COVID-19 and anticipated company loss carry backs to claim cash tax – A potential alternative to changing Company year end

The HMRC company tax manual was amended this week with an important update which allows companies to submit claims to carry back current year losses to the previous period in a way which has previously not been widely available or indeed possible at all.

Under existing tax practice, generally a company will submit a tax loss carry back claim once the current period is over and the accounts have been finalised. This means the tax computation containing the loss claim can only be submitted to HMRC post year end; holding up potential tax refunds until the year is over at the earliest.

Up until now we have been working with clients to consider changing the company’s year end and typically shortening the period to allow the facilitation of earlier loss carry back claims to be submitted to HMRC. Under the new guidance from HMRC, however, it will be possible to obtain these tax refunds in certain exceptional circumstances, including businesses severely affected by the COVID-19 crisis.

Claims based on anticipated losses: exceptional cases

HMRC Officers have now been instructed to consider allowing claims for tax repayments (including those made in the quarterly instalments payments regime) based on anticipated tax losses. For example, in cases where it can be demonstrated that the expected allowable tax losses will be so great that they will wipe out the current period’s taxable income as well as the amount of taxable profits of the previous period. According to HMRC, anticipated loss carry back 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 loss position of the company.

HMRC state that companies will be expected to provide them with full evidence to support such claims. The level of evidence required will depend on the particular pattern of facts for each company so that any claim can be considered on a case-by-case basis. However, where a claim is made before the end of the current period then, in addition to management accounts, HMRC would expect to see forecast management accounts.

For businesses that are suffering drastic falls in revenue due to the coronavirus pandemic and who are anticipating incurring substantial losses; this will count as “exceptional” in terms of the above. We will be able to assist you in pulling together the appropriate accounting information and related forecast tax computations needed to support an anticipated tax loss carry back claim.

For companies who were previously paying significant amounts of corporation tax, we can help you claim cash tax back urgently. Please get in touch with your usual Baldwins contact for more information.

The information in this update should not be regarded as financial advice. This is based on our understanding on 29 June 2020. Laws and tax rules may change in the future.