One of the key COVID-19 relief measures that has been introduced recently allows companies more flexibility to retain and use tax losses from prior years. Historically, companies were required to maintain 49% commonality of shareholders in order to keep their tax losses, which has caused a number of problems for business.
From the 2020/2021 income year, unless there is a major change in the business within 5 years following a change in ownership, you can carry forward losses for your company even if you have a greater than 51% change in shareholding. It is important to note, however, that this only applies to losses derived from the 2013/2014 income year and onwards.
Inland Revenue have identified the following key elements to help determine whether there has been a “major change in the business”. These elements are: the assets used, the business processes, the scale of business activities, the use of suppliers or other inputs, the markets supplied to, and the type of products or services supplied.
If there has been a major change in the business activities carried on by a company, the business continuity test may still be satisfied if the major change is in line with one of the permitted changes as specified in the legislation.
These permitted changes include:
- Changes made to increase the efficiency of the business activity
- Changes made to keep up to date with advances in technology
- Changes caused by an increase in scale of the business
- Changes caused by a change in the type of products or services provided
This is only a brief overview of a complex change, and there are various other factors that should also be considered before any shareholding changes in a company. The key point is that there are now more options available if you are considering selling or buying shares in a company that has tax losses from prior years.