Repayments of corporation tax and anticipated losses

In a move that will be welcomed by the vast majority of companies, HM Revenue and Customs has confirmed that in exceptional circumstances they will now consider claims for repayments of corporation tax for prior periods based on anticipated losses before the current accounting period has concluded.

This covers corporation tax paid both under the Quarterly Instalment Payments (QIPs) regime and non-QIPs payments typically due nine months and one day after the accounting period ends.  

A long standing tax rule typically allows a trading loss incurred in an accounting period (AP2) to be first offset against any other profits or gains arising in the same period before being allowed to be carried back and offset against the total profits arising in the previous 12 months (AP1) (as long as that same trade was undertaken in the prior period).

Previously, HMRC would not have looked to action the benefit of any losses in AP2 until that accounting period had ended. Their view was that an upturn of profitability may still occur in the final stages of the accounting period, or an unexpected windfall gain may arise on the final day of AP2. Therefore, you had to wait until after the end of AP2 before approaching HMRC with any management accounts that would look to quantify the size of losses incurred in AP2 to be carried back to AP1.  

What HMRC’s updated guidance now confirms is that in “exceptional circumstances” they will now consider the actioning of tax repayments for AP1 where the anticipated losses in AP2 are to be so great as to “comfortably exceed” any other possible income in AP2, and the amount of taxable profits in AP1 that relates to the repayment claim.        

It would appear that HMRC now accept that the lockdown and social distancing measures introduced in response to the COVID-19 pandemic are the exceptional circumstances that have, and will, continue to affect a wide range of industries, to the extent that many companies will be accumulating unprecedented level of losses during current accounting periods.

What types of information should be included in any claim?

The guidance confirms that companies will be expected to provide HMRC with full evidence to support such claims. The level of evidence required will depend on the particular fact pattern of the company so each claim must be considered on a case-by-case basis.

In addition to year to date management accounts that will show the actual trading position since the start of the accounting period, HMRC will also expect to receive profit and loss forecasts to the end of the accounting period. They should be supported by detailed reasoning and assumptions underlying them and with confirmation that these are the same profit and loss forecasts it uses for internal planning and are shared, where relevant, with any regulators or providers of finance. Companies will also need to confirm that no exceptional income or gains are expected to be made in the remainder of the accounting period.

The guidance does indicate that:

“It will be extremely difficult for a company to provide adequate evidence during the earlier part of its accounting period.”

This is because when the date of the claim is further into the accounting period, there is less reliance on forecasts and the smaller the chance of any upturn or recovery of losses.

In addition to exploring the potential to reclaim tax already paid, companies should also be bearing this issue in mind when deciding whether to pay tax due for AP1 that would otherwise be becoming due for payment in the near future.

Contact us

MHA Tait Walker have had recent experience in assisting a number of clients in obtaining substantial repayments of corporation tax previously made by way of QIPs only 4 months into AP2. We have also helped clients to consider whether the shortening of an accounting period can aid cash recovery.  

For further information on how we may be able to assist you in respect of this matter please contact Stuart Brown, Senior Tax Manager on 0191 226 8392 or email Alternatively, please contact your usual corporate tax adviser at MHA Tait Walker.