Loan relationship deficit carry back

With bond values haven fallen in June 2013 I suspect some companies will have loan relationship deficits when they prepare tax provisions at the half year and thought in would be timely to take a look at the rules for the carry back of loan relationship deficits.

The pre Finance Act 2012 rules for the carry back of loan relationship deficits were not very satisfactory, in particular relief by way of carry back might be inappropriately restricted in situations where there was both a loan relationship deficit and a life assurance trading loss.  Its important that the new rules do not give a similar result  - there has been an unprecedented increase in bond values over the last 10 years, that has to unwind at some point and as it does many life insurers are likely to have loan relationship deficits.

Originally I was hoping to do an all singing and dancing analysis on the carry back rules but looking at the legislation this remains a very complicated area especially the interaction with life assurance trading profits so as this is a free blog I'll restrict the coverage to some "observations".  Very happy to discuss in more detail if people have particular issues.

The legislation covering loan relationships and life insurance companies is in sections 386  - 391 of CTA 2009.  As per section 388 the "basic rule" is that loan relationship deficits have to be set against BLAGAB income of the period before there is any carry back or forward.  Section 388 of CTA 2009 refers to step 4 of section 73 FA 2012 so the current period offset of loan relationship deficits includes receipts as per the minimum profits test FA 2012 93 (5) (a) but is before taking in to account management expenses.  By requiring that loan relationships  are offset against current period BLAGAB income before taking in to account  management expenses the scope for effective loan relationship deficit carry backs is reduced.

However, there is some good news in that section 92 (1) of FA 2012 reads 

"This section applies if an insurance company has a BLAGAB trade profit for an accounting period."

Accordingly I believe that there is no minimum profits calculation in a period where there is a BLAGAB trade loss.  Previously it seemed that an excess adjusted trading profit did have to be calculated in circumstances where there was a trading loss (but that loss was smaller than the excess E amount) although the only practical result was to restrict loan relationship deficit carry backs.

Even if a current period loan relationship deficit can be carried back it can only be set against available profits of the previous 12 months.  Available profits is defined in CTA 2009 section 390 and is (ignoring charitable deductions)

The net loan relationship credits of the period that the deficit is being carried back to (so its not possible to set loan relationship deficits carried back against other non - loan relationship income and gains) less (the management expenses of the period - less the amount of those management expenses that can be offset excluding loan relationship credits.)

So say that there was a loan relationship deficit available for carry back of 25, a loan relationship credit in the previous period of 30, other BLAGAB I of 10 and management expenses of 20.

The available profits would be (I think) Loan relationship credits = 30

Less Management expenses = 20

Less non loan relationship income that management expenses can be set against 10.

So available profits are 30 -(20-10) = 20.

And only 20 of the 25 loan relationship deficit can be carried back.

I think the available profits provision is to prevent a loan relationship deficit carry back displacing management expenses which tidies up the FA 2012 section 93 adjustment.

Finally as per CTA 2009 389 (2A) when a loan relationship deficit is carried back the amount is "left out of account for the purpose of applying section 93 of FA 2012 in the case of that period."

So its not included in the minimum profits test of the carry back period.  Again this is a welcome and pragmatic development.