Coronavirus: corporation tax refund for anticipated losses

Normally you would have to wait until the end of the accounting period in which losses occur to claim a refund of that overpaid tax, but HMRC have clarified their guidance to confirm that in some cases companies may claim based on anticipated losses in the current accounting period. This will provide a welcome cash flow boost for some companies.

Background

A previously profitable company that incurs unexpected losses can be at a cash flow disadvantage due to the requirements for claiming a refund of overpaid corporation tax.

The problem arises where a company paid tax for a previous accounting period, and during the current accounting period it expects to make a loss which it will be able to carry back to reduce that previous tax bill and claim a refund. Since losses must first be set against profits of that accounting period they originated in, then the starting position is that this period must end before the remainder can be carried back.

In recognition of this and similar scenarios, a company can apply for a repayment of corporation tax where its liability for the accounting period has not been finally established but it has grounds to believe that, due to a change in circumstances, it has paid too much tax.

However, historically it has not always been clear how to use this provision – and it is suddenly in point for many companies given the losses anticipated from coronavirus.

What has changed?

HMRC have updated their guidance to make it clearer that companies may claim a repayment based on anticipated losses in exceptional circumstances. While not name checked, the changes seem clearly aimed at coronavirus losses.

HMRC give an example scenario for reclaim where a company has paid tax for accounting period 1 (AP1) and during accounting period 2 (AP2) believes it will make a loss, that it intends to carry back to AP1 and the expected allowable tax loss will be so great in AP2 that it is likely to comfortably exceed any relevant income in AP2 and the amount of taxable profits of AP1 that relate to the repayment claim.

Companies will be expected to provide HMRC with full evidence to support such claims.  HMRC note that “where a claim is made before the end of AP2 then, in addition to management accounts, HMRC would expect to see forward looking reports to the company’s board of directors and any relevant public statements”.

HMRC’s officers are told to 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. 

If you have further questions on these provisions, please get in touch with our experienced corporate tax team who will be able to assist.