Changes to the reform of loss relief rules for corporation tax

The measure

Legislation will be introduced in Finance Bill 2021 to make technical changes to the loss relief rules. The loss relief rules were significantly reformed with effect from 1 April 2017, and the government has stated that these further changes are being made to ensure that the legislation works as intended and to reduce administrative burdens for businesses. 

The amendments will ensure that groups have access to the deductions allowance to which they are entitled for the period prior to a change in the ultimate parent through acquisition or demerger. Specifically, such groups will be allowed to make a nomination where there was not a valid nomination at the date the deductions allowance group ceased to exist. A nominated company will be able to submit a group allowance allocation statement for periods up to the date the group ceased to exist and thereby have access to a deductions allowance for that period. Transitional provisions will allow an otherwise out of time allocation statement to be submitted.

Amendments will also be made to:

• apply an extended definition of “change of ownership” in cases where there is a transfer of a trade by a company that underwent a change in ownership;
• allow carried-forward losses to be surrendered as group relief in certain situations where the surrendering company has covered its profits fully;
• resolve a circularity issue concerning the interaction of group relief and the calculation of qualifying profits and allow the computation to work as intended;
• alter the loss restriction calculation to cap the figure of relevant profits at nil where the allocated deductions allowance exceeds qualifying profits and to ensure only in-year reliefs actually claimed are included in the loss restriction calculation;
• alter the formula for allocating the group deductions allowance to group companies to allow the nominated company to allocate the deductions allowance as they choose;
• extend the time limits for submitting an original group allowance statement to include the enquiry time limits, and
• remove the requirement for a nominated company to submit a group allowance statement where no group companies have used any carried-forward losses in the period.

Who will be affected?

All companies and unincorporated associations that pay corporation tax and have losses carried forward will need to be mindful of the updated rules, although most of the proposed amendments impact very specific circumstances only.

When will the measure come into effect?

The amendment to the nomination procedure and submission of a group allowance statement where a deductions allowance group ceases to exist will apply retrospectively with effect from 1 April 2017.

The following amendments will be treated as having always had effect:

• alteration of the loss restriction calculation to ensure amounts of in-year reliefs actually claimed are to be included in the loss restriction calculation; and
• capping relevant profits to nil where the allocated deductions allowance exceeds qualifying profits.

Certain amendments required as a consequence of the introduction of Corporate Capital Loss Restriction will be treated as having always had effect since 1 April 2020.

The following amendments will apply for accounting periods beginning on or after 1 April 2021:

• the amendment in relation to group relief for carried-forward losses;
• the amendment to correct a group relief circularity issue;
• the amendments to the time limits and requirement to submit a group allowance allocation statement; and
• the amendment to the formula for allocation of the deductions allowance.

The extension of the definition of “change of ownership” will apply for acquisitions made on or after 1 April 2021.