Corporation Tax Losses: Restriction, Allowance and Group Relief

Most companies with any history are running two loss regimes at once. Nearly every dispute in this area traces back to one of three things: mis-streaming pre-2017 losses, misapplying the 50% restriction, or a group allowance allocation statement that was never filed.

Two Regimes Running in Parallel

The corporation tax loss rules were substantially reformed with effect from 1 April 2017, and the consequence is that most companies with any history are operating two regimes at once. Losses arising before that date remain subject to the old, narrower streaming rules. Losses arising after it are more flexible in what they can be set against, but are subject to a restriction on how much can be used in any period.

Nearly every dispute in this area comes from one of three places: mis-streaming pre-2017 losses, misapplying the restriction, or getting the deductions allowance allocation wrong within a group.

The Carried-Forward Loss Restriction

Broadly, carried-forward losses can be set against only 50% of profits above the deductions allowance. The mechanics matter:

• The restriction applies to carried-forward losses. Current-period losses and losses carried back are not restricted in the same way.
• Profits are taken after in-year reliefs, so the base against which the 50% is measured is not simply the trading result.
• The restriction bites on the excess over the deductions allowance, not on the whole figure. A company with modest profits may be entirely unaffected.
• Different rules apply to certain loss types and certain companies, and the interaction with the capital loss restriction needs separate consideration.

The Deductions Allowance

• The allowance is a group allowance, not a per-company one, for companies in a group at any time in the period.
• It must be split between trading and non-trading profits, and the split is stated in the company’s own return.
• Amendments to the allocation statement are possible but time-limited.
• Short accounting periods reduce the allowance proportionately.

Group Relief and Group Relief for Carried-Forward Losses

There are two distinct regimes and they are frequently confused:

• Group relief under Part 5 CTA 2010 surrenders current-period losses to a claimant company in the same group, on the 75% ownership test.
• Group relief for carried-forward losses under Part 5A allows post-2017 carried-forward losses to be surrendered, but with additional conditions, including that the surrendering company cannot itself use the loss and that the companies were in the same group when the loss arose.

Claims and surrenders are made in the returns, subject to time limits, and consortium relief adds a further layer where ownership is shared.

Change in Ownership and Major Change in Business

Carried-forward losses can be denied where there is a change in ownership accompanied by a major change in the nature or conduct of the trade within the relevant period. This is the provision that most often ambushes a purchaser who assumed the losses came with the company.

• “Major change” is a question of fact and degree: changes in the type of property dealt in, services provided, customers, outlets or markets can all count, whereas mere improvements in efficiency or scale generally do not.
• A gradual change over the period can still be a major change when viewed end to end.
• There are additional restrictions on the transfer of a trade and on investment businesses.
• On any acquisition, the loss position should be diligenced and, where material, warranted, not assumed.

Carry-Back and Terminal Losses

• Trading losses may generally be carried back one year against total profits, with an extended carry-back available in defined circumstances.
• Terminal loss relief allows a wider carry-back on cessation, and this is often the most valuable relief in an insolvency or wind-down, and the one most often overlooked once a company has stopped trading and no one is attending to its tax affairs.
• Repayment claims arising from carry-back are a standard HMRC verification target, so the supporting computation should be capable of standing up before it is submitted.

Where the Disputes Arise

• No group allowance allocation statement, or a defective one, producing an unexpected restriction.
• Pre-2017 losses used as if post-2017, against profits they cannot be set against.
• Part 5 and Part 5A confused, with a carried-forward loss surrendered as if it were current-period.
• Loss buying challenges after an acquisition and change of activity.
• Penalty exposure under Schedule 24 FA 2007 where the resulting return understates the liability. On a technical loss error, careless is the realistic ceiling and suspension should be sought.
• Discovery assessments where the enquiry window has closed, and here the officer’s awareness from the return itself is the battleground, following Langham v Veltema and Charlton.

Practitioner Application

1. Maintain a loss memorandum distinguishing pre- and post-April 2017 amounts by type. Without it, errors are close to inevitable.
2. Submit the group allowance allocation statement and check it every year. It is administrative, and it is expensive to get wrong.
3. Diligence losses on acquisition, and think hard about the change in ownership rules before restructuring the target’s activities.
4. Claim terminal loss relief on cessation before the company is dissolved and nobody is left to make the claim.
5. Expect verification on any carry-back repayment claim and prepare the computation accordingly.
6. On a penalty, argue the behaviour category first, then suspension, then special circumstances.

Frequently Asked Questions