CTM06840 - Corporation Tax: loss buying: restriction of group relief for carried-forward losses: changes in a trade or business

CTA10/S676CF

In most circumstances, the restriction under CTA10/PART14/CH2C does not apply to companies that were able to surrender amounts to one another for group relief for carried-forward losses immediately before the change in ownership occurred.

Chapter 2C also does not generally prevent other companies within the group from surrendering losses to the company whose ownership has changed (the transferred company) or the co-transferred company.

However, where there is a major change in the trade or business of a transferred or co-transferred company, these exceptions may not apply. This will be the case if the change meets certain conditions set out in CTA10/PART14/CH2, CH2A or CH3.

In these circumstances, the company in which the major change occurred is prevented from obtaining group relief for carried-forward losses;

  • For losses incurred before the change in ownership that have been carried forward under any of the provisions specified in Chapter 2C at CTA10/S676CH,
  • Against any of the company’s affected profits. Broadly, these are profits connected with the change in the company’s business that arise in the period of five years following the end of the transferred company’s accounting period in which the change of ownership occurred.

Losses incurred after the change in ownership and profits that have no relation to the change in trade or business are not affected.

Major change in a trade or business

S676CF will only restrict a company’s relief for losses if:

  • Disallowance of trading losses (Chapter 2) applies because there has been a major change in the nature or conduct of a trade carried on by the transferred company (condition A of CTA10/S673) (CTM06300),
  • The restriction on relief following a major change in the business (Chapter 2A) applies to the transferred company or a co-transferred company, or
  • Restrictions on relief for companies with investment business (Chapter 3) apply due to a major change in the nature or conduct of a business carried on by the transferred company (condition B of CTA10/S677) (CTM08700).

Where Chapter 2 could apply because of a condition other than condition A, or Chapter 3 could apply because of a condition other than condition B, s676CF will not place any additional restrictions on reliefs. For example, if Chapter 3 applies due to a significant increase in the amount of the company’s capital (s677(2)), this will not bring s676CF into effect.

Chapter 2A restricts relief for transferred companies only. However, s676AA(3) and s676CF operate together so that the restriction in s676CF can also apply to a co-transferred company where there has been a major change in that company’s business.

Change in ownership

CTA10/S719

An expanded definition of a change in ownership applies for CTA10/PART14/CH2A-E. Broadly, this allows a company to meet the change in ownership condition for any of those chapters if, as a result of changes in its ownership, it is newly able to meet the group condition for group relief for carried-forward losses (CTA10/S188CE, S188FB, CTA10/PART5/CH5).

In general, this expanded definition is not used for the purposes of Chapters 2 and 3. A change of company ownership only occurs for the purposes of these chapters if another condition of s719 is met.

However, for the purposes of s676CF, to determine whether an additional restriction on group relief for carried-forward losses applies, the expanded definition of a change in ownership is used.

For example:

  • There is a change in the ownership of a company that meets the expanded definition of a change in ownership, but not the definition usually in place for the purposes of Chapters 2 and 3.
  • There is also a major change in the company’s trade that meets the conditions of Chapter 2.
  • For most purposes, Chapter 2 does not apply since its change in ownership condition has not been met.
  • However, for the purposes of s676CF, the company is treated as if Chapter 2 did apply. This means that the company’s ability to claim group relief for carried-forward losses is restricted by s676CF.

Required period

The additional restrictions at s676CF only apply in specific circumstances set out in Chapters 2, 2A and 3. This will be the case if there has been a change in ownership and, within a required period, a major change in the trade or business of the transferred company or co-transferred company.

For the purposes of Chapter 2, and for Chapter 2A where the restriction applies to prevent relief for carried-forward trade losses, the required period is:

  • A period of five years,
  • Beginning no later than the change in ownership, and
  • Beginning no earlier than three years before the change in ownership.

For the purposes of Chapter 3, and for Chapter 2A where the restriction applies to prevent relief for other amounts, the required period is:

  • A period of eight years,
  • Beginning three years before the change in ownership.

In both cases, a change in the business that occurs entirely over a space of time more than five years after the change in ownership, or more than three years before, will not bring the restriction into effect.

Chapters 2 and 3 do not require the change in the trade or business to occur before 1 April 2017. However, s676CF will only apply if the change in ownership occurs on or after 1 April 2017 (CTA10/S676CA).

Apportionment

Relief is only restricted for losses incurred before the change in company ownership. A company in the same group with an accounting period that begins before and ends after the change in ownership may wish to surrender losses as group relief for carried-forward losses to a transferred or co-transferred company to which the restriction at s676CF applies.

If this is the case, the surrendering company will need to apportion amounts using the method set out in legislation to determine the amount of losses affected by the restriction.