By email to HMRC

7 August 2016

Dear Sir/Madam,

Reforms to corporation tax loss relief: consultation on delivery

Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 26 May 2016. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment on some specific aspects of the current consultation.

Firstly, Chartered Accountants Ireland wishes to reiterate its support for the proposal to make losses arising from 1 April 2017 more flexible when being carried forward.

The proposed introduction of flexibility in the use of corporation tax losses carried forward would be a welcome change to the tax system which should reduce the amount of losses that become ‘trapped’ in companies that are unable to offset them. That aside, we wish to raise a number of other points in relation to the consultation proposals for delivery of these reforms.

Pre April 2017 losses

As noted earlier, we welcome the proposed flexibility that would ensue from opening up the rules for losses carried forward where these arise after 1 April 2017.

However, the proposed 50% restriction rule applies to all losses arising including any incurred pre- April 2017. The consultation proposals do not grandfather or protect pre-April 2017 losses in any way from the proposed restriction though we note that the consultation does suggest that these losses would be used in priority to post-April 2017 losses.

In addition, pre-April 2017 losses retain their original character and remain inflexible. For example, trading losses carried forward can only be set against future trading profits from the same trade, in the same company.

Notwithstanding the £5 million allowance (which we accept will take a number of companies out of the restriction) there will now be situations where companies will pay tax, despite having incurred losses on what were, for tax policy purposes, deductible business expenses and costs in the past.

The inclusion of pre-April 2017 losses in a new tax rule which applies a restriction retrospectively is simply unfair and could be damaging to the UK economy. At a time of uncertainty as the UK seeks to shape its new economic destiny after the EU referendum vote outcome; the impact on pre-April 2017 losses seems a backward step and a disincentive to investment in the UK.

We would propose that pre-April 2017 losses are not subject to the new restriction if they are to retain their original character. However if the restriction is to be imposed on all losses it seems only fair that all losses are treated equally in the corporation tax computation and thus it would seem sensible that the new flexibility for losses carried forward be applied irrespective of when the losses arose.

Alternatively the £5 m threshold could be increased as an incentive to companies with a loss history to remain UK resident.

Complexity

The current rules on corporation tax loss relief are well established and simple to use. The consultation proposals would add an additional layer of complexity to corporation tax computations where losses are involved with further complexity where group scenarios arise.

The detailed proposal and model set out in Chapter 3 of the consultation document proposes very complex and mechanical rules to compute loss offsets. There can be no doubt about this when the worked examples at appendix A of the consultation document are scrutinised. These proposals come at a time when the Office of Tax Simplification (OTS) has been tasked with a number of projects in relation to corporation tax simplification.

Further complexity arises when the interaction of these proposals with other areas of the corporation tax system are considered. For example, the consultation does not address situations where the accounting periods of group companies are not coterminous or how the rules will work when companies join or leave a group. Other areas of interaction such as calculating the surrenderable loss when a company is considering claiming a payable tax credit under the SME R&D tax relief regime and relief for EEA losses (Chapter 3 of the Corporation Taxes Act 2010) also require consideration.

Additional complexity will also arise for companies able to avail of the Northern Ireland rate of corporation tax under the Corporation Tax (Northern Ireland) Act 2015. Such companies are already required to stream losses between UK and Northern Ireland activity. The current proposals will add even further complexity to the computations of those companies.

In addition, there will be a different definition of “group” for group relief of losses than there will be for considering which companies are members of a group for the purpose of the £5 million group allowance.

One suggestion to reduce the complexity of the calculations required would be to afford pre-April 2017 losses the same flexibility as post-April 2017 losses are to be given. This would remove the need for Step 2 of the model outlined in Chapter 3. Effectively all losses would then be equal.

A level of complexity would be removed from calculations with the added benefit that the proposed restriction for using pre-April 2017 losses would not have as great an impact if such losses are more flexible and do not retain their original character. This particular suggestion specifically addresses question 2 on page 12 of the consultation document.

Exchequer impact

At paragraph 2.4 of the consultation document it is stated that “this increased flexibility will have a significant impact on the Exchequer, both in terms of accelerating relief for companies’ carried-forward losses and providing relief for losses that may otherwise have been unutilised”. That proposal taken alone will no doubt have a negative exchequer impact.

However, the net exchequer effect of the consultation proposals (taking into account the proposal to restrict the amount of annual profit that can be relieved by carried-forward losses to 50% from 1 April 2017) is not clear from the consultation. A tax information and impact note should be available at the next stage of this consultation so that the net impact can be considered.

In our opinion, any negative exchequer impact from the increased flexibility of losses from 1 April 2017 will more than likely be funded by the slowdown in offset of brought forward losses for companies and groups impacted by the new restriction rule. This could represent a real acceleration in tax cost for some companies at a time of economic uncertainty after the recent EU referendum outcome.

Transitional provisions

Although not currently covered in the consultation, on the basis of the current model outlined in Chapter 3, the final rules will require transitional provisions to split an accounting period straddling 1 April 2017 into two periods. This presumes that pre-April 2017 losses retain their original character and will require separate streaming.

A loss arising in a straddling period would then be restricted to the extent that it falls in the split period ending 31 March 2017. This would presumably be calculated on a time basis, unless that basis would be unjust or unreasonable. Again, this adds further unnecessary complexity to the corporation tax computation.

Such complexity is easily resolved by our previous suggestion of affording pre-April 2017 losses the same level of flexibility as those incurred post-April 2017. No straddling period calculation would be required.

Miscellaneous

The consultation proposes that if a company joins a group with trading losses carried forward it will only be able to use them against profits of the same trade/business, despite the changes proposed by the consultation. This seems unfair and could be a disincentive to investment.

The current anti-avoidance legislation which applies when there is a change in ownership coupled with a major change in nature or conduct of trade could be extended to cover situations whereby the losses of a company joining a group become available to other companies in the newly joined group and vice versa. Unless the anti-avoidance rule applies, losses should otherwise be available to both the new company joining the group and reciprocally.

The consultation does not propose any changes to the loss rules on cessation of a company’s trade. We presume this means that the existing terminal loss relief provisions will be maintained. Under the terminal loss relief provisions, companies that cease to carry on a particular trade can claim terminal loss relief for losses generated in the final accounting period. Losses may be carried back up to three years and set off against total profits.

As the consultation proposes that losses become more flexible, it seems only natural to widen the scope of the terminal loss relief provisions such that terminal losses can be used in the previous 3 years within the wider group and are not just restricted to use against total profits by the company which is ceasing to trade. We would recommend that this be considered as part of the detailed design of these reforms.

Anti-avoidance legislation

Inevitably, whatever the shape of the final reforms to the corporate losses, it can only be expected that anti-avoidance rules will feature both as an ongoing part of the regime but also during the transitional period straddling 1 April 2017. Again we would reiterate our suggestion that pre-April 2017 losses are treated in the same manner and afforded the same flexibility proposed for post-April 2017 losses. This would have the additional benefit of largely negating the need for anti-forestalling measures if all losses are treated equally.

Conclusion

The consultation proposals would be a significant change to the UK corporate tax system for relief of losses. Whilst some additional flexibility in using losses is proposed, the opportunity is not being taken at this stage to simplify the “schedular” system for company taxation.

The categorisation of profits within the corporate tax system can be complex and is inconsistent with how companies calculate and report profit for accounting purposes. The current corporation tax projects of the OTS may address issues such as these. However that work should go hand in hand with examining how reforms to corporation tax loss relief can be implemented which introduce greater flexibility without adding additional complexity. This seems to be a missed opportunity to avail of the talents and skills of the OTS.

The consultation document proposes that the new rules will apply from 1 April 2017. This consultation closes on 18 August 2016. At that point, any changes will be just over six months away. In our view this simply does not allow sufficient time for full and proper consideration of the many issues raised by this consultation.

The flexibility offered by the proposal to widen use of losses post-April 2017 is no doubt attractive but should not come at the expense of larger companies paying more corporation tax in the shorter term or disincentivising investment in the UK.

The UK is currently in a period of unprecedented economic uncertainty in the wake of the recent EU referendum vote. It would seem sensible to us to consider implementing these rules only after a prolonged period of consideration and consultation.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours faithfully,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland, www.charteredaccountants.ie