Important changes to repayment of corporation tax and anticipated losses

Date: June 30, 2020

In exceptional circumstances, brought on by the impact of COVID-19, companies’ claims will be considered by HMRC for the repayment of corporation tax before the current accounting period has concluded.

In these cases, companies can claim corporation tax refunds for prior periods before the current period has concluded. HMRC updated their guidance on this on 16 June 2020.

For example, a company might be very profitable in the year ending 31 August 2019, paying its corporation tax on 1 June 2020. However, the directors now know that the company will make substantial losses in the year to 31 August 2020 due to the impact of COVID-19. Ordinarily, the refund from the loss carry back could not be claimed until the accounts and corporation tax return for the year ended 31 August 2020 has been submitted. However, if enough proof that the loss will occur is provided, HMRC will allow the relief now and refund the cash.

If a company had good profits last year but are about to make significant losses and require a cash injection, they might consider this option.

This will be particularly relevant to industries that have been impacted the most by COVID-19, especially those that were forced to close. These include the aviation, tourism and hospitality sectors, who are likely to have accumulated huge losses in the last three months.

HMRC has updated its company tax manual outlining when companies can make claims for repayments of corporation tax based on anticipated losses, recognising these exceptional circumstances and providing additional support.

Claims based on anticipated losses – what are exceptional cases?

HMRC states, in the updated tax manual that “Officers may, however, consider REG6 claims made before the end of AP2 in exceptional circumstances where, for example, the expected allowable tax losses will be so great in AP2 that they are likely to comfortably exceed any relevant income in AP2 and the amount of taxable profits of AP1 that relate to the repayment claim. Claims should take into account how much of the accounting period has expired, any possible upturn in revenue and any other factors that may affect the ultimate AP2 loss position of the company.”

Repayment of quarterly instalment payments (QIPs)

Evidence will be required to be submitted by a company to substantiate any claims and support the significance of any expected.

This evidence will need to illustrate that the losses are so significant that they will easily shelter any income of the current period and the taxable profits of the previous period appropriate to the claim.

Repayment of corporation tax

Similar guidance has been provided by HMRC regarding repayment of corporation tax made on the normal due date for payment. This is usually nine months and one day after an accounting period ends.

Where a company can make a loss-carry-back claim based on an anticipated loss in the current accounting period which has not concluded, similar principals apply. This is subject to a company providing significant evidence.

What information will be required to make a claim?

It is apparent that each case will be reviewed by HMRC based on its own facts and circumstances and there will not be any definite rules. Obviously, the more clarity and detailed information that claimants can provide to confirm their losses, the greater the chances of HMRC agreeing.

The types of information which would be useful to provide as part of any claim include:

Comprehensive reasoning and assumptions explaining any figures submitted
Confirmation that no exceptional income or gains in the existing accounting period is expected by the company
Directors reports and (if applicable) any public statements made regarding the company’s trading position.
Documents shared with regulatory or financial institutions or those that confirm these are the same forecasts used for internal planning purposes
Draft tax computations
Management accounts
Updated profit and loss forecasts

In addition, it would also be useful to provide any available external evidence, such as from professional bodies, sector or industry commentary that can support the fact that the issues involved are unlikely to be resolved in the short term.