This issue arises due to the repeal of s371UD TIOPA 2010 (relief against a CFC charge) and its interaction with s105 CTA 2010 (restrictions on losses and other amounts which may be surrendered as group relief).
Read on to find out more about these provisions and their combined effect on UK companies with corporate losses and CFC apportionments.
What is s105 CTA 2010?
Only losses in excess of a company’s “gross profits” may be surrendered as group relief. Finance Act (FA) 2013 amended s105 CTA 2010 to prevent companies turning profits assessable as gross profits into CFC apportioned profits and surrendering greater amounts of group relief than they would otherwise have been entitled to.
The effect of the change is that companies are no longer able to increase current year loss surrenders by offsetting a CFC apportionment against brought forward losses. Instead, companies have to first offset a CFC apportionment against current year losses with only the balance being available for group relief. The relevant losses here are (i) amounts allowable as qualifying charitable donations, (ii) a UK property business loss, (iii) management expenses, and (iv) a non-trading loss on intangible fixed assets.
Deletion of s371UD TIPOA 2010.
This provision allowed a company to utilise losses against a CFC charge.F(No2)A 2015 prevented companies offsetting losses (whether current or brought forward) against a CFC charge by repealing s371UD TIOPA 2010.
Implications
The combined effect of these two law changes means that a company is not able to utilise its current year management expenses (and other types of losses mentioned above) against a CFC apportionment. It is also unable to surrender those losses up to the amount of the CFC apportionment to other group companies, despite not being able to use those losses against the CFC apportionment.
A typical fact pattern where this may apply is where CFCs are held directly under the parent company of a group (or another intermediate holding company incurring management expenses) and there is a CFC apportionment (e.g. under the CFC exemption for profits from qualifying loan relationships which results in 25% of the interest income of a CFC finance company being taxable in the UK parent company).
Clearly other scenarios may also be in point so if in doubt please do not hesitate to contact your usual PwC contact or Andries Louw.