Reforms announced in the budget today will relax the rules on the use of carried forward losses. Under the new rules, companies will be able to surrender losses from prior periods by way of group relief and the restrictions on the types of profits against which carried forward losses can be set will be relaxed.
The reforms will also introduce a new restriction. Under current rules, there is no limit on the amount of eligible profits which a company can shelter with carried forward losses. Under the new rules, profits in excess of £5,000,000 will only be eligible for 50% relief through the use of carried forward losses.
There is one important point to note re the timing of the new rules. The relaxation of the rules will only apply to losses incurred on or after 1 April 2017. So, companies are not about to see their existing losses become more valuable. Conversely, the new 50% restriction will apply to profits arising on or after 1 April 2017 (i.e. it will apply to all carried forward losses, whenever generated, to the extent that they are used against profits arising after 1 April 2017). Therefore, the changes can only make existing losses less valuable.
The proposed new rules are subject to a consultation process and may well change between now and their legislation. However, going by the limited detail given in the budget documentation, it seems that from 1 April 2017 there will be two parallel regimes for carried forward losses. The first regime (for losses generated before 1 April 2017) will be as per the present law, save that the 50% restriction will now apply to their use. The second regime (for losses generated on or after 1 April 2017) will be the more relaxed regime described above and also subject to the 50% restriction.