions allowance and submit a group allowance allocation statement.
Any company which fails to specify the amount of their trading profits deduction allowance or non-trading profits deduction allowance will only be able to offset 50% of their profits utilising brought forward losses.
This applies even if the company falls below the level of the deduction allowance.
It is also likely that these reforms will be mirrored in upcoming changes to Capital Loss Restrictions set to be introduced in April 2020.
A consultation on these proposals ended in January and highlighted the introduction of a restriction for carried-forward capital losses arising in a company to no more than 50% of the capital gains arising in an accounting period.
With these new compliance regulations creating burdens on businesses which could have significant financial implications if not followed, it is important that accounting software is able to make compliance as simple as possible.
Automating as much of the process as possible, so relevant information is automatically populated into the correct forms ensures compliance and removes the added administrative burden.
As an example, CaseWare’s Corporation Tax ensures that if a loss relief claim which needs a deductions allowance to be specified the information appears on the computation – regardless of the company’s size.
Automation is particularly useful for a small group claiming loss relief for brought forward losses under these new rules, which has become a burdensome undertaking with the new regulations.
This is because the nomination and group allowance allocation statement is submitted to HMRC separately from CT600 tax returns (the forms for which have not been altered in the wake of the new rules).
By using accounts automation software to prepare a return for a nominated company the losses worksheet will populate a group allowance allocation statement which can be run off, signed and submitted to HMRC as a separate document.
What is clear is that the process of compiling accounts information manually is becoming an ever more complex and burdensome task for accounts departments, practitioners or businesses.
Automating these processes ensures compliance and that businesses can have confidence that they are submitting correct information.
For more information about how accounts automation software can help you stay compliant with these corporation tax loss relief reforms – and others – click here