ICAS comments on reforms to corporation tax loss relief

Business people discussing document

Susan Cattell outlines the ICAS response to the consultation on reforms to corporation tax loss relief.


The details of the proposals were discussed in an earlier article.

In summary the three main proposals (ignoring some specific proposals for banks) are:

  • Losses arising on or after 1 April 2017 and carried forward will be available to set against taxable profits from different activities.  Under the existing rules losses from particular activities may be carried forward only against future profits from similar activities.
  • Losses arising on or after 1 April 2017 and carried forward will be available to set against profits of other members of the same group. For this purpose the familiar group relief definition of group relationships based on beneficial ownership will apply.
  • From 1 April 2017 the amount of annual taxable profits that can be relieved by carried-forward losses will be limited to 50% of the taxable profits in excess of £5m. This £5m threshold or ‘allowance’ will apply on a group-wide basis, with the group having full discretion as to how it is allocated, and for this purpose a different definition of group will apply – possibly based on control as defined in IFRS 10 (Consolidated Financial Statements).

The reforms will be restricted to revenue losses; the rules for relieving capital losses will be unaltered.

Increased flexibility for carried forward losses

For smaller companies, unaffected by the restriction on profits which can be relieved, the new model should provide some extra flexibility in the use of carried-forward losses.  However, the retention of the old rules for carried forward losses relating to periods prior to April 2017 undermines the flexibility, even for these companies.  Once these losses are exhausted the position will improve for companies unaffected by the new restriction.  For companies affected by the restriction the increased flexibility is likely to be negated or diminished by the restriction of profits eligible for relief.  Additionally, the calculations are excessively complex and will occupy a disproportionate amount of business time.  

Office of Tax Simplification review

The Office of Tax Simplification (OTS) is currently conducting a review of the corporation tax computation and is due to report before Budget 2017.  The basis of the OTS project is that simplification of the tax computation is desirable and the review will consider the treatment of different sources of company income, and the legislative and practical complexities arising. It does not make sense to go ahead with major changes to corporate loss relief before the OTS has completed its review of the corporate tax computation.  The changes, as proposed, will introduce more complexity for the largest companies, undermining the OTS project before it even reports.

Impact on larger companies

ICAS agrees with the principle set out in the consultation document that relief for carried-forward losses is an important feature of the tax system, ensuring that the tax paid by a company is reflective of its profit over the long term. Whilst this does have an impact on the Exchequer, the proposals to restrict loss relief clearly undermine this important principle.  Businesses have to take a long term view and take some risks to ensure the economy continues to grow – an overall profit over the business cycle may mean losses in some accounting periods but profits in others.  Whilst the tax system should not encourage excessive or unmanaged risk-taking, equally it should not discourage managed risk-taking, which is vital for long term prosperity.  

Wider impact

The consultation document notes that over 99% of companies will not be affected by the restriction due to the £5 million allowance.  However, the 1% of companies that will be affected represent a sizeable part of the economy.  In practice, smaller companies will also be affected indirectly if the effect of the new rules is that the 1% subject to the restriction respond by scaling back their activities to limit risk and hence reduce the amount of work they provide to SMEs.  A proper impact assessment should be carried out to ascertain the likely impact of the proposal on the companies affected and hence on the wider economy.  


Consideration should be given to deferring the introduction of the restrictions on set off to allow companies time to deal with the immediate consequences of Brexit and until the OTS recommendations on the complete picture of the corporation tax computation are available.   The rules should be made simpler and there should be OTS input in developing them.  As the computational examples in the consultation document illustrate, the calculations currently proposed for common group situations will be excessively complicated. Delaying implementation will permit further consultation on the details and proper consideration of the draft legislation.  The current proposed timetable is inadequate.  

£5 million allowance

The £5 million allowance per group that can be relieved without the need to consider the restriction is helpful. However, it is important that it is indexed, or regularly reviewed, to ensure that its value is not eroded over time bringing more companies within the restrictions.  

Definitions of group

The consultation document proposes that for the purpose of the surrender of carried-forward losses the definition of group should be aligned with the existing group relief definition.  This makes sense; this is well understood and familiar.  However, the proposal that a different definition of group should be used for the purposes of the £5 million allowance adds additional complexity.  There are already multiple definitions of group for different parts of the tax legislation.  One possibility might be to review all these definitions and to consult on possible standardisation across tax legislation; this could be another project for the OTS. Otherwise the same definition should be used for the surrender of carried-forward losses and for the purposes of applying the £5 million allowance

Detailed questions

The ICAS response also covered some of the detailed questions in the consultation.


  • Tax

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