Introduced in 2017, carry forward group relief can help to reduce taxable profits considerably. However, there are risks that this relief may be lost for future periods in a sale transaction, and here we look at steps you can take to preserve the value of tax assets.
Broker groups now enjoy significant enhancements in tax legislation, which provide more options for how accrued losses can be used across the group in later years.
Previously, any losses could only be used against future profits of the same company.
Carry forward group relief, applicable to accounting periods starting on or after 1 April 2017, means that early losses in a start-up business or group finance company can now be relieved in profitable entities from the same group in subsequent years.
Avoid the pitfalls
But beware, there are flies in the ointment for the unwary. The scope of future relief may be limited in certain circumstances. For example, if a group is restructured to combine business units, or if there is a change of operations, particularly in the years around a change in ownership.
This includes complex structures that involve investor stacks from previous PE acquisitions (Topco/Midco/Bidco), funded by a combination of external and shareholder debt. The impact may be felt not only in respect of legacy entities, but also those that are active at the time of any transaction.
The broking sector continues to experience strong M&A activity. So being aware of the possible pitfalls, and considering the future direction of the group when deciding how to use losses, may help protect the value in such events.
In other words, it’s worth taking care to make the most of tax assets and use them to full advantage as they could positively influence the sale value of the group.
What are the different types of tax attribute?
Broker groups typically hold a range of tax attributes. The most common are:
- Losses. In very basic terms:
- Trade losses – those accruing to a broker or MGA company.
- Non-trade losses – typically finance costs (loan relationships) or operating costs (management expenses) of entities that do not have a trade, such as a holding or sub-holding company.
The 2017 changes allow us to consider groups more holistically in terms of loss utilisation. But at the end of each year the unutilised losses of any company in the group are first and foremost losses of that company. So changes in the activities of that company may reduce the potential for using those losses in the future.
- CIR (corporate interest restriction) attribute:
- Interest allowance – unused interest capacity that can be carried forward by the group and used to shelter future interest deductions.
- Interest disallowances – interest expense restricted under the CIR rules can be carried forward by the company which was allocated the disallowance.
CIR attributes are at risk of being lost, particularly where there is a change of ownership or if an entity is liquidated or struck off. In cases where both company ownership and company activity change, so that it no longer has any relevant interest costs, the carried forward interest disallowances can be lost.
So what changes can deny future tax relief?
The legislation is complex, but here’s a broad summary:
- Entities can only surrender losses on a carried forward basis for so long as that entity continues to operate in the same manner. So, for example, if a company stops trading, those losses cannot be surrendered in the future. Likewise, if a financing company ceases to be a provider or recipient of finance, any excess loan relationships cannot be surrendered to any entities in the future.
- If the company ceases to exist (for example, it’s liquidated or struck off in a group simplification project), any unused losses are cancelled. If a trading company transfers its trade to another group company in advance, its losses may follow the trade if conditions are met. But non-trade items cannot transfer in the same way. Similarly, if a company is struck off or liquidated before using any disallowed interest expense, this is also lost.
- If there is a change of ownership (either directly or indirectly) of the group, losses may no longer be available if certain conditions apply:
- For trade losses, if the trade changes substantially (including becoming small or negligible) in the period three years before to five years after the ownership change
- For non-trade losses, if the nature of the entity changes substantially, or if the capital base (including loan creditors) increases by 25%. This could be a significant risk for finance entities in debt-funded broker structures.
What should brokers do and why?
When planning the best way to use losses, it’s vital for any intermediary group to be aware of what the future may hold. That’s because the choice of which entities to remove from the structure can be key. Before simplifying the group, it’s best to utilise losses where possible either through current year group relief or carried forward group relief.
Keeping interest disallowances in a company that’s more unlikely to change its activity subsequent to any transaction can maximise the opportunity to claim a deduction in future for previously disallowed interest.
Existing legacy entities which already hold valuable tax attributes (losses or CIR) should not be removed from the structure until these are utilised or deemed unusable.
Corporation tax returns can be amended 12 months after the statutory filing date. And group relief claims and surrenders can be made two years after the end of the company’s accounting period.
For any CIR amendments, any changes in the reporting company should be made as soon as the period ends. CIR returns can be amended to reallocate interest disallowance up to three years after the end of the accounting period. But this may not be beneficial for the additional year, as group relief cannot necessarily be amended in that year.
These windows allow groups some flexibility to refine tax attributes. This includes amending group relief and reallocated CIR allowances following deals. But early planning is essential.
So, there are many advantages of using tax attributes wisely. Planning the maximum possible utilisation across a group lowers the risk of attributes being lost on a change in ownership, and preserves the right to reliefs. The overall result is a reduction in tax due in the long-term.
How we can help
Tax assets can easily be overlooked during restructuring or a sale, but they often hold significant value. If you would like to safeguard your tax assets and optimise your structure before making any changes, please get in touch with us for guidance and support. Contact Chris Riley.
