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Budget 2017: Loss Relief reforms & Business Rates could increase business failures – R3

By CreditMan Wednesday, March 8, 2017

Changes to corporation tax loss relief included in the Budget Red Book could damage UK business rescue, warns insolvency and restructuring trade body R3.

The 2017 Budget was a missed opportunity to amend the reforms, which were first proposed in last year’s Budget and are due to come in on the 1st of April 2017.

The changes are expected to raise £1.6bn over the next five years, but R3 says this will come at the cost of an increase in business failures.

After 1 April, businesses may only be allowed to write off 50% of past losses from future corporation tax bills, rather than the current 100%. This will make some business rescues unviable (background below).

Andrew Tate, president of R3, says:

“The loss relief reforms could damage business rescue in the UK. In some cases, business rescues will be hindered by hefty tax bills that would not arise under the existing tax regime. More business failure and less business rescue will be the consequence.”

“It’s frustrating that while the government, through the BEIS department, is considering reforms to boost business rescue, the failure to tweak the loss relief reforms could cancel out that work significantly.”

“The impact on other creditors in situations where businesses have failed is problematic, too. The failure of one company can cause the failure of another if there is not enough money owed to it returned through an insolvency procedure. By limiting loss relief so significantly, HMRC is essentially jumping the queue of creditors and will benefit from money that could have been a lifeline for small businesses and other trade creditors.”

“This is more of an oversight than anything else but there is very little time left to put it right. It is very common for the government to overlook the way new legislation will interact with the unique circumstances of insolvency. The simple fact is, different rules are often required when insolvencies occur to encourage business rescue.”

“An exemption from some of the reforms for insolvency situations is needed, with protections to prevent abuse. Insolvency exemptions already exist in other parts of the tax code, and this situation should be no different. While we welcome the government’s determination to close the tax gap and tax losses from insolvencies, and approve of the flexibility introduced to the tax regime by other parts of the proposals, reform should not come at the expense of business rescue.”


The government has spent the last year consulting on reforms to corporation tax loss relief, due to come into force from 1 April 2017.

After the changes, businesses will only be allowed to write off 50% of past losses from future corporation tax bills, rather than the current 100%, which allows post-insolvency procedure corporation tax bills to be significantly reduced or prevented altogether. Reduced post-insolvency tax bills mean:

A barrier to business rescue is removed. Companies in distress going through a restructuring process – such as a Company Voluntary Arrangement (CVA) – sometimes generate one-off taxable profits or gains. For example, assets may be sold, or businesses profit from being released from an onerous lease. Being able to set-off 100% of the earlier losses against these significant one-off profits can make the rescue viable.

More money is returned to non-HMRC creditors. Taxes incurred as part of an insolvency procedure – such as those relating to asset sales – are an ‘expense’ and have to be paid as a priority to HMRC before debts owed to other creditors. Higher loss relief means lower tax bills and more money back to the creditor body as a whole.

Limiting relief to 50% means:

Some business rescues may not be viable. Businesses may face unaffordable tax bills for one-off profits during a rescue procedure – leaving business failure and job losses as the only option.

Non-HMRC creditors will get less money back. HMRC ‘jumps the queue’ and post-insolvency realisations will go to the taxman rather than other creditors.

Business rates rise threatens companies’ futures

Following the Chancellor’s announcements of £435m of transitional measures for the new Business Rates, Andrew Tate, president of R3 says:

“While most businesses will see rates cut, and many will benefit from the new help offered by the Chancellor, the rates rises faced by some businesses could be a threat to their financial health. A future consultation on rates won’t help businesses affected this April.”

“Although some businesses face relatively small rises, these are coming on the heels of a significant drop in the value of the pound since the summer and the subsequent increase in inflation and import costs. Some businesses will be seeing their outgoings rise dramatically in a short period of time.”

“Business distress levels, as measured by R3, are close to historic lows but started to rise throughout 2016. Rates rises could help push distress levels up further in 2017.”

R3’s Business Distress Index is carried out with BDRC Continental – a representative sample of UK businesses is interviewed about their finances every four months. In the latest survey (September 2016*):

  • 21% of UK businesses say they are experiencing one of five key signs of distress (reduction in sales volumes; decreased profits; recent fall in market share; regularly using maximum overdraft; redundancies). This is up from the record low of 17% in December 2015 (record high: 64% March 2012).

  • 8% of all UK businesses are only paying off the interest on their debt and not repaying the debt itself.

  • Corporate insolvencies increased 13% to 16,502 in 2016 from 14,657 in 2015 – the first annual increase since 2011 (2016 numbers include 1,796 connected personal service companies – without these, there was a 0.3% increase to 14,706 insolvencies).

*Business Distress Index research undertaken by BDRC Continental. Questions were put to 500 UK businesses via BDRC Continental’s monthly Business Opinion Omnibus. Telephone-based interviews with a nationally representative sample of senior financial decision makers across the UK, weighted by size, region and sector. Fieldwork dates 5th-15th September 2016