In Autumn 2018 HMRC, announced that a consultation would be carried out with a view to restricting a company’s carried forward capital losses for offsetting against only 50% of the capital gains arising in a future accounting period (as opposed to 100% as is currently the position). The consultation on the corporate capital loss restriction (CCLR) will run until 25 January 2019. The new rules would, if implemented, take effect from 1 April 2020.

An anti-forestalling measure will have effect from Budget Day 2018 (29 October) to prevent companies taking advantage of the existing rules before a change in the law. This measure will prevent the artificial recognition of gains before the loss restriction comes in to force by, for example, bed and breakfasting arrangements or entering into contracts with a delayed completion date for no commercial purpose. There is no intention to restrict the offset of in year capital losses through the CCLR. These can still be offset in full and, through an election under Section 171A Taxation of Chargeable Gains Act 1992, chargeable gains and losses can be moved around a group of companies allowing losses to be utilised in the most efficient way.

The CCLR is a follow-up measure to the corporate income loss restriction (CILR) which was introduced with effect from 1 April 2017. Under the CILR income losses which arise after 1 April 2017 are no longer streamed which enables losses to be used much more flexibly. For example, trading losses can now be carried forward to future accounting periods and set off against any type of profits including capital gains, something which was impossible under the old inflexible rules. Also, where a company with losses is a member of a group of companies, these losses may be carried forward and set off against the profits (of whatever nature) of other companies in the group. However, this new flexible use of losses contained in the CILR came at a price. Subject to the operation of a £5 million deductions allowance, the CILR provides that only 50% of a company’s profits for an accounting period can be relieved by carried forward losses.

Capital losses were not included in the CILR so, under current rules, capital losses can be carried forward without restriction. The CCLR consultation is intended to complete unfinished business. If implemented as intended by HMRC the new rules will only allow 50% of capital gains to be offset by carried forward capital losses. However, the potentially harsh effect of this rule will to some extent be offset through the £5 million deductions allowance which can be used against both income profits and capital gains (as appropriate) before the 50% restriction will operate.

The consultation document sets out some complex examples of how the CCLR will be calculated and what transitional arrangements will be in place. In order to apply the restriction from 1 April 2020 an accounting period which straddles that date will be split into two notional accounting periods with the first ending on 31st March 2020 and the second commencing on 1 April 2020. The CCLR will only apply to gains arising in the notional period from 1 April 2020 onwards. Specific exemptions from the new rules will apply to certain life assurance business and to the ring-fenced profits of UK oil and gas extraction companies.

HMRC intends to publish draft legislation dealing with the CCLR during summer 2019 for a period of technical consultation prior to its inclusion in the Finance Bill 2020.

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