CTM04880 - Corporation tax: CT loss reform: commencement and apportionment
F(2)A17/SCH4/PART12/PARA190 to PARA192
Non-trading loan relationship deficits
Introduction
The amendments to legislation made by F(2)A17/SCH4 (which contains provisions relating to relief for losses carried forward) have effect from 1 April 2017 (PARA190 (1)).
For the purposes of applying those amendments, where a company has an accounting period that straddles 1 April 2017, the periods falling before and after that date are treated as separate accounting periods (PARA190 (2)).
In some circumstances, it may be necessary to apportion profits, losses or deductions (described in PARA190 (2) as amounts) of the straddling accounting period in order to determine how much of these amounts fall before and after 1 April 2017.
Additional rules apply to companies affected by the corporate interest restriction at TIOPA10/PART10 and where both sets of provisions require apportionments to be made, consistency is needed, see CTM04890. For general guidance on the corporate interest restriction, which also took effect from 1 April 2017, see CFM95000 onwards.
Meaning of apportionment {#}
Where apportionment is necessary, it is normally on a time basis in accordance with CTA10/S1172 but may also be made on a just and reasonable basis where appropriate, depending on the precise circumstances.
Apportionment means distributing or allotting an amount into its proper shares or portions. This will mean that shares of the amount will be allotted to the appropriate deemed accounting periods. This could, depending on the circumstances, result in all of the amount being allocated to one period and nil profit/loss to the other. It cannot create a profit in one period and a loss in the other, as this is not apportionment.
For example, a company incurs a non-trading loan relationship deficit of £120,000 in the straddling accounting period from 1 October 2016 to 30 September 2017 that is available to carry forward. This amount needs to be apportioned to the periods falling before and after 1 April 2017. Apportioning on a time basis, the amounts are carried forward from the following periods:
| £ | |
|---|---|
| 1/10/16 to 31/3/17 | 60,000 |
| 1/4/17 to 30/9/17 | 60,000 |
However, in some circumstances, an alternative basis may be appropriate. For example, as above, a company makes an overall non-trading loan relationship deficit of £120,000 in its accounting period from 1 October 2016 to 30 September 2017. The deficit was entirely and properly attributable to a particular event that occurred in the period from 1 October 2016 to 31 March 2017, and this gave rise to a non-trading loan relationship deficit of £140,000 in this period and a non-trading loan relationship credit of £20,000 in the period from 1 April 2017 to 30 September 2017.
As the overall deficit for the accounting period was £120,000, on an alternative just and reasonable basis, apportionment of the loss carried forward would be as follows:
| £ | |
|---|---|
| 1/10/16 to 31/3/17 | (120,000) |
| 1/4/17 to 30/9/17 | nil |
The company does not recognise the full £140,000 deficit attributable to the first notional period, as this would leave a £20,000 profit in the second notional period, even though there was an overall deficit in the straddling period as a whole. Instead, the full amount of the overall £120,000 deficit is apportioned to the period in which the loss-making event occurred.
In both of the above examples, apportionment on a time basis has been made by reference to months. In practice, this should normally be made by reference to days.
The guidance at CTM80260 provides some examples of situations where an alternative basis might be used.
Extent of apportionment {#}
Apportionment of profits, losses and deductions is only required to the extent necessary to allow the amendments made by F(2)A/SCH4 to be implemented.
Companies are not required to apportion amounts to any greater extent than is necessary for these purposes.
This is because the legislation at F(2)A17/SCH4/PARA190 specifies that, ‘for the purposes of those amendments’, where a company has an accounting period that straddles 1 April 2017, then this period should be treated as two separate accounting periods, one ending immediately before 1 April 2017 and the second beginning on that date, with amounts apportioned between these two notional periods. The amendments in question are those made by F(2)A17/SCH4/PART1 to PART9 and PART11, which introduce the CT loss reform. PARA190 requires amounts to be apportioned for the purposes of those amendments, and not for any broader purposes.
In practice, this means that the extent to which a company with a straddling period will need to apportion amounts depends on their particular situation in that period.
Where the company has losses or other amounts that arise in the straddling period and will be carried-forward to later periods, apportionment is required to determine how much of each loss or amount should be treated as arising before 1 April 2017 and how much on or after that date.
Where the company has profits in the straddling period and wishes to relieve these using losses carried-forward from previous periods, the loss restriction (CTM05000) will have effect. This means that the company will need to apportion both profits and losses and other amounts arising in the period in order to find:
- the amount of losses carried forward as at 1 April 2017,
- the amount of profits arising on or after 1 April 2017, for which relief is affected by the loss restriction, and
- the amount of losses and other amounts attributable to the period after 1 April 2017
to allocate against profits arising on or after that date when the company calculates the loss restriction, or to carry forward as post-1 April 2017 losses where relief for these amounts is not claimed in-year.
Apportionment generally applies only for these purposes, and does not affect, for example, surrenders of losses as group relief, which are made by reference to the straddling period overall. It may however affect the amount claimed as group relief (CTM04960).
The only situation where apportionment could apply more broadly, for example with reference to amounts surrendered as group relief, is where the company chooses to apportion its non-trading loan relationship deficits (NTLRDs) arising in the straddling period to a greater extent than is required (see below).
No apportionment is necessary if:
- the company does not have any losses or other amounts to carry forward from the straddling period, and
- the company does not set any carried-forward losses against profits of the straddling period.
Companies whose use of carried-forward losses is not limited by the loss restriction
A company may find, after apportioning amounts, that its qualifying profits for the post-1 April 2017 part of a straddling period or the losses carried-forward to that period are equal to or lower than the amount of its deductions allowance for that notional period, with the result that the company’s use of carried-forward losses in the straddling period is not limited by the loss restriction (CTM05000). Alternatively, a company may find, after apportioning amounts, that losses carried-forward at the beginning of the notional period ending on 31 March 2017 are all relieved in that period, and that there are no losses to carry forward to the post-1 April 2017 period. Again, the result is that the company’s use of carried-forward losses in the straddling period is not in practice limited by the loss restriction. In these circumstances, HMRC accept that it is just and reasonable for the company to calculate the amount of in-year relief (CTM05060) it can claim with reference to its result for the whole of the straddling period, and apportion this amount to the pre and post 1-April 2017 periods in a manner that achieves this outcome.
This means that a company whose use of carried-forward losses is not, in practice, limited by the loss restriction should not have the amount of in-year relief it can claim (including group relief) inadvertently affected by the method of apportionment.
Non trading loan relationship deficits {#}
As set out above, apportionment of profits, losses and deductions is only required to the extent necessary to allow the amendments made by FA17/SCH4 to be implemented.
Although these amendments include new legislation at CTA09/PART5/CHAPTER16A governing set off of non-trading loan relationship deficits against profits of the deficit or earlier periods (CTA09/S463B to S463F), these sections duplicate the operation of equivalent sections in CTA09/PART5/CHAPTER16 (CTA09/S456 to S462). The underlying rules relating to set off of deficits against profits of the same or earlier periods have not changed.
For this reason, HMRC accept apportionment of NTLRDs on the same basis as for other losses and do not require NTLRDs to be apportioned beyond the extent necessary to determine:
- what amount of any NTLRDs arising in the straddling period and carried forward should be treated as arising before 1 April 2017, and what amount should be treated as arising on or after that date, and
- the amount of restricted NTLRDs that may be allowed in the period beginning on or after 1 April 2017.
This is subject to the caveat that there should be consistency with the approach adopted in making any necessary apportionments for the purposes of the corporate interest restriction, see CTM04890.
However, since the whole of CTA09/CHAPTER16A falls within the amendments made by F(2)A17/SCH4/PART12, companies are able, if they wish, to apportion NTLRDs into pre- and post-1 April 2017 periods for the purposes of claiming in-year relief, group relief under CTA10/PART5 and relief against profits of previous periods.
If a company chooses this second approach, HMRC expect them to apply it consistently in the way they treat all NTLRDs of the straddling period. A company that, for example, treats its NTLRDs as arising in two separate accounting periods, falling before and after 1 April 2017, for the purposes of surrendering amounts as group relief, must also treat its NTLRDs as arising in those two separate periods for the purposes of in-year relief and relief against profits of previous periods.
Either approach is acceptable and companies have free choice in which to use.
CTM04920 provides an example of a company that chooses the second approach, and also sets out the implications for amounts surrendered as group relief.