22 August 2016 by Russell Cockburn
New rules for corporate loss relief
The Chancellor included a brief note in his Budget statements earlier this year that proposes changes to the existing, and very anachronistic, rules covering the availability of set-off for carried forward corporation tax trade losses.
On a first reading this looks like a good development and, if it does go ahead, it will certainly represent a major increase in the flexibility companies will have in using their unused and carried forward trading losses in the future. On the other hand, there is a unwelcome sting in the tail for some, particularly larger companies and groups.
The basic proposition is that for losses arising after 1 April 2017, and carried forward from one accounting period to another, relief will be available for set-off against the differing sources of income that a company may have in those later accounting periods. They will not, as is currently the case, be subject to the ‘same trade’ restriction.
This will do away with the annoying situation that can arise where a company that is still in an overall loss-making situation has to pay corporation tax on small amounts of investment income, such as rents, in a later years. That is because the losses carried forward cannot currently be set against that small source of income. Instead, carried forward losses will be available for set-off against other sources of income.
In a further, and rather surprising, inclusion it also appears that carried forward losses will be available for group relief in subsequent accounting periods, something that has never been possible before. So, at long last, it would seem that one aspect of the UK’s corporation tax system is going to be reformed in line with common sense, rather than dogma. This change is, in my view, to be warmly welcomed.
It would have been even better if the chancellor had gone all the way and allowed carried forward losses to be set off against ‘total profits and gains’ − i.e. against chargeable gains and other non-income sources as well, but perhaps that was just too much to hope for.
However, the price for these forthcoming relaxations is a nasty sting in the tail for companies or groups with profits in excess of £5 million. Where this threshold applies, only 50% of a company’s profits will be available for set-off against any losses carried forward from one accounting period to the next. Alongside this, the equivalent carry forward fraction for banks is be reduced again to only 25% coverage. It is interesting to note that the loss restriction is historic, i.e. it applies to losses incurred during the recessionary years, whereas the new flexibility only applies to losses arising after 1 April 2016.
HMRC has recently published guidance for eventual inclusion in its Employment Status Manual on the new travel expenses rules, which came into force from 6 April 2016. These concern expenses for home to work travel incurred by employees or workers engaged though ‘employment intermediaries’.
The rules are in the 2016 Finance Bill which will shortly become the 2016 Finance Act. Unfortunately the legislation already contains an error which currently means that intermediaries would have to apply the IR35 tests rather than the new ‘supervision direction and control’ test actually envisaged by the new rules. HMRC has already had to confirm that it will arrange for the legislation to be amended at the earliest opportunity to correct this problem.
Under these new rules each separate engagement has to be regarded as a ‘separate employment’ for the purposes of determining whether or not the employee is able to obtain tax relief for any relevant travel and subsistence expenses.
This, in effect, makes obtaining tax relief for such travel expenses much harder because it is not then possible for the employee to argue that they are being asked to work away from their normal place of work. If they could, they might be able to qualify for tax relief for these expenses under the general ‘24 months’ rule, which is applicable for detached duty in such circumstances where the employee’s contact of employment continues throughout. This will no longer be the case for such employees.
This recent Stamp Duty Land Tax (SDLT) case, Project Blue v HMRC, sounds initially like something out of the realms of the murky world of espionage. In fact, it actually involves good old fashioned tax avoidance − or at least that is what seems to have been involved. The more one looks at it, the more one suspects that we may never know the real circumstances behind what happened here, although in essence the history of the case seems relatively simple.
Chelsea Barracks was sold by the Ministry of Defence (MoD) in 2008 to property developers for £959 million. As a result of the sale, the government was in line to receive around £38 million in SDLT but it did not get its money because the parties involved entered into specific tax planning strategies. The planning involved was rather convoluted but essentially used a combination of what was then known as the ‘sub-sale provision’ SDLT avoidance scheme and some specific exemptions from SDLT available where transactions involved Sharia funding.
The UK tax system has contained specific provisions for some years that recognise the presence in our commercial world of differing systems of finance, as is the case for those under Sharia law, and rightly makes special provision for them where it can.
However, it is a big step from facilitating the acceptance and usage in our fiscal regime of differing cultural attitudes to some financial arrangements, to having those same provisions used for tax avoidance purposes in circumstances which the legislation was not intended to facilitate. That seems to have been what happened here.
The Court of Appeal held that the tax avoidance strategies that had been entered into here failed. It was because the Sharia funding exemption was not available when the lease and purchase sub-sale provisions for SDLT were subjected to detailed interpretation and analysis on the relevant statutory provisions. It looked as though HMRC was due to get its £38 million after all.
However, a startling final result is that the money is apparently still not being paid because it seems that HMRC had actually assessed the wrong person. By the time the case was settled and the error had been identified, they were out of time to assess the correct person to recover the tax.
Although academics have been making considerable play out of the technicalities of the case and the esoteric arguments involved in deciding whether or not there was tax avoidance involved here, a more interesting point seems to be the question why was the payment of SDLT not made a precondition − i.e. part of the deal between the MoD and the purchaser?
Could the MoD, a government department with presumably a vested interest in assuring itself that all legally due taxes would be forthcoming, not have made it one of the preconditions of the sale, rather than subject to some rather artificial and convoluted tax avoidance scheme in the first place? Some might also say that it also beggars belief that HMRC assessed the