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Kirk Rice Blog

Corporation Tax – When Making A LossWritten on October 20, 2020 by Kirk Rice LLP

Corporation Tax – When Making A Loss
Taxing Times Questions

The Question:

Last year my company made a decent profit for which a sizeable corporation tax bill will be due. However, the current year is expected to present a loss as it has been affected by the COVID 19 situation. This is likely to leave the company short of cash. What steps can I take to help fund the corporation tax payable for last year?

Kirk Rice LLP answers:

Profits to losses

If your company is facing a downturn, the last thing you need is a hefty corporation tax bill just when you expect finances to be tight.

Example:

Acom Ltd’s profit for the year to 31 December 2019 was £120,000. Corporation tax is due on these nine months, and one day after the end of the accounting period and so Acom must pay £22,800 on 1 October 2020. If between 1 January 2020 and when the tax is due, it makes a loss it can obtain some of the tax back, but it must first pay it and then wait for a refund, which could take a while.

Loss relief rules

The rules allow companies to reduce the corporation tax payable on current profits where they made losses in earlier years. But losses made in the current year cannot under general rules be set against the previous year’s tax bill until the accounts in the current (loss-making) period have been prepared. In our example, that would mean Acom is waiting until at least January 2021 to reclaim some of the corporation tax it paid for 2019. This won’t be of much use to Acom when it’s struggling to find the £22,800 corporation tax in October 2020.

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What can be done?

Acom could change its accounting period to accelerate the tax relief for its current losses. Tax and company law will allow a company to extend its accounting period to cover up to 18 months. This would help Acom’s cash flow.

Example.

Acom Ltd has a financial year-end of 31 December. Its taxable profit for 2019 is £120,000. The tax payable on this is £22,800, due on 1 October 2020 The company is expecting to make losses of £30,000 for the six months to 30 June 2020. Extending its accounting period to the maximum 18 months would reduce its profit to £90,000. But that’s not the end of the story.

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One Year’s Profit

A corporation tax period must not exceed twelve months, so following the change of accounting date, the company still needs to complete a corporation tax return for the year to 31 December 2019, and then one for the six months to 30 June 2020. The £90,000 profit is spread across these, i.e. £60,000 to December and £30,000 to June. The corresponding tax payments are: £11,400 (£60,000 x 19%) on 1 October 2020; and £5,700 (£30,000 x 19%) on 1 April 2021.

As a result of the change of accounting date, Acom’s corporation tax bill for October 2020 is half what it was.

Any reader interested in discussing this topic further can telephone 01344 875 000 or email info@kirkrice.co.uk to arrange a call.

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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