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HMRC to allow CT repayments based on forecast loss carry-back

HMRC to allow CT repayments based on forecast loss

Companies which were profitable in 2019 but expect to be heavily loss-making in 2020 can potentially claim a repayment of 2019 corporation tax before the end of 2020.

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HMRC have confirmed a change in policy designed to help businesses that have made corporation tax payments in respect of the 2019 accounting period assuming they will be profitable in that period but, due to the impact of COVID-19, are now expecting significant losses to arise in 2020 that will be available to carry back to 2019. HMRC will now be able to consider claims for repayment of corporation tax before the end of the accounting period in which losses are anticipated to arise where there are ‘exceptional circumstances’. This is particularly welcome news for larger companies that pay under the quarterly instalment payments (QIP) regulations. Repayment of excessive payments in the current accounting period has always been possible but the position has been less certain where QIPs made in the prior period become excessive due to an anticipated loss carry back from the current period. It is now clear that in exceptional circumstances a claim can be submitted before the current accounting period has concluded. Similar principles will apply for smaller companies. In addition to opening up possibilities to secure corporation tax repayments, this change in policy may also be important for businesses in discussions with HMRC about paying postponed tax liabilities and/or formalising Time to Pay arrangements.

Following representations from KPMG and other stakeholders, HMRC have published updated guidance on corporation tax repayment claims under:

  • Regulation 6 SI 1998/3175 – which applies to ‘large’ and ‘very large’ companies who are required to pay corporation tax by instalments; and
  • Section 59DA(2) TMA 1970 – which applies to non-large companies who are required to pay corporation tax nine months and one day after the end of the accounting period.

HMRC will now consider allowing claims for repayments in respect of a prior period based on anticipated loss carry-backs from a current accounting period which has not ended where there are ‘exceptional circumstances’. We understand that by ‘exceptional circumstances’ HMRC mean that there is evidence to suggest that the allowable trade losses in the current accounting period are likely to be so large they will comfortably exceed any other relevant income in the current accounting period giving rise to an amount available to carry back to the prior period.

A company anticipating a large tax loss for its year ended 31 December 2020 may therefore be able to make a claim now for a repayment of corporation tax for its year ended 31 December 2019 on the basis it will make a loss-carry back claim in its tax return for the year ended 31 December 2020.

HMRC will review claims carefully on a case by case basis and companies will need to provide ‘full evidence’ to support such claims. Evidence should include management accounts for the current period showing year to date results, forward looking reports provided to the Directors and any relevant public statements (e.g. earnings guidance).

HMRC’s guidance notes the below points, in particular, which they will consider when deciding whether to accept a claim:

  • The earlier the claim for repayment is made in the current accounting period the less likely HMRC are to accept it as there could be a change in the company’s circumstances, however HMRC have not indicated any minimum period which must have expired; and
  • HMRC will want to know whether the business has considered any potential upturn in revenue and other factors that could change the tax outcome for the current period (e.g. a planned disposals of assets).

Where the evidence provided is deemed insufficient, taxpayers should expect HMRC to open an enquiry in order to obtain additional evidence which will inevitably slow down the process for securing a repayment.

It is likely that HMRC will insist on any prior year corporation tax repayments being set-off against postponed liabilities (e.g. PAYE) that are now due therefore businesses should be mindful of this when making a claim.

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