Wounded travel businesses can have some reprieve through early corporation tax repayments, says MHA MacIntyre Hudson tax partner Glen Thomas
When the first national lockdown was introduced in the UK just over a year ago, we all expected the travel industry to be negatively affected. However, there was no true appreciation as to what extent and for how long the Covid-19 pandemic would wreak havoc for the sector.
The UK government signed off a raft of schemes to assist businesses during the pandemic, such as the furlough scheme, VAT deferral and the Coronavirus Business Interruption Loan scheme (CBILS). However, in spite of such support, there were fears back in autumn that many companies in the travel industry were close to running out of cash.
For those businesses in the sector that have made it this far but are still grappling with dwindling cash reserves, there are further options available to get some reprieve through tax relief. The most important one is the relief that can be claimed on early corporation tax repayments.
Although such relief was already available in ‘exceptional circumstances’, allowing qualifying companies to carry back losses without needing to file a return for the loss-making year, HMRC recently announced that business disruption caused by Covid-19 will qualify as ‘exceptional’ for these purposes.
What this means in practice is that companies can receive a repayment of corporation tax paid in their last filed accounting period (or claim a repayment of quarterly instalment payments for larger businesses) for losses resulting from Covid-19.
Making such a claim can trigger a repayment of corporation tax that a business has already paid much earlier than expected, thus freeing up cash for companies of all sizes. This can provide welcome and much needed breathing space for cash-strapped travel firms.
To access this claim, companies need to write to HMRC and provide evidence of the disruption caused by Covid-19 on their business, such as up-to-date management accounts showing a loss, to qualify. In some circumstances, HMRC might require further evidence which could range from board minutes of company results or projections of future profits.
Putting theory into practice
Sounds complicated? Fear not, here is an example of how this works in practice. One of my clients operating within the travel sector went from making profits in excess of £5 million in one year to predicted losses in excess of £10 million the following year due to Covid-19. The company had paid a significant amount of corporation tax for its accounting year ending on 31 March 2020 by quarterly instalments.
In the ordinary course of events the business would have needed to wait until it filed its corporation tax returns for the year ending on 31 March 2021 to make a valid loss carry back claim and receive its corporation tax repayment. Because this return requires final accounts to be prepared, this can further delay the filing of the return by a number of months after the end of an accounting year. Such a delay could be the death knell for a business starved of cash.
By providing enough evidence to HMRC, in the form of management accounts and projections, to demonstrate that the company would indeed suffer significant losses in the year to 31 March 2021, a repayment of all the tax paid by the business in 2020 was granted. This resulted in a very valuable cash injection in excess of £1 million for the company over a year before it would have filed a tax return, let alone received a repayment. A much-needed help in the current circumstances.
Additionally, as a result of changes announced in the latest budget, £2 million worth of losses can now be carried back beyond the previous accounting year to two years before that. So, in the above example, the company could carry back losses of £2 million to its accounting years ending in 2018 and 2019, resulting in a potential additional cash injection of £380,000.
I would urge every business owner in the industry to review their company’s position and enquire with their tax advisor as to whether a corporation tax claim is possible. Industry players need all the assistance they can get to successfully navigate what will be uncertain times ahead and be ready to thrive once restrictions on travel are finally lifted.
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