When a company makes a loss from a particular activity, it can offset that loss against other taxable profits realised within the same accounting period. It can also, depending on the nature of loss, offset the loss against profits of other group members.
In addition, any unutilised losses can be carried forward indefinitely. For instance, trading losses can be carried forward and set off without limitation against future profits of the same trade within the company.
In the 2016 Budget, a consultation was announced which suggested two major reforms. First, the current streaming rules will be made more flexible so that losses arising on or after 1 April 2017 will be useable, when carried forward, against profits from other income streams or the profits of other companies within a group.
Second, from 1 April 2017, companies will only be able to use losses carried forward against up to 50% of their profits above £5 million. For groups, the £5 million allowance will apply to the group. These changes will not apply to the North Sea ring-fenced corporation tax regime or banks who have their own specific restrictions.
Following the consultation, the Government has confirmed that it will legislate the reforms to take effect from 1 April 2017.
These reforms will provide more flexibility in the use of losses within a corporate group but will not affect most small/medium sized companies.
For larger companies/groups, where group profits are greater than £5m, carried forward losses will be restricted, so it may take longer to use them. The losses can continue to be carried forward without time limit.