HMRC consultations on corporate tax

Susie Walker

Susie Walker

Partner & Head of Tax

HM Revenue and Customs have issued two important consultations on the reform of corporation tax loss relief and the tax deductibility of corporate interest expense.

Corporation Tax Loss Relief consultation 

The consultation aims to make loss relief more flexible however due to its complex nature, it must be approached with caution. 

It is proposed that for losses arising after 1 April 2017, carried forward trading losses will be available to:

  1. Offset against other profits including non-trading profits such as profits on property businesses;

  2. Surrender to other group companies and set off against trading and non-trading profits.

The corporation tax loss relief will be restricted to 50% of profits, subject to a £5m allowance per group. The definition of a “group” is to be based on common control therefore it will include all companies under the same economic ownership. However losses will only have the ability to be surrendered if the companies form part of the same loss relief group, which follows a different definition. 

It is worth noting that capital losses will remain ring-fenced and are out with the scope of the new rules and the existing rules restricting the use of losses where there has been a change of ownership and a major change in the nature or conduct of the trade will remain in place.  

The application of these rules is complex and it is recommended that advice is taken prior to the rules coming in to ensure optimisation of the loss relief going forward. 

Tax deductibility of corporate interest consultation

HMRC have issued a new consultation focusing on the policy and implementation of how the proposed UK restriction on the tax deductibility of interest for corporates should be legislated. New legislation is expected to take effect from 1 April 2017 at the earliest.

HMRC are consulting on this subject in order to comply with the Base Erosion Profit Shifting (BEPS) agreement and the Organisation for Economic Co-operation and Development (OECD) plans set out in October 2015. 

In summary, the proposals are that:

  1. Groups will be able to deduct net UK interest of up to £2 million per annum; groups or stand-alone companies with a net-interest expense of less than £2 million will not be affected by these rules.

  2. For those affected, the amount of UK tax relief for interest will be capped at 30% of the group’s UK taxable earnings before interest, tax, depreciation and amortisation (EBITDA).

  3. An optional group ratio rule will also be introduced which may allow groups to obtain a higher level of deductions in line with the group’s position. 

There are also provisions for public benefit infrastructure projects where the project meets set conditions. 

Johnston Carmichael are monitoring both consultations closely and will be collating responses to HMRC. The consultations close on 18 August 2016 and 4 August 2016 respectively. 

If you have any feedback or further questions in response to these consultations, please contact Susie Walker, Head of Tax or your usual adviser.