In 2017, the CT loss relief rules were amended to give more flexibility over the use of tax losses against profits, while creating a limit on the amount of brought forward losses that could be offset in any one period.
The amendment announced in the Autumn 2021 Budget relates to companies who have adopted IFRS 16 lease-accounting and who renegotiate their leases. IFRS 16 requires companies to recognise a loss on onerous leases. Subsequent renegotiation of the lease, including reversal of the onerous lease provision, can then give rise to a taxable credit. The existing loss relief rules meant that companies in financial distress, who were entering into lease renegotiations to avoid insolvency, and who had adopted IFRS 16, could not always offset all of the lease-related loss in one period against lease-related profits in following periods, because of the brought forward losses restriction introduced in 2017.
An exemption was introduced previously so that the loss restriction did not apply to cases where reversals of onerous lease provisions form part of a corporate rescue. However, the narrow wording meant that this exemption did not apply to companies adopting IFRS 16 who wanted to offset brought forward lease-related losses against profits arising from lease renegotiations. The new amendments announced in the Budget mean that companies adopting IFRS 16 continue to benefit from the loss reform in certain circumstances. Amendments will therefore be made to the legislation relating to reversals of onerous lease provisions so that it also incorporates reversal of right of use asset impairments and other similar credits under IFRS 16.
The new rules apply retrospectively for accounting periods beginning on or after 1 January 2019.
Who is affected?
This applies to UK companies and unincorporated associations who pay Corporation Tax and who have adopted IFRS 16 accounting policies for lease accounting, and in particular to companies who renegotiate their leases because of financial difficulty.
If you have any questions about this change and how you are affected please contact us.