If a company is liable to corporation tax and makes a loss from trading, they will be able to claim relief from corporation tax. This is available by offsetting the loss against gains or profits of the company in the same accounting period. In the absence of other elections, this will then be carried forward to future accounting periods. In most cases, trading losses arising from periods after 1 April 2017 can be carried forward and set off against total profits of that company, or total profits of another company in the same group.
Tax avoidance legislation exists to prevent companies carrying forward trading losses, where the company has undergone a change of ownership. A practical example of this would be where the new owner’s intentions were to buy the company simply to utilise the losses brought forward. If HMRC consider there has been a major change in the nature or conduct of the trade, they will not allow the losses to be brought forward against total profits of the company. Further to this, if the company’s trade was small or negligible immediately before the change in ownership, and the trade undergoes a considerable revival following the change, the brick wall may once again come up!
HMRC will review the period from 3 years leading up to the change, to the 3 years that immediately follow.
Legislation defines a major change as including “a major change in the type of property dealt in, or services or facilities provided, or a major change in customers, outlets or markets.” However, changes brought in to keep pace with current technology, the dropping of unprofitable product lines, or the adaption of new management techniques are stated by HMRC guidance as being commercial changes for the continuance of a profitable trade, and therefore will not restrict the availability of relief.
Property investment/non-trading businesses are not exempt from the anti-avoidance rules. After a change of ownership, HMRC will again consider anti-avoidance rules, recognising significant differences in the company’s capital, and the nature of investments as triggers for their restrictions (being on specific non-trading loss relief). The time periods remain the same, however guidance indicates they will also consider gradual changes outside of this period.
Be aware that “shell companies” which may not have any trading or investment activity may also be impacted by these rules.
HMRC have indicated that they will look at all factors and will have regard to qualitative as well as quantitative factors. As the change in loss relief rules have occurred relatively recently, changes may once again come afoot as a result of the practicality of these new loss relief rules.
Should you wish to discuss any of the above with our corporation tax team, please contact us on:
+44 (0) 207 495 2244