Aside from the various measures HMRC has introduced in relation to deferral of tax payments including the VAT deferral and the Time To Pay schemes, companies may be able to adopt other tax payment planning measures. One possibility is to consider changing the company's accounting reference date (the date to which accounts are prepared). The amount of profits on which tax is paid and when tax is payable is based on the length of accounting periods and when they end. We set out below an example of how shortening the accounting reference period by moving the accounting reference date forward could help with payment planning in the case of a private company. A second possibility may be to apply to use any current year losses to claim back corporation tax from the previous year. We also explain this option below.
How could shortening an accounting reference period help?
Take a private company accruing profits of £50,000 every month, which makes its accounts up to 31 March. Potentially it has tax to pay on £600,000 in nine months' time. If instead, before it is due to file its accounts, it brings its accounting reference date forward to 30 September (or 31 December) it would only have tax to pay on six months i.e. £300,000 (or nine months i.e. £450,000) of profits. The tax would not be payable until nine months after the end of the shortened accounting period.
Doesn't that just mean I have accelerated the tax payment date?
Possibly, although note the discussion below about companies paying tax by instalments. However, the key point is that potentially a smaller amount of tax is due and the profits that would have comprised the second six months (or last three months) of the original accounting period will fall into a later accounting period so either the tax payment date on those profits is correspondingly delayed or they might be sheltered by losses resulting from COVID-19 disruption.
Rather than shortening my company's accounting reference date, why don't I lengthen it?
From a tax viewpoint it won't help if the extended accounting period exceeds 12 months. For tax purposes, the lengthened period will be split into a 12 month accounting period and a short accounting period for the remainder of the extended accounting period. Furthermore, there are company law restrictions on companies lengthening accounting reference dates including that a period may not be extended for more than 18 months and (subject to limited exceptions) more than once in a five year period.
Why aren't all companies taking this step?
Firstly, companies might accrue profits in the first part of an accounting period and losses in the second – perhaps they sold assets at a "fire sale" price to realise cash – in which case it would no sense to separate the profits from the losses. Secondly, it is usually desirable that accounting reference dates for companies in a group are aligned. In a group context, therefore, the different consequences for each company in the group would need to be considered. Additionally, if the parent is quoted, there are additional requirements that need to be worked through, including for example, shorter deadlines for preparing accounts under company law and the market on which the company is quoted, committee approval processes and the need to lay accounts for approval at a company's AGM. Consents may be needed from shareholders or finance providers such as under covenants in any shareholders' or facility agreement. Other accounting implications of preparing the accounts to a different date and likely availability of key stakeholders and impact on internal processes would also need to be considered.
What if my company pays tax by instalments?
In that case the company is likely to have already have made payments on account. However, even where an accounting period is left unchanged, if the company now makes losses in the second part of the accounting period, it may, where profits will be lower, be able to recover from HMRC any overpayments of tax already paid by instalments.
So what action would you advise us to take?
You should speak to your external advisers and model the projected tax and cash flow advantages and disadvantages. Consider, for example, the impact of shifting the tax payment date to when the business will be incurring cost post-lockdown, for example on new inventory. You should also check the reasons for the company's current accounting reference dates and whether consents are required. While this will not be a solution suitable for every company, it is worth considering alongside other options.
How HMRC might permit an early corporation tax refund?
In limited circumstances a company which paid corporation tax for its last accounting period may persuade HMRC to refund part of that tax, even though the current accounting period has not ended. This will need the company to show that it will be in a net loss position for the current accounting period, even if business picks up in the remainder of the period. HMRC are more likely to be persuaded the shorter the period to elapse before the current period expires, and the more data there is about past trading patterns.
Generally for companies which have taxable profits of less than £1.5m an accounting period, HMRC are unlikely to entertain the idea until just over 9 months of the current accounting period has elapsed [ see HMRC's Corporation Tax Manual CTM 92090]. So a company which has an accounting period ended 30 September 2019 that had suffered significant losses by 30 June 2020 (and so was unlikely to benefit much from any pick up of trade in the last 3 months of the period) might be able to obtain some of the tax it had paid or was about to pay to HMRC. So called "large companies" which ordinarily have profits in excess of £1.5m up to £20m in an accounting period, and so pay corporation tax by instalments, may be able to persuade HMRC to reduce instalments due or even obtain refunds of tax already paid earlier in the accounting period [for more details see HMRC's Corporation Tax Manual CTM 92650].
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