Last week more high street businesses open their doors and adjust to the ‘new normal’.  Despite this, many businesses are still facing financial difficulties as a result of the lock down.

Many companies, particularly in the hospitality and retail sector where lock down has adversely affected profits and potentially pushed profitable businesses into a loss-making position.

HMRC has now clarified its position as to when claims for corporation tax refunds can be made where losses are anticipated.

Loss Carry Back Rules

Under existing rules companies can carry back trading losses by up to 12 months to reduce taxable profits of a prior period.  HMRC will only process such claims once the loss-making period ends and the corporation tax return and accounts have been submitted, evidencing the loss.

HMRC recognises that there may be exceptional circumstances where companies have seen their profits adversely impacted by the coronavirus pandemic and there may also be delays in preparing the accounts and tax returns.

HMRC has therefore confirmed it will now consider early loss carry-back claims.

Companies wanting to make a claim will need to write to HMRC asking for an amendment to the prior year tax return to include the loss carry back claim.  For the claim to be accepted, the company will have to provide evidence that losses will be reported on the return for the loss-making period once submitted.  To do this the following information will need to be provided:

  • Profit and loss forecasts
  • Management accounts
  • Draft tax computations
  • Detailed reasoning/assumptions behind the figures submitted
  • Reports from the board of directors
  • Any public statements made regarding the company’s trading position

HMRC has also stated that repayments will only be considered where the trading losses “comfortably exceed” any other profits in the period, and the profits that relate to the repayment claim.

For companies in the earlier part of an accounting period, HMRC will take a more critical view on whether the accounting period will end up in a loss-making position.  They have said that “Even a drastic downturn in a company’s trading environment may reverse in the later part of the period, or its position could be mitigated by the recognition of an unexpected capital gain or revenue item”.

Quarterly Instalment Payments

Companies that pay corporation tax by Quarterly Instalment Payments (QIPs) should also review their tax position.

Under QIPs, the dates for early instalments fall during the accounting period and are based on estimates of full-year profits.  Companies who pay by QIPs may have overpaid if the payments were based on forecasts drawn up before the coronavirus pandemic.

Example

A restaurant has a June year end and is within the QIPs regime.  It pays large rents and is highly leveraged.  The first QIP for 30th June 2020 was paid on the 14 January 2020, based on a healthy profits forecast.

Due to the lockdown they were forced to shut their doors in early March and as a result have been haemorrhaging cash.  This accounting period will now be loss-making but the tax return may not be submitted for several months.

Provided the company provides evidence to support their claim that the taxable profits will be significantly reduced, HMRC may accept a claim for a refund of the QIP.  If the losses are substantial enough to significantly reduce the previous period’s profits then an early loss carry-back claim could also be considered.