Bank loss relief restriction – pre-election banker bashing?

Mark Joscelyne, Tax Partner, CMS

In a highly political Autumn Statement today, George Osborne could not resist another bout of banker bashing. His aim is to ensure that, once banks return to profit after the financial crisis, they pay tax on their profits rather than offsetting the huge losses brought forward from the recession to eliminate profit for what could be the next 10 – 20 years. Companies carrying forward losses from previous years is not usually controversial but, in the case of banks, it is likely to be unacceptable to the public as the banks were bailed out with taxpayers’ money and their losses have been increased by massive compensation payments for mis-selling. As Osborne said in his speech: “The banks got public support in the crisis and they should now support the public in the recovery”.

The measures announced today will apply with effect from 1 April 2015. Accounting periods straddling 1 April will be treated as two separate periods and profits time apportioned. The restriction will not completely prevent carry forward of losses but will restrict them to 50% of current profits in any accounting period with the balance available for carry forward to later periods, subject to the 50% threshold. This will mean that it will take much longer for the losses to be offset and the banks will have to pay tax sooner than they would otherwise have done.

The new challenger banks set up after the crash should not be affected by this restriction as it will not apply to losses in the start-up period, the first five years after the commencement of banking activity.  For longer established banks it is a blunt instrument, restricting carry forward of pre April 2015 losses regardless of whether a bank was bailed out or fined for mis-selling.

The restriction does not apply to all types of losses. Trading losses, non-trading loan relationship deficits and management expenses arising prior to April 2015 will be affected, but other losses such as capital losses and losses of property letting business would not be restricted. 

 An anti-forestalling provision will prevent banks from accelerating profit to a period ending before (or straddling) 1 April 2015 to avoid the restriction on use of carried forward losses and there will also be a targeted anti-avoidance rule (TAAR) aiming to counter arrangements seeking to circumvent the new restrictions.

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