Using 2020 Losses to Reduce 2019 Corporation Tax Bill – What Every Limited Company Director Needs to Know
Ø Provisions have been put in place to provide accelerated loss relief for limited companies adversely impacted by COVID19 restrictions.
Ø Section 396(D) of the Taxes Consolidation Act 1997 provides for a temporary acceleration of Corporation Tax loss relief for eligible limited companies.
Ø The purpose of these provisions is to provide cashflow support to previously profitable limited companies who have become loss-making during the period impacted by COVID19.
Ø The provision allows companies to estimate trading losses for certain accounting periods affected by the COVID19 restrictions and make an ‘interim claim’ to carry back up to 50% of those losses against taxable profits of the preceding accounting period.
Ø This will result either in a repayment of some or all of the Corporation Tax paid for that period (the preceding accounting period) or in a reduction in the amount payable. (You can only be refunded tax that has actually been paid!)
Ø The provisions stipulate that the accelerated loss relief is only available for a ‘specified accounting period’ – that accounting period is defined as ‘any accounting period of a limited company carrying on a trade which includes some or all of the period commencing on 1st March 2020 and ending on 31st December 2020.’
Ø The estimated trading loss should be quantified on a ‘best estimate’ basis. A company will be regarded as having made a best estimate where a genuine attempt has been made to calculate the amount of the loss based on all the information available to the company at the time the interim claim is made.
Ø It is recognised that there is an inherent uncertainty involved in making a claim for tax relief on an estimated basis, particularly as it is not possible at this point (August 2020) to judge how the restrictions arising from COVID19 will evolve for the remainder of 2020, and their corresponding impact on companies.
Ø A company should calculate its actual loss incurred up to the date of the interim claim and should project any future losses expected to be made to the best of the company’s knowledge and belief.
Ø Companies in receipt of any taxable COVID19-related financial support, including for example the Temporary or Employment Wage Subsidy Scheme (TWSS or EWSS), should also ensure that they factor such funding supports into their income projections when calculating their estimated loss!
Ø An interim claim may be made as early as 4 months after the beginning of the specified accounting period and up to 5 months after the end of the specified accounting period.
Ø Eligibility criteria:
1. Declaration: When a company makes an interim claim, it will be required to make a declaration that it has incurred, or will reasonably be expected to incur, an estimated trading loss in the specified accounting period.
2. Tax Compliance: To be eligible to make a claim a company must be Tax Compliant.
3. Documentation: There is no requirement to submit documentation in support of an interim claim for loss relief, HOWEVER, there is a requirement to maintain and have available for inspection any relevant documentation for the purposes of demonstrating that the losses have been computed in a reasonable manner.
Ø There is a temporary procedure in place for the submission of interim claims for loss relief, until such time as Revenue can update their systems.
Ø The temporary procedure involves the following:
o The company must have filed the Corporation Tax Return (CT1) for the preceding accounting period.
o The claim for accelerated loss relief is made by amending the CT1.
o The claimant company must notify Revenue that they are making a claim under Section 396(D) – they must do this by entering a note in the Additional Notes section of the CT1.
o A template for the note has been provided by Revenue.
Ø Clearly this is a matter for your accountant to deal with, as there are complexities involved.
Ø Should you wish to discuss further please feel free to contact me by emailing paula@traversaccounting.ie