From 1 April 2017 some key changes may be introduced to certain aspects of the corporation tax regime.
These could impact groups where either there is at least one company within it making losses, where losses brought forward at the date of introduction of the new rules are in excess of £5 million, or where there is a significant UK interest cost.
These changes formed part of the Finance Bill 2017 and were due to be debated and legislated in the House of Commons and House of Lords in Spring/Summer 2017. However due to the recently announced General Election, these changes have now been dropped from the current Finance Bill.
We fully expect them to be revisited later in 2017, but it is not yet certain whether they will still be implemented from 1 April 2017 or a later date. Despite the uncertainty, businesses should still be assessing the impact of the changes as it is a case of ‘when not if’ these changes are introduced.
Changes to the loss relief rules
The proposed new rules will allow much greater flexibility in the use of losses, so that trading losses will be able to be set against both trading and non-trading profits of a later period, i.e. companies will no longer be required to stream trading losses carried forward for losses incurred after the commencement date.
In addition, these losses will also be available to be surrendered as group relief in a later period. This contrasts with the rules for losses incurred before the commencement date where once carried forward, they can only be used in the company in which they are made. This often caused losses to be stranded in a particular group company, despite the overall group being profitable.
The downside to the new rules is that groups, or companies, with UK profits in excess of £5 million from implementation date will only be able to set off the brought forward losses against a maximum of 50% of total profits in excess of the £5 million. This applies to all losses brought forward, whether incurred before or after the commencement date.
Despite the restriction applying to ‘old’ losses as well as new, old losses will unfortunately not benefit from the new flexibility. ‘Old’ trading losses incurred prior to the commencement date will be subject to the old rules, and can only be set against future profits from the same trade in the same company.
While, on balance, for many this will be good news, the impact assessment published alongside the draft legislation suggested that an additional £1.4 billion of corporation tax is expected to be raised over four years as a result of these changes. Clearly there are some significant ‘losers’ from the change. There may be some opportunity to reduce any adverse impact of the changes and therefore businesses should be considering the impact sooner rather than later.
Restriction for interest deductions
The other important change to corporate tax rules originally scheduled to apply from 1 April 2017, is a proposed new measure to limit relief for interest paid by UK companies.
In summary, subject to a £2 million de minimis allowance, the proposed new measure has been broadly designed so an interest restriction arises where net UK interest expense exceeds either a fixed ratio of 30% of UK EBITDA, or by election, the group ratio of group interest to group EBITDA, subject to a cap related to external net group interest expense.
As always the detail is complex. There are a number of detailed rules for calculating the ratios and net interest expense. Disallowed interest will be able to be carried forward for offset in future years where surplus interest capacity is available.
You would be forgiven for thinking based on this, that groups with net UK interest expense of less than £2 million, or who calculate that they should not have any interest restrictions don’t need to take any further action.
Caution needs to be exercised here, particularly by groups that have volatile profits, or which are growing, acquisitive or just thinking about changing their financing structure in the future. This is because any unused interest capacity can be carried forward for up to five years. However, in order to do this, an interest restriction return will need to be filed for the year the allowance arises and for each intervening year up until the allowance is used.
Consideration will need to be given to whether the full calculation should be undertaken, and an interest restriction return filed on an annual basis to protect this allowance, particularly if future interest profile or profitability is likely to change.
Qualifying infrastructure exemption
There are some proposed exceptions from the corporate interest restriction rules, including most significantly a public infrastructure exception. This excludes most interest expense paid by ‘qualifying infrastructure companies’.
Qualifying infrastructure companies must be fully taxed in the UK and their activities must relate to the provision of public infrastructure assets. In addition, an election will need to be made before the start of the accounting period for which it is to apply, with some transitional rules.
Buildings (or parts of) that are part of a UK property business and are let on a short term basis (less than 50 years) to unrelated parties will also be able to be categorised as public infrastructure assets.
It is anticipated that many property companies and also Housing Associations may be able to make this election. However, the election cannot be revoked for five years once made and therefore the impact of such an election on the rest of the group should be considered before it is made.
Companies or groups affected by either of these changes should carefully model the impact of the proposed new rules on their business.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.