What do corporation tax loss relief and interest restrictions mean for property companies and wider business?
Past is prologue
Back in the spring of 2016, the then Chancellor of the Exchequer George Osborne announced changes to the way companies could carry forward historical losses to mitigate tax.
The measures designed to modernise the UK’s loss relief regime and increase flexibility over the profits that future carried-forward losses can be relieved against have the added benefit of ensuring businesses pay tax in each accounting period where substantial profits are made. The OBR report confirms that this measure will increase tax receipts by £395m in the first year alone (2017/18) and by the end of this Parliament will have netted a total of £1.36bn of additional tax receipts.
In a potential double whammy for the UK property industry, on the 1 April, the Government will also implement legislation capping a deduction for net interest or interest-like expenditure, generating a further £1bn of additional tax receipts. Taken in conjunction with the loss relief restrictions this could have significant consequences for many industries, not least the property investment sector.
So what does this mean? Well, it will certainly draw a line for many businesses that were seriously impacted by the global recession and have since carried significant losses forward. The bottom line is that a £5m allowance will apply to profits during each accounting period but after this point profit can only be reduced by 50% – therefore for many firms, this could be the first time they have paid tax in nearly a decade!
HMRC expect this measure will carry an administrative cost burden as a result of ‘familiarisation with the new rules’ and updating systems. This is initially expected to come in at between £20m and £25m with further ongoing costs estimated at between £3m and £5m per year. The number of companies in scope for this could be north of 100,000.
The restrictions on interest relief will be the higher of:
- a de minimis of £2m
- the lower of 30% of ‘tax-EBITDA’ and the consolidated net interest expense of the worldwide group (otherwise known as the fixed ratio)
- the lower of a ‘group’ percentage of ‘tax-EBITDA’ and the consolidated net interest expense of the worldwide group on third party debt (also known as the group ratio).
Following consultation earlier this year, the government has now offered a rather complex and convoluted opportunity to ‘elect’ to apply different rules or use the Public Benefit Infrastructure Exemption (a welcome consideration that major infrastructure projects carry long-term risk and should fall outside of the interest restrictions). Furthermore, Real Estate Investment Trusts (REITs) will also fall outside of the new restrictions. Even so, this measure is expected to affect 3,800 companies with a net ongoing compliance cost of £1m per year.
For many companies that are carrying losses forward or are highly leveraged and therefore non-taxpaying, capital allowances is a subject that has lost most of its meaning. Why would a company that is sitting on significant losses or high debt levels go to the time, effort and expense of maximising an incentive designed to mitigate tax? Well, for those firms potentially affected, the time for capital allowances to make a great comeback is now!
For those companies that spent their way to success by expanding their property portfolios, investing in new factories, modernising their existing facilities or just maintaining a yearly capital expenditure program then it is time to reap the reward.
There are no time restrictions to claim and maximise the availability of capital allowances on historical expenditure meaning profitable companies can take the potential sting out of these new measures. The time to act is now!
Gateley Capitus offers a complimentary review to identify and value the potential tax benefits accrued from historical capital expenditure.