Early corporation tax repayments and anticipated losses

It is no surprise that many previously profitable businesses are now struggling, incurring losses and facing cash flow difficulties.

In response to the current economic climate and global impact of COVID-19, HMRC’s recently updated guidance on corporation tax repayments offers a valuable lifeline, or simply a boost to cash flow, for those businesses that are now loss-making.

Historically, companies have had to wait until after the end of their accounting period for their accounts and tax return to be signed off to carry back a loss and claim a repayment of corporation tax paid for the prior period.

However, HMRC has now acknowledged that, in exceptional circumstances, claims for repayments of corporation tax for prior periods can be made based on anticipated losses before the current accounting period has ended.

This unprecedented update to HMRC’s manuals will be particularly relevant to companies that have previously paid corporation tax; however, due to the ongoing impact of COVID-19 are now incurring significant losses. It is widely accepted that industries such as hospitality, tourism, aviation and some retailers are among the worst affected; however, the new guidance applies to companies of all sizes in all sectors.

Repayment of Corporation Tax (paid on the normal due date)

The usual payment deadline for a company to pay its corporation tax is nine months and one day after the end of its accounting period.

Example

A company with a year-end of 31 December 2019 would normally pay its corporation tax by 1 October 2020.

Assuming this company had taxable profits in the year ended 31 December 2019, however, was very likely to be loss-making in the year ended 31 December 2020, it would usually need to prepare and sign off its 2020 accounts, and tax return before a repayment for 2019 could be considered by HMRC – typically the timing would be early to mid-2021 at the earliest.

As a result of HMRC’s updated guidance, a claim can now be made, and related repayment received much earlier – even before the period end – subject to providing detailed information.

Repayment of Quarterly Instalment Payments (QIPs)

Similarly, it was clarified that large companies who had paid their corporation tax on account in quarterly instalments might be able to access repayments quicker. QIPs for large companies are usually due on the 14th day of months 7, 10, 13 and 16 of the accounting period.

Example

A large company with a year-end of 31 December 2019 would normally pay its corporation tax in four equal instalments on 14 July 2019, 14 October 2019, 14 January 2020 and 14 April 2020.

Assuming this company had taxable profits in the year ended 31 December 2019, however, was anticipated to be loss-making in the year ended 31 December 2020, it would typically be at least a few months into 2021, once the accounts and tax return had been filed with HMRC, that the first payment made in July 2019 could be repaid.

Previous guidance allowed for repayment of excessive instalments in the current accounting period; however, the position in respect of prior periods was less certain. The updated guidance offers clarity to large companies and provides confidence that payments made many months ago can be repaid earlier.

What information should be included in a claim?

HMRC will review each case on its facts; however, the more information that can be provided by the company to evidence the losses, the better the chance of a successful claim. Where cash flow is critical, it will be important for claims to be complete to pre-empt queries by HMRC, causing a delay in receiving repayment.

HMRC expect companies to provide “full evidence to support such claims”, and businesses will need to be able to show that the anticipated losses comfortably exceed any income in the current period and cover at least some, if not all, profits in the prior period. HMRC are also likely to take into account how much of the accounting period has elapsed as “it will be extremely difficult for a company to provide adequate evidence during the earlier part of its accounting period”. This is because early forecasts may not be so reliable and there could be a greater chance of an upturn in the company’s performance in later months.

Recommended evidence to provide with a claim includes:

Management accounts
Draft tax computations
Forecasts presented to the company’s Board of Directors, including any assumptions made
Any relevant public statements, such as press releases or interim financial results published
Correspondence with regulators or lenders consistent with the management accounts and forecasts
Confirmation that the company is not expecting any exceptional gains or other income in the period
External evidence of challenges facing the relevant sector that is unlikely to resolve in the short term, e.g. industry commentary or competitor results

This post was written by Gemma Thake, Senior Tax Manager. Price Bailey has extensive experience with claiming tax repayments. If you think you may be eligible to claim an early repayment or have any questions on the above, you can contact Gemma using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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