CW Energy LLP

New HMRC view of how losses can be utilised for supplementary charge purposes

The supplementary charge calculation requires the relevant financing items to be excluded from the ring-fence CT (RFCT) profits. The question of how this relatively simple concept operates where losses are being utilised has been in dispute since the levy was introduced in 2002. Industry has believed that the so-called “shadow” method, where RFCT losses adjusted for any financing elements could be carried forward and set against SC profits as they arose, was valid, following an agreement with HMRC in 2007. This method has appeared in the HMRC manuals since then and continues to do so.

However, following further industry discussions on the way the rules should apply to loss carrybacks, which has never been subject to a consensus, HMRC has recently written to UKOITC setting out a new view as to how the carry-forward rules should be applied. They have stated that they will not seek to displace the shadow treatment in prior period returns, but will apply their new view going forward, presumably to include any 2019 returns not yet filed.

The consequence of the new HMRC view is that if a company has financing charges in a year which mean its SC profit is greater than its RFCT profit, it cannot shelter the excess even if there are sufficient “SC losses” brought forward available. Further, HMRC’s view is that to the extent any CT losses brought forward contain any financing costs, a pro-rata reduction of any losses utilised for RFCT purposes must be made before set off against SC profits.

A UKOITC working group is planning to discuss this new view with HMRC and try to persuade them that it is not in accordance with the law. However, there can be no certainty at present that this new view will not be applied going forward.

The new HMRC view can create some anomalous situations. Companies with significant RFCT loss carry-forwards which would not be exhausted for many years if ever, could nevertheless have annual SC to pay if they had any allowable financing costs. Also if there were FX gains in a year which meant SC losses were greater than RFCT losses, relief for those excess losses may never be obtained (unless there were equal and opposite finance costs in subsequent years when RFCT losses arose).  The new view may also lead to an increased deferred tax charge for any company that is currently carrying a deferred tax asset in respect of its SC losses.

CWE has a number of ideas that can help avoid or mitigate the effect of this new view. Some of these may take time to implement and, while the final view on this matter is still under discussion, it may be worth reviewing what options are available now as if the new HMRC view does prevail, liabilities could already be accruing.

CW Energy LLP
May 2020