Modification of the reform of the loss offset rules for corporation tax

Who is likely to be affected

Unincorporated companies and associations that pay corporation tax (CT) and have losses carried forward.

General description of the measure

This measure amends the reform of the loss compensation rules to ensure that the legislation continues to work as intended.

Political objective

The 2017 CT the loss reform has increased flexibility in the use of tax losses against profits while ensuring that companies pay taxes in each accounting period in which they make substantial profits.

This measure makes changes to ensure that the legislation continues to work as intended by continuing to grant an exemption from the loss reform rules for companies in financial difficulty, allowing them to obtain full relief for carried forward losses that offset profits resulting from the renegotiation of leases when they adopt the International Financial Reporting Standard (IFRS) 16.

Context of the measure

the CT the loss reform rules were enacted in Sections 18 and 19 and Schedule 4 of the Finance Act (No. 2) 2017 and apply from 1 April 2017 and were amended by the Finance Act Finances (FA) 2019 and FA 2021. A tax information and impact note was published on December 5, 2016 and gives further information on the background of the rules.

Since 2017, HMRC has continually assessed the CT loss reform rules to identify where changes are needed. These efforts have established that changes to the way leases are accounted for in IFRS 16 mean that companies in financial difficulty are denied relief from loss limitation for losses carried forward which are set off against profits resulting from the renegotiation of leases.

When a lease becomes onerous, because the costs of meeting the obligations under the lease exceed the benefits the business will receive in return, accounting standards require the business to recognize a tax-deductible provision for net losses resulting from the lease. Lease renegotiations that result in a reduction in rent or the subletting of the property require the cancellation of all or part of the onerous lease provision which is treated as a tax credit. Under normal circumstances, the loss reform rules would restrict the use of any loss arising from the onerous lease clause to 50% of any profit from the reversal in excess of the abatement deductions.

A derogation from this rule has been introduced where reversals of onerous lease clauses are part of a business rescue. The change in the method of accounting for leases IFRS 16 means that the narrow language of this exemption does not apply to companies that are required to adopt the new standard.

Detailed proposal

Effective date

The amendment will apply retrospectively with effect for accounting periods beginning on or after January 1, 2019.

Current law

The current law is included in Part 7ZA (Restrictions on Certain Deductions) of the Corporation Tax Act 2010 (CTA 2010) to sections 269ZX and 269ZY.

Proposed revisions

Legislation will be introduced in the Finance Bill 2021-22 to ensure that companies adopting IFRS 16 continue to benefit from the loss reform exemption in certain circumstances.

Changes will be made to the legislation that specifically refers to reversals of onerous lease covenants so that it also incorporates reversals of right-of-use asset impairments and other similar credits under the new accounting standard. These will allow businesses that are required to adopt IFRS 16 to benefit from an increase in the allowance in the event of renegotiation of the lease to avoid insolvency. These amendments will ensure that companies accounting under pre-existing accounting standards and IFRS 16 will receive substantially the same treatment.

Summary of impacts

Impact on Treasury (£m)

This measure should have no impact on the Treasury.

Economic impact

This measure should not have significant economic impacts.

Terms used in this section are defined in accordance with the Office for Budget Responsibility’s indirect effects process. This will apply when, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

There is no impact on individuals since this measure only affects businesses.

This measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

This measure is not expected to impact groups that share protected characteristics, as it only affects businesses.

Impact on businesses, including civil society organizations

This measure should have a negligible impact on less than 100 companies that pay CT, carried forward losses and entered into lease renegotiations resulting in reversals of previous onerous lease covenants, primarily to allow the company to continue operations and avoid administration or insolvency. This measure makes a minor technical change. One-time costs will include familiarization with the change. There should be no ongoing costs.

This measure is not expected to have an overall impact on the experience of businesses and individuals dealing with HMRC, as the change does not alter any processes or obligations of the tax administration.

This measure should have no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The operational impact of this measure is negligible as it is a minor technical change.

HMRC advice pages will be updated to reflect the change.

Other effects

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed by contacting the taxpayer groups concerned.

Additional tips

If you have any questions about this change, please contact Eva Upali on telephone: 03000 542 465 or email: eva.upali@hmrc.gov.uk.