Corporation Tax repayments now available on FORECAST losses

Robert Barrie


Corporation Tax repayments now available on FORECAST losses

 

PLEASE NOTE: The below article details HMRC corporate tax repayment information only.  For ALL our latest updates on support available around COVID-19, please visit: www.frenchduncan.co.uk/covid-19.  This links to various resources, all of which we are keeping updated as things progress.

This article was first published Tuesday 1st July.  Please check back regularly, or follow us on Twitter or LinkedIn to keep informed of all the changes.

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Corporation Tax repayments are possible quickly (before year end), if your business forecasts losses this year.

HMRC have recently confirmed a change in policy, designed to help businesses that have made corporation tax payments (in respect of the prior accounting period) but, due to the impact of COVID-19, are now expecting significant losses to arise this year (in the current accounting period).

It has always been possible to carry back losses to a previous year, however previously the company would need to have prepared its next set of accounts and corporation tax return first - meaning companies often had significant delay before they received any of this money back.

The change is that HMRC are now willing to consider claims for a repayment of corporation tax before the end of the year (current accounting period, in which losses are anticipated to arise) and where there is an ‘exceptional case’.  By ‘exceptional case’ HMRC mean that there is clear evidence to support that there will a) be tax losses available to carry back to the prior period and b) that the claim made when the tax return is eventually submitted will comfortably exceed the claim made presently.

By way of an example:

  • Imagine a company had taxable profits during its year ended 30 September 2019 of £700k.
  • But it now anticipates a tax loss for its year ended 30 September 2020 of £1m.
  • It may be able to make a claim now for a repayment of corporation tax for the year to September 2019, should HMRC consider the quantum of current period losses to comfortably exceed the level of taxable profits on which the loss carry-back claim is to be made.
  • This could generate a repayment of corporation tax, at 19%, of £133k.  The loss carry-back claim would be formally made when the corporation tax return for the period ended 30 September 2020 was submitted to HMRC.
  • Cash would be returned to the business relatively quickly (i.e. well before the accounts and corporation tax return for the loss making period will be ready to submit) which will greatly help their cashflow.

What do I need to make a claim?

Companies will be expected to provide HMRC with full evidence to support their claim that losses this year will result in a tax reclaim position once everything is done and dusted.  The level of evidence required will depend on the individual circumstances of the company, with each claim considered on a case by case basis, however examples of such evidence may include:

  • Management accounts for the period to date.
  • Accurate forecasts for the remainder of the accounting period - demonstrating the loss being forecast.
  • Forecast tax losses, based on the management accounts and trading forecasts.
  • Board minutes where financial performance was noted.
  • Consideration of whether performance could improve over the remainder of the accounting period or not.

HMRC’s guidance notes that they will consider the following when deciding whether to accept a claim:

  • How much of the accounting period has expired – it’s not unreasonable to think that the earlier the claim for repayment is made in the current accounting period, the less likely HMRC are to accept it as there could be a change in the company’s circumstances. HMRC have not, however, indicated any minimum period which must have expired; and
  • The possibility of an upturn in revenue or other factors affecting the loss – the company must have considered any potential upturn in revenue and other factors that could change the tax outcome (e.g. planned disposals of assets).

HMRC have also stated that, where the evidence provided is deemed insufficient, they will open an enquiry to obtain additional relevant evidence before accepting a claim.  This would inevitably slow down the process for securing a repayment and highlights the fine balance in providing the optimal level of evidence at the start. It is our view that businesses in sectors most heavily hit by the pandemic and Government reaction to it, such as Hospitality and Travel,  will likely have little difficulty in satisfying the HMRC criteria.

This change in policy may also be important for businesses in discussions with HMRC about paying postponed tax liabilities and/or formalising Time to Pay arrangements.  It is likely that HMRC will insist on any prior year corporation tax repayments being set-off against postponed liabilities that are now due, which we have seen already with R&D repayments, and as such businesses should be mindful of this when making a claim.

This sounds complicated, why bother?

Perhaps we are stating the obvious, but an area of critical concern for so many businesses right now is cash flow. This flexibility from HMRC is another way they are trying to ease cash flow, enabling previously profit-making businesses to reclaim tax paid against forecast losses quickly to help then through.

Other considerations?

There are other means to secure an early repayment of corporation tax, including shortening your impacted accounting period to bring forward the submission of your corporation tax return and the carry back of losses.  The change to HMRC’s policy may actually instead promote the extension of impacted accounting periods, to capture more losses.  Or it may simply mean that a change of accounting periods, and the additional workload that often comes with doing that, is no longer required.

Next steps?

These are complex and subjective matters which need to be considered on a case by case basis.  If you think that you may benefit from taking advice on this then please contact our Corporate Tax team on 0141 221 2984 or email Robert Barrie, Tax Director at r.barrie@frenchduncan.co.uk.

 

Click here to see Robert's profile and contact details.

 

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