Possible unwelcome changes for Upstream groups
The proposals for the changes to the loss rules were published on 20 March.
The draft legislation runs to over 100 pages. These new rules are intended to increase flexibility in the use of losses whilst introducing restrictions to prevent the relief from brought forward losses/deficits from exceeding 50% of the profits of a period.
These rules will also apply to the use of ring fence losses against non-ring fence profits (subject to some carve outs to prevent claims by companies against the government under Decommissioning Relief Deeds in respect of decommissioning losses).
As expected the rules for the use of ring fence losses against ring fenced profits are to be broadly maintained, with no 50% restriction on the use of losses against profits and no additional flexibility to set off ring fence trading losses on a non current basis against non-trading ring fence profits or as group relief. It appears that a number of the new restrictions will impact the ring fence. We do not know whether this is intended or not and will be making representations on these aspects.
Ring fence trade anomalies
Because of the way in which the ring fence has been carved out a number of changes will impact the ring fence
- The draft legislation extends the period in which a major change in the nature or conduct of the trade following a change of ownership that occurs on or after 1/4/17 could trigger the disallowance of losses from a 3 year to a 5 year period that includes the change in ownership and which begins at the earliest 3 years prior to that change.
It seems that ring fence losses in general including decommissioning losses are within the scope of this change as currently drafted, although we have received an indication that decommissioning losses are intended to be outside the scope (presumably as companies would have a claim under a Deed).
2. Further; the transfer of trade rules do not appear to allow post 1/4/2017 ring fence losses to be transferred to the successor.
3. Finally it appears that the pool of losses for RFES will only include pre 1/4/2017 losses.
We are hoping that all of these anomalies are simply drafting errors that will be corrected before the bill is passed into law.
We continue to review the effect of the new rules and shall be discussing these items with HMRC. We will keep you informed on the progress and passage of the legislation.
Non ring fence profits
Subject to the points mentioned above in most cases the new rules should not impact upstream groups except of course where they have significant non-ring fence profits. Such profits could arise from group service activities or as a result of interest and foreign exchange gains on lending arrangements.
One area which groups need to consider very carefully is their exposure to significant non-ring fence exchange gains and losses. The 50% restriction rules could mean for example that tax is paid on a gain in a period even though overall no gain or loss arises on the particular item.
It is even more important following these changes that groups try to manage the tax risk of exchange gains and losses. Groups with large non-ring fence losses carried forward who have never had to look too closely at the position could suddenly find themselves in a tax paying position if there was a large movement in exchange rates over a year.