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20 October 2016

There have been a few recent developments in the world of corporation tax with new proposed legislation set to come in from next year. Two of the key measures put forward are highlighted below.

Interest deductions - more rules

Just in case there weren’t already enough rules to restrict corporation tax deductions for interest expense, an additional layer of rules will be introduced from April 2017.

Existing rules such as transfer pricing and loans for an unallowable purpose must still be considered and applied first. Following this, if the proposed interest deduction for the year is greater than £2million, new interest rules must also be applied. In broad terms, the new rules will seek to restrict interest deductions to 30% of “tax EBITDA” (based on profits chargeable to corporation tax but with certain exclusions).

The rules are complex and will need careful consideration, however, they are only likely to affect larger corporates in practice.

Carried forward corporation tax losses

Two changes are proposed from April 2017 that will impact on the utilisation of carried forward corporate tax losses:

  1. Increased flexibility – losses arising after 1 April 2017 can be carried forward and offset against the total taxable profits of the company as well as the profits of its group members. Pre-April 2017 losses will continue to be treated under the old rules and hence trading losses created before this time will still have to be streamed for offset against the trade to which they relate.
  2. 2. 50% restriction – Currently there is no restriction on the amount of carried forward losses that can be offset against current year profits. Under the new proposals each group will have a £5million annual allowance such that they can utilise carried forward losses up to that amount in a given year without restriction. After this, it will only be possible to offset carried forward losses against 50% of the remaining profit.

Given the £5million annual allowance, the restriction is only likely to apply to larger companies/groups. However, the increased flexibility could benefit groups of all sizes and prevent the issue of ‘locked losses’ (i.e. where a group entity has losses but no possibility of future profits) where created post April 2017.