Corporation Tax loss reforms
Impact on ring fence losses
Readers will be aware that the Government is proposing some quite significant changes to the rules dealing with the use of carried forward losses. Draft clauses were included in the Finance Bill published earlier this year. These provisions were however pulled from the truncated Bill which has passed into law, but revised legislation to be included in the Finance Bill to be published after the summer recess, has recently been reissued. These revised draft clauses are substantially the same as those included in the original Finance Bill, but government has taken the opportunity of the delay to correct some of the anomalies in the previous draft which related to the use of ring fence losses.
We reported In April on a number of potential anomalies to the ring fence loss rules. In particular, we viewed several items as inconsistent with the principle which we thought had been proposed by government, that the offset of ring fence losses against ring fence profits would not be impacted by the reforms. The changes that have been made are as follows
- The RFES rules have been amended such that pools can include post 1/4/2017 losses. A number of other changes to these rules are included to cope with the new loss carry forward rules.
- The transfer of trade rules which allow trade losses to be transferred from the predecessor to the successor company are to be preserved not just for pre 1/4/2017 losses but also for ring fence losses arising after this date, including decommissioning losses.
- The extension of the review period from 3 to 5 years included in the previous draft is to be applied to the ring fence when considering whether there has been a major change in the nature or conduct of a ring fence trade.
Decommissioning losses have however been carved out from this extended period in the latest version of the legislation recognising presumably that the Finance Act 2013 legislation needs to be preserved to prevent potential claims under Decommissioning Relief Deeds.
The fact that the ring fence has not been completely carved out from this change is particularly disappointing given the representations that have been made by industry on the adverse effect these rules have. To now make them worse seems perverse. The application of the rules in general continues to be discussed with HMRC as they are seen as a major impediment to getting the dwindling North Sea resources in the right hands to assist with the government objective of maximising economic recovery (MER) and this issue is currently being dealt with as part of the ongoing consultation on late life assets. It seems unlikely that a blanket exclusion will be introduced but its hoped that some helpful guidance will come out of these discussions.
There are a number of further changes to the original draft wording with restrictions introduced which apply to the offset of ring fence losses against non ring fence profits, essentially to bring these rules in line with the non-ring fence loss rules. These are however thought to have limited practical application.
We will continue to review the changes and will update readers in due course