Corporate Capital Loss Restriction

Written by: Kyle Barford, Product Manager (Tax)

From 1 April 2020, an extension to the existing Corporate Income Loss Restriction (CILR) regime is in force, to include a Corporate Capital Loss Restriction (CCLR).

The introduction of the CILR was one of the most significant compliance challenges to corporate taxpayers of the last few years, in part because of the changes that the reformed loss rules made to the way in which losses are claimed, and the disclosures required.

The CILR rules introduced the concept of the £5 million deductions allowance available to a company, or group of companies, above which most income relief claims are subject to a 50% restriction.

Under the CCLR rules, there is a restriction on brought-forward capital losses, which can only be used to offset 50% of net chargeable gains, subject to the deductions allowance. The £5m deductions allowance is shared between income and capital losses and must be allocated between income and capital by the claimant company.

This adds further complexity to groups, which already need to allocate the allowance between group companies and between trading and non-trading activities (for pre-1 April 2017 brought-forward losses).

In a similar way to the CILR coming into force, companies with an accounting period straddling 1 April 2020 need to apply the CCLR rules on the basis of two notional periods, one ending on 31 March 2020, and the other starting on 1 April 2020. Net chargeable gains in the first notional period are not subject to restriction.

The transitional rules are quite detailed, and more guidance on these is available in HMRC’s CCLR consultation document.

The CaseWare Corporation Tax template is due to be updated for this new statutory content in April of this year, shortly after it comes into force. The updates include a new worksheet to assist users with the multiple ways in which allocations need to be considered, as well as consideration within the worksheets under the transitional rules.

There are several crucial things for corporate taxpayers to bear in mind when complying with these rules:

1. As a reminder, under the current CILR rules, although most companies will make claims below the £5m allowance threshold, even companies well below the £5m limit have to explicitly specify their deductions allowance on their return if they wish to claim loss relief for brought-forward losses.

This means all companies wishing to apply brought-forward capital losses against net chargeable gains arising on or after 1 April 2020 must also explicitly specify their deductions allowance on their return. If no allowance is claimed, then only 50% of the net chargeable gains can be offset by brought-forward capital losses.

1. Most groups of companies will also be well below the new £5m limit. However, as well as each group company needing to comply with point 1 above, even groups of companies well below the £5m limit have to nominate a group company to allocate that group’s deductions allowance and submit a group allowance allocation statement.

For a small group, claiming loss relief for brought-forward losses is quite burdensome under these rules. The nomination and group allowance allocation statements are submitted to HMRC separately from any CT600 tax return.

Using CaseWare Corporation Tax, if preparing a return for a nominated company, the losses worksheets will populate a group allowance allocation statement which can be run off, signed and submitted to HMRC as a separate document.

It is essential that taxpayers be aware that the impact of the restriction rules is far more wide-reaching than the £5m limit implies.

Taxpayers should also be aware that the usual complement of anti-forestalling rules has been proposed to prevent tax avoidance around the rule change. More guidance on these is available in HMRC’s CCLR consultation document.

The CCLR consultation has renewed calls from taxpayers, respondents and professional bodies to streamline not only the new CCLR rules, but the existing CILR rules as well.

*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.