Did you know that your use of Corporate Tax losses could help you maximise cashflow?

It has been over ten months since lockdown measures were first implemented due to Covid-19 and many companies will have made substantial losses as a result.

Corporate tax losses can be utilised to reduce taxable profits and may be able to reduce your corporation tax liability or, in some cases, be used to generate a refund of tax previously paid.

What can you do with corporate tax losses?

The treatment of what you can with company losses depends upon what source of income has generated the losses. Generally, losses which arise in the current year can be offset against other income streams in the same year. Losses arising from the disposal of capital assets are considered separately and are not considered in this blog.

If you do not consider anything else, any unused losses will be carried forward to future accounting periods but is this the best option?

What if you were tax paying in the previous period? You may be able to carry back all or part of the loss back to this period to generate a repayment of tax previously paid, which can provide a welcome cash injection.

There may also be further options available to you if you are part of a group of companies, and there are other companies which reflect taxable profits. A group relief claim may be able to be made, where a loss-making company surrenders losses to a profit-making company to reduce their corporation tax liability.

If a company in a group also has losses brought forward which arose after April 2017, they may also be able to surrender these losses following the changes in rules with allowed for greater flexibility of the use brought forward losses. However, there can be restrictions where losses are in excess of £5m so care must be taken with this.

If a company has losses it is worth careful consideration of the best way to utilise these to ensure you maximise the value received, as well as the immediate cash benefit which is likely to be especially welcome in the current circumstances.

These reliefs are not automatic, and claims must be made so make sure you don’t miss out.

Plan your use of losses to maximise cashflow

Typically, the objective with the use of tax losses is to maximise the benefit of offsetting the losses against tax payable, or tax already paid. This can require detailed calculations across a group to work out the optimum use of the losses. In addition, losses may also be surrendered for tax credits (e.g. R&D tax credits) and so in groups there may be both R&D claim surrenders and also loss utilisation to factor in.

Early relief for anticipated losses

Normally, a company would need to wait until the end of an accounting period before being able to claim any relief for losses for tax purposes.

Last year, HMRC acknowledged that, in exceptional circumstances, claims for repayments of corporation tax based on anticipated losses before the end of the account period should be considered. This covers both corporation tax paid under the Quarterly Instalment Payments (“QIPs”) regime and non-QIPs payments typically due nine months and one day after the accounting period ends.

Any submission to HMRC to request an early claim for the carry back of losses would need to include sufficient evident that the losses will be included in the company tax return when this is eventually submitted. This may include:

  • Management accounts showing the loss;
  • Accurate forecasts for the remining months in the accounting period; and
  • Draft tax computations showing a taxable loss.

However, their guidance did indicate that “It will be extremely difficult for a company to provide adequate evidence during the earlier part of its accounting period”.

Companies may have not considered making a claim when the HMRC guidance was originally updated as they were in the early part of their accounting period and there was still a lot of uncertainty of overall impact of the lockdown measures and they would not be able to provide the required evidence to HMRC.

If you are approaching the end of an accounting period which is expected to result in a loss and you have previously been taxpaying, now may be the time to take action and make a claim to provide some cash flow, if you have not already done so.

Contact us

The information provided is a very brief overview of what can be a complex area and therefore is something you should seek professional advice in relation to.

For further information please contact Claire Smailes, Senior Corporate Tax Manager (claire.smailes@taitwalker.co.uk). Alternatively, please contact your usual corporate tax advisor at MHA Tait Walker.