How the new UK corporation tax loss relief rules will affect insurers

New UK corporation tax loss relief rules were brought in by the Finance (No.2) Act 2017. The changes apply retroactively from 1 April 2017.

Key changes mean:

1. More flexibility - The majority of losses arising after 1 April 2017 will be carried forward and it will be possible to offset these against most types of profits, irrespective of which activity the losses arose from. It will also be possible to offset carried forward losses against taxable profits of other group companies and consortia.
 
However, where a trade becomes too small or negligible, trade losses will only be available to carry forward to offset against profits of the same trade. In addition, companies will only be able to surrender carried forward losses to group companies where the surrendering company had assets capable of producing income.

2. More restriction - The amount of profit that can be relieved by carried forward losses will be capped at 50% from 1 April 2017, once a £5 million annual allowance for each group is exceeded. The changes therefore provide one relaxation of the existing rules, but also one restriction. Whilst the 50% cap will apply to carried forward losses, irrespective of when they arose, the enhanced flexibility offered will only apply to losses arising after 1 April 2017.
 
The rules relating to capital losses are unchanged. The £5 million annual allowance will be applied on a group basis and group members will be able to choose which companies benefit from the allowance. Various anti-avoidance measures will prevent manipulation of the new regime.

Insurers’ shock losses

The Government acknowledged concerns raised by insurers that the loss restriction could both reduce the balance sheet value of existing losses, and reduce the value that insurers can obtain for shock losses in calculating their solvency capital requirement in a ‘1 in 200’ stress event.

As a result, shock losses are excluded from the new loss relief rules. The good news is that the use of carried forward shock losses will not be subject to the 50% cap. The bad news is that carried forward shock losses cannot be used against total profits or surrendered as group relief.   
 
Additionally, general insurers subject to insolvency proceedings may not be able to use carried forward losses against the total profits of a specified period.

What should insurance groups be doing?

Insurance groups should model their corporation tax losses to assess the impact of the new rules on their financial statements and cash flow. There may also be planning opportunities to maximise the utilisation of losses, particularly where companies have both pre- and post-1 April 2017 tax losses and a mix of trade and non-trade profits.

How Moore Stephens can help

Our dedicated Business Tax & VAT team of industry experts provide advice to underwriters, P&I clubs and other mutuals, outsourcers, Lloyd’s and multinational insurers and brokers. We advise clients on their statutory requirements and the most efficient ways of fulfilling these obligations, as well as preparing their corporate tax returns. We also advise many organisations on the most tax-efficient ways to structure their affairs and ensure that all available reliefs are utilised. With tax legislation being an area of regular change, our specialist team also helps clients thrive in a changing world and stay abreast of the latest opportunities, as well as any potential pitfalls.

We pride ourselves on the breadth and depth of our insurance expertise, offering specialist and tailored support to industry participants and regulators, locally and internationally.

For more information on the tax services we provide, or to discuss how the new corporate tax loss changes will affect your business, please contact us.

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