Repayment of corporation tax based on expected future losses

Repayment of corporation tax based on expected future losses

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In May the Government announced the extension of its Job Retention Scheme until at least mid-October 2020. In so doing, more than one million employers will continue to receive direct support from the Treasury which will meet 80% of furloughed employees’ salaries (subject to a £2,500 per month cap). Eligible workers under the Self-Employment Income Support Scheme (SEISS) will also be able to claim a second and final grant in August. The grant will be worth up to 70% of their average monthly trading profits, paid out in a single instalment covering three months’ worth of profits, and capped at £6,570 in total.

Further measures were announced recently to provide additional financial assistance to businesses through changes to the corporation tax regime; specifically, regarding claims for the repayment of corporation tax in anticipation of losses.

The changes, which are already reflected in HMRC’s Company Taxation Manual, will allow companies to make claims for the repayment of corporation tax for a prior accounting period based on expected losses for the succeeding period, before computations have been finalised. Claimants should, however, expect claims to be properly considered by HMRC staff before being given the green light. It is suggested, therefore, that any claims which are to be made under the new rules are carefully prepared and robustly supported.

A reminder

Before the above changes were announced, companies caught by the quarterly instalment payments regulations (QIPs) have long been able to claim repayments of “current year” payments of corporation tax. Such claims are not uncommon, for example where a company’s performance is impacted by worsening trading conditions causing downward pressure on profit projections.

Any tax paid before the first instalment date for the accounting period is repayable up until that date without any pre-conditions. Thereafter, companies wishing to secure tax repayments in-year (or at least before profits / losses for an accounting period have been finalised) will need to make a so-called REG6 claim.

Broadly, REG6 claims are comparable to claims by non-QIPs companies for repayment of corporation tax in advance of final liabilities being established (under s59DA TMA 1970). The main difference is that companies may only make section 59DA claims after the normal due date for corporation tax, i.e. following a period of nine months and one day after the end of the accounting period. In contrast, REG6 claims in relation to quarterly instalment payments can be made before the due date.

Claimant companies are required to state the amount of tax which is believed to have been overpaid and the grounds leading to the overpayment.

HMRC officers are instructed to consider each case based on its own circumstances. However, where claims are not accepted, the HMRC manual directs officers to initiate enquiries into the rejected claim under the provisions of Schedule 1A TMA70.

Claims where losses are anticipated

The changes to HMRC’s operating procedures mean that, with immediate effect, officers will now also be able to sanction repayments of corporation tax for previous accounting periods based on the expectation of losses in later periods.

For example, a company will be able to claim the repayment of corporation tax for an accounting period (AP1) on the basis that it expects to generate losses in its next accounting period (AP2). Such a claim can be made before the end of AP2 and in any event before computations are finalised.

Clearly, the new measures are designed to provide much needed cash flow assistance to companies hit hard by the Coronavirus pandemic. It will be interesting in the years to come to see if these changes become permanent rather than a temporary relief.

However, companies will need to prepare claims carefully as it is expected that HMRC officers will review claims very closely on a case-by-case basis. Particular scrutiny should be expected where claims are made early in AP2 where there remains significant scope within the accounting period for companies to improve their financial performance.

It is recommended that all claims are accompanied by as much supporting evidence as possible to assist HMRC’s understanding of a company’s position, thereby increasing the likelihood of acceptance. The following evidence, whilst not an exhaustive list, is likely to be relevant;

• Management accounts including cash flow forecasts;
• Revised corporation tax forecasts, including explanations of any particular factors underpinning them;
• Data illustrating seasonal trends;
• Confirmation that the company is not anticipating any exceptional gains or other taxable amounts in the remainder of the accounting period.

Again, where no or insufficient evidence is provided, companies should not only expect HMRC to reject their claims but also instigate enquiries.

Summary

There is no doubt that the new guidelines for corporation tax repayment claims represent a further welcome measure which (hopefully) will assist with the recovery of the UK economy. However, companies should ensure that their claims are well considered and properly supported. HMRC’s guidance requires officers to review claims with considerable diligence and to reject unsupported claims.

Companies should also bear in mind that, where repayment claims are accepted by HMRC but which turn out to be excessive (for example by the overstatement of a trading loss in AP2), further adverse consequences could result in the form of tax geared penalties.

Finance Act 2007 introduced the concept of potential lost revenue (PLR) when computing penalties for errors. PLR includes incorrect claims to loss relief. Therefore, companies will be well advised to retain clear records documenting how forecast losses are quantified. Provided a company can evidence that it demonstrated an appropriate degree of care and diligence in preparing a repayment claim, it should be possible to avoid penalties even if it transpires the claim is excessive.

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