Easing The Pain Of Paying Last Year’s Corporation Tax BillWritten on October 9, 2014 by Kirk Rice LLP
Taxing Times QuestionsThe Question:
Last year my company made a decent profit for which a sizeable tax bill will be due. However, the current year is expected to present a loss and this is likely to leave the company short of cash. What steps can I take to help fund the tax payable for last year?
Kirk Rice LLP answers:
Profits to losses
The last few years have been tough on businesses and we might not be out of the woods yet. If your company is facing a downturn, the last thing you need is a hefty corporation tax (CT) bill just when you expect finances to be tight.
Example. Acom Ltd’s profit for the year to 31 December 2013 was £120,000. CT is due on this nine months and one day after the end of the accounting period and so Acom must pay £24,000 on 1 October 2014. If, between 1 January 2014 and when the CT 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 CT payable on current profits where they made losses in earlier years. But losses made in the current year can’t be set against the previous year’s CT bill until the accounts in the current (loss-making) period have been prepared. In our example that would mean Acom waiting until at least January 2015 to reclaim some of the CT it paid for 2013. This won’t be of much use to Acom when it’s struggling to find the £24,000 CT in October.
What can be done?
Acom could change its accounting period in order to accelerate 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. Bcom Ltd has a financial year end of 31 March. Its taxable profit for 2013/14 is £100,000. The CT payable on this is £20,000, due on 1 January 2015. The company is expecting to make losses of £30,000 for the six months to 30 September 2014. Extending its accounting period to the maximum 18 months would reduce its profit to £70,000. But that’s not the end of the story.
One year’s profit
A CT period must not exceed twelve months so following the change of accounting date Bcom still needs to complete a CT return for the year to 31 March 2014, and then one for the six months to 30 September. The £70,000 profit is spread across these, i.e. £46,667 to March and £23,333 to September. The corresponding tax payments are: £9,333 (£46,667 x 20%) on 1 January 2015; and £4,666 (£23,333 x 20%) on 1 April 2015.
As a result of the change of accounting date Acom’s CT bill for January 2015 is less than half what it was.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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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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