Currently, if a business has suffered trading losses in the past, it is able to utilise those brought forward losses to shelter future profits of the same trade. Whilst the new proposals will allow the brought forward loss to be offset against any income, where the business makes a profit of more than £5 million, it will only be able to set its losses brought forward against 50% of those profits.
For a business with significant brought forward losses that becomes profitable, this restriction will accelerate the date at which corporation tax becomes payable. However, for a business that is now distressed and in need of rescue, there could be a very nasty sting in the tail.
In many corporate rescue transactions, significant taxable profits can often be triggered due to the restructuring of liabilities. For example, if onerous leases with landlords are being renegotiated as part of a CVA, tax reliefs previously claimed would be clawed back. Currently, a business would be able to fully utilise its losses brought forward against such profits, thereby matching historical losses with profits triggered by the rescue. This would no longer be possible under the proposal and corporation tax liabilities could be triggered, with no prospect of shelter, at a time when there is unlikely to be any surplus cash available. Absent any concession for business rescues, many commercial restructurings could be doomed to failure.
We only have limited information at the moment and HMRC has announced that it will consult on the proposed changes. We will be lobbying HMRC on this fundamental point to ask that the rules dealing with loss relief apply fairly to a business in distress, which needs to be rescued or restructured in order to secure a future for it and its workforce. A new tax exemption has recently been introduced for the release of loan relationships that are restructured as part of a corporate rescue (whether inside or outside a formal insolvency procedure), and it will be essential that the proposed changes include similar flexibility.
Other announcements of interest to those dealing with distressed businesses include:
- the restriction of the amount of interest that may be deducted from taxable profits for corporation tax purposes. Following HMRC’s earlier consultation, it has confirmed that from 1 April 2017, interest deductions will be restricted to 30% of profits. This may further exacerbate the problems created by the restriction of losses outlined above
- an increase in the top rate of SDLT on commercial property from 4% to 5% and its being payable on consideration over £250,000 could impact the price a purchaser is willing to pay to acquire property
"I will urge the Government to extend the corporate rescue exemption to the proposed loss relief restriction."
- Kathryn Hiddleston, Partner, Head of Restructuring Tax at Grant Thornton UK LLP