Corporate tax overpayments: Do businesses have any leftovers?

A key element of the government’s financial support for businesses dealing with the economic impact of the coronavirus pandemic is the option for self-assessment taxpayers to defer payment of income tax and NICs. At the time of writing, there is no similar provision for corporation tax.

A ‘time to pay’ arrangement may be appropriate for a company experiencing difficulties. Contact details for HMRC’s payment support service are provided at tinyurl.com/ifa-8551. There are other steps that companies can take proactively to manage the cash flow impact of their corporation tax liabilities, James Morris, head of corporate tax at RSM UK, told Financial Accountant.

These include seeking the timely repayment of tax overpaid because of losses or reduced profits. Figures obtained under a Freedom of Information request show that HMRC repaid corporation tax of £9.1bn in the year to March 2020.

“That figure is going to be dwarfed this year,” says Nikhil Oza, corporate tax director at UHY Hacker Young. “Unfortunately, the application process for requesting refunds where the tax return has not yet been submitted is rather tortuous,” Oza explains, adding that it may be easier to simply file the tax return early.

“This speeds up the process of reclaiming any overpayment and generating a cashflow advantage, which is likely to be particularly valuable as companies try to bounce back from Covid.”

TAX SCHEDULE

Large companies are required to pay corporation tax in quarterly instalments, based on estimated profi ts. A company with an accounting period ending on 31 December 2020 would normally pay four instalments between July 2020 and April 2021. It may be able to claim a repayment if, by reason of a change in circumstances, the liability for the period is likely to be less than previously calculated. (Corporation Tax (Instalment Payments) Regs 1998 (SI 1998/3175), regs 5 and 6). There are diff erent rules for “very large” companies.

Claims based on anticipated losses

HMRC’s corporation tax manual at CTM92090 notes that, as a general rule, a company that has paid tax for accounting period 1 (AP1), and believes during accounting period 2 (AP2) that it will make a loss that it intends to carry back to AP1, cannot anticipate losses and obtain repayment under TMA 1970, s 59DA. But HMRC adds that, after the end of AP2, officers “may accept draft accounts or management accounts as evidence the company has grounds for believing it has paid too much tax”.

HMRC updated this guidance in June 2020, in the light of the coronavirus crisis, to address “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.”

In those circumstances, a claim will be considered but the company will need to provide “full evidence”. For a claim made before the end of AP2, HMRC would expect forward-looking reports to the company’s board of directors, any relevant public statements, as well as management accounts.

For large companies, CTM92650 addresses claims under SI 1998/3175, reg 6. HMRC should allow a claim based on lower anticipated profits of the period for which the instalment payments have been made unless they are “dissatisfied with the grounds given by the company”.

The approach to claims based on anticipated losses available to carry back is similar to that in CTM92090 for smaller companies, but HMRC adds that claims for anticipated losses “must be examined critically and in full”. The evidence to validate a claim “should be viewed strictly as there will often be considerable doubt about the company’s profit position in future months”, it adds.

TOO MUCH

Corporation tax overpayments may arise as follows: Generally, corporation tax is payable nine months after the end of the relevant accounting period (see opposite for large companies). Repayment may be claimed if there is a change of circumstances and the company has grounds for believing that the amount paid exceeds its probable tax liability although that liability has not been finally established (TMA 1970, ss 59D, 59DA). Trading losses may be available to carry back against total profi ts of the current year and the previous year (CTA 2010, s 37).

A pragmatic approach

How is HMRC’s updated guidance being reflected in practice? James Morris’s firm has advised “a number of companies, where trading conditions have been poor during 2020, which have fi led 2019 corporation tax returns containing provisional loss carry back claims based upon the latest management accounts”.

“Although never recommended, some companies have simply delayed fi ling their corporation tax returns, having accepted that HMRC charges interest and penalties, and are fi ling their returns when they have the cash to settle their liability,” Morris said.

Andrew Goodall is a freelance tax writer and journalist