Many trading companies will make substantial losses during Covid-19. With cash flow so important for such companies, they will want to make sure that they do not suffer any cash flow disadvantages because of corporation tax payments due.
By way of example; a trading company has a 31 March year end and makes a trading profit of £500,000 during its year ended 31 March 2020. It anticipates a trading loss of £1 million during the year ending 31 March 2021 due to the impact of Covid-19.
If the trading company takes no action, the position will be as follows:
- 1 January 2021: The company must make a payment of £95,000 (£500,000 at 19%) in respect of its 31 March 2020 corporation tax liability.
- Say, 1 January 2022: The company submits its corporation tax return for the year ending 31 March 2021. As part of this tax return, the company will carry back trade losses of £500,000 to the year ended 31 March 2020 to generate a repayment of corporation tax of £95,000.
There will clearly be a cashflow disadvantage for the trading company here, as it will need to physically pay over the £95,000 in January 2021 and then wait (in this example for 12 months) for the 31 March 2021 corporation tax return to be prepared and submitted to HM Revenue & Customs (HMRC) before it can make a claim for the £95,000 to be repaid.
What can be done now to improve the cash flow position for the trading company?
1. The trading company could extend its period of account.
The trading company might be able to extend its period of account to the maximum 18-month period from 31 March 2020 to 30 September 2020.
Using the example above, the overall 18-month period would then include six months of the 31 March 2021 trading losses (£500,000, being 6/12ths of £1 million) which would reduce the overall corporation tax liability for the 18-month period to 30 September 2020 to nil and therefore remove the need to make a corporation tax payment on 1 January 2021.
The commercial and company secretarial implications of seeking a change to the period of account would need to be considered and understood in advance. In particular, there is a time deadline as this extension can only be undertaken in advance of the accounts’ filing deadline for the year ended 31 March 2020 and, if the company has had an extension to its period of account in the previous five years, this option might not be possible.
2. The trading company could make an early loss carry-back claim
As referred to above, the default position is that the 31 March 2021 trading losses can only be carried back once the corporation tax return for the year ending 31 March 2021 has been prepared and submitted to HMRC.
However, in exceptional circumstances (such as where a company’s trade has been hit hard by Covid-19) and with a high evidence requirement, HMRC will allow early loss carry-back claims. In this situation, a trading company can make a loss carry-back claim based upon anticipated trade losses in the current period which has not yet ended.
Using the example above, a proportion of the 31 March 2021 trading loss could be carried back and offset against the 31 March 2020 trading profit of £500,000, which would reduce the corporation tax liability for the year ended 31 March 2020 to nil. This would remove the need to make a corporation tax payment on 1 January 2021.
For completeness, this early loss carry-back claim would not work for investment companies, including property investment companies, as excess management expenses and property losses cannot be carried back.
3. The trading company agrees a Time to Pay arrangement with HMRC
Where trading companies are temporarily struggling with cashflow due to Covid-19 (but possibly don’t have the large losses to enable the extension of its period of account or early loss carry back claim to reduce its corporation tax liabilities) then the company can contact HMRC and look to agree a payment plan for its corporation tax liabilities under a Time to Pay arrangement.
This would enable the company to spread the payment of its corporation tax liability over a number of more manageable instalments.
In summary, and as set out above, taking action now could provide valuable cashflow benefits for those trading companies whose trades have been worst affected by Covid-19.
Where early loss carry-back claims or Time to Pay arrangement are being considered, early engagement with HMRC is likely to be key.
If you require any more information in respect of the above, please speak to your usual Saffery Champness contact.
Sean Watts, Director