Darling Urged To Change Rules On UK Losses

by Jason Gorringe, Tax-News.com, London

01 April 2009

Chancellor of the Exchequer Alistair Darling should use changes to the current UK rules on tax losses as a means to provide a much needed shot in the arm for the country's struggling businesses, according to advisors KPMG.

With precious little in the kitty left for the government to bring about a second stimulus package to add to the one announced in last November's pre-budget report, the government has found itself increasingly constrained by its heavy borrowing requirement and falling tax revenues in the run up to the crucial 2009 budget on April 22. However, KPMG believes that the rules around tax losses present one area where the Chancellor might be able to announce tax measures to help stressed businesses remain solvent.

KPMG’s suggestions for changes to the tax rules on losses include:

• Significantly increase the GBP50,000 limit (or remove the cap altogether) on the three year carry-back of losses announced in the 2008 pre-budget report.
• Extend payable tax credits in the form of “cash for tax losses” that already exist for activities such as Research and Development and environmentally beneficial plant and machinery temporarily for other types of expenditure.
• Introduce rules that allow companies to “sell” tax losses back to HM Revenue and Customs for cash.
• Allow groups to carry forward a single consolidated loss rather than insist that losses from one activity may only be set against the same activities.

Sue Bonney, head of tax at KPMG Europe, commented: “The current rules do little to help loss-making companies as any immediate tax rebate is capped at a carry-back of GBP50,000 worth of current losses which can be set against last year's profits on which tax was paid (which works out at a maximum of a GBP15,000 rebate plus any repayment supplement due). Furthermore any larger tax losses currently being incurred can only be claimed in the future if and when the business returns to a profit-making position. The problem with this is that the immediate benefit is often relatively insignificant and many companies can’t afford to wait to get the full tax benefit of current losses by deducting them from future profits in the current climate. Indeed some may not survive at all to return to profits. They need the help now.”

Referring to the proposal that companies could “sell” today’s losses back for cash, Bonney explained: “At the moment, many businesses are desperate for cash and frankly being able to set today’s losses against future tax bills is of little use when they are battling for survival. If priced correctly, an initiative whereby today’s losses could be sold back to the Treasury for cash could be a win-win for the government and for struggling businesses."

She added: “Losses being incurred now will be worth 28p in the pound in the future if they are offset against profits for a large business subject to UK corporation tax at 28 per cent. The business may be willing to surrender those losses for a cash payment of less than 28p in the pound today."

“Getting the pricing right will be crucial. The Treasury needs to discount for the time value of money and the risk that a proportion of these losses would never be used anyway if some businesses fail, whereas the cash rebate would need to be attractive enough for companies to see it as worth surrendering future losses. If done correctly this is a measure that could significantly help business at no net cost to the Treasury in the longer term.”

Bonney continued: “If the Government is serious about helping struggling UK businesses survive the recession, the rules on corporate tax losses would be a good place for the Chancellor to focus some attention in the Budget."

“An unrestricted three year carry-back would have the most effective and immediate impact for companies that have recently started to make losses as a direct result of the economic downturn. However, we estimate that this could cost hundreds of millions of pounds and so may be too expensive an option. If this is the case, then some of the other changes suggested here would go some way towards easing the pressure on UK businesses battling to survive in these turbulent times.”

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