Tax advice: Corporation tax relief for property losses and P11D car benefit employee contributions

    Every year, our tax and VAT helplines receive over 55,000 calls. Each month, we provide a round-up of topical news and below is a short summary of the key points our team has been discussing with accountants in June.

    Corporation tax relief for property losses

    HMRC made major changes to the corporation tax relief loss rules in Finance (No. 2) Act 2017. The changes apply from 1 April 2017 and affect UK property losses arising before and after this date. Advisors should check that their tax return software is dealing with loss relief correctly.

    Losses of a UK property business

    You need to know the date the loss arose to establish the options you have for relieving it. If the accounting period straddles 1 April 2017, you split it into two separate periods for loss relief purposes and time apportion the profits and losses (unless another method gives a fairer result):

    a)    Losses which arose up to 31 March 2017

    If the loss arose before, and was to be relieved against profits arising up to, 31 March 2017, these losses were automatically set as far as possible against the company’s total profits in the same accounting period. Only then could any remaining loss be group relieved. 

    If there is still an unrelieved loss, then providing the company still carries on the UK property business in the later accounting period, it was and still is carried forward and treated as a UK property loss of the next accounting period. That meant that the carried forward loss could be set against the total profits of the next accounting period. However, any carried forward loss could not be group relieved.

    If a pre-April 2017 loss is relieved against profits arising from 1 April 2017 onwards, the set off against total profits of the same period is no longer automatic and must be claimed within two years of the end of the accounting period. The company can specify how much of the brought forward loss it wishes to relieve and the whole loss can even be carried forward again to a later period. As above, the UK property business must still be carried on in the later accounting period(s).

    b)    Losses arising from 1 April 2017 onwards

    Such losses are not automatically set against profits of the same accounting period. The relief now has to be claimed within two years of the end of the accounting period and does not have to be relieved in full or at all against the company’s own profits. The benefit is that all the loss can now be group relieved, whereas previously only the excess of the loss over the company’s own profits could be group relieved.

    If these losses are carried forward to later accounting periods, the set off against the company’s own total profits is not automatic and can be claimed in whole or in part (or not at all). Groups can then take advantage of the new “group relief for carried forward losses” as well as or instead of using the loss-making company’s own profits.

    The maximum amount of carried forward losses is restricted by the new “deductions allowance”, which is an allowance of up to £5m plus 50% of the excess profits for the accounting period over that allowance. Single companies get an allowance of £5m per 12 month period. Group companies allocate their allowance around the group as they choose. The deductions allowance will be covered in a later article.

    Losses of an overseas property business

    A company’s loss on an overseas property business can only be carried forward to be set against future profits from the same overseas property business in that company. The loss cannot be group relieved. The relief was not altered by Finance (No. 2) Act 2017 so it does not matter when the loss arose.


    P11D car benefit employee contributions

    When the employer calculates an employee’s car benefit in kind for their P11D, deductions are available for an employee’s contribution (HMRC’s P11D working sheet 2 is useful). Capital contributions fall under two headings:

    1.    A capital contribution

    Such contributions are made for the provision of a car or any extra “qualifying accessories” (whose value needs to be added to the list price when working out the benefit in kind attached to the car), whether or not they can be removed. They are usually made where the employee wants a more expensive or better equipped car than the employer is willing to offer. Typically the contribution is made when the car is first provided but there is no requirement that it all has to be paid up front.

    A deduction for capital contributions totalling up to £5,000 is available (s132 ITEPA 2003) and it is deducted from the list price of the car. The deduction is available every tax year for as long as the employee has that specific car or the extra accessories. If the capital contribution(s) total more than £5,000 there is no relief for the excess. If the car is transferred to a new employee, the new employee cannot get a deduction for the capital contribution paid by the previous person who had it.

    2.    A contribution for private use

    Once the initial value of the benefit in kind has been calculated using the list price (minus any capital contributions) and CO2 emissions, the benefit can be reduced by any contributions the employee has made towards their private use of the car.

    There are conditions that need to be met before a deduction is available and HMRC do check the employer’s records for these when they carry out employer compliance reviews. The conditions are:

     
    • The employee is required to pay an amount for the private use of the car by them or their family/household. The wording in the agreement with the employer must specifically state that it is a payment for private use. If the wording just states that the employee is required to pay any other costs, such as insurance or petrol, those costs will not be deductible in the P11D calculation.
    • The obligation on the employee to make a private use payment must be in place before the employee starts using the car privately. 
    • For benefits provided in 2017-18 onwards, the payment is only deductible if it is made to the employer by 6 July following the end of the tax year. For earlier years, the payment had to be made within the same tax year to be deductible.
    • If the private use contribution is more than the value of the benefit in kind, the benefit is reduced to nil but should still be reported on the P11D, as a car fuel benefit can still arise if private fuel is provided by the employer.

    For further information regarding any of these hot topics, please contact us on 0345 223 2727 or email 
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