What can individuals do with their tax losses in the pandemic?

I’ve been writing in this column about tax measures required to escape the current Jurassic economy for some time now. My last column dealt with how companies can use certain losses to aid cash flow based on the provision of the Financial Provisions (Covid-19) (No. 2) Act 2020 (Covid act). This week I thought we’d look at the same issue for self-employed humans. These measures are available to humans carrying on a trade or profession either as sole traders or in partnerships.

Before this law, such individuals would generally have had to wait to until their financial year-end to calculate tax losses before they could do anything with them. When they did that, then they could use those losses to reduce income tax on other income or they could carry them forward to reduce future year’s trading profits. The Covid Act provides a number of temporary income tax measures to help such individuals who were impacted by the Covid19 restrictions.

There are three measures involved. Under the first measure, self-employed individuals can require their 2020 losses and certain unused tax depreciation (an allowance on certain qualifying assets) be “thrown back” to reduce their profits for the 2019 tax year which reduces the amount of income tax payable on those profits. There’s a €25,000 limit on the total amount that may thrown back. The second measure allows for an acceleration of that relief by allowing self-employed individuals to make “interim claims” based on the estimated amount of relief available to them. The third measure allows farmers to step out of income averaging for the tax year 2020. We’ll just look at the losses point here given it’s probably the most widely applicable.

The above applies in respect of trading losses incurred in the period 1st January to 31st December 2020. But you don’t have to wait until the end of the year to make the claim. You can make an “interim claim” against the 2019 profits before the end of the 2020 financial year. It must be made in respect of the estimated losses and estimated allowances. Revenue guidance to these provisions accepts the inherent uncertainty involved in making a claim for a tax relief on an estimated basis, particularly as it’s not possible right now to judge how the restrictions arising from Covid-19 will look for the rest of 2020. It explains that while some taxpayers may have monthly accounts, it’s not necessary for taxpayers who would not normally prepare such accounts do so in order to make a claim. Instead, individuals should take a “practical and proportionate approach” to quantifying their relief. On that matter Revenue guidance outlines a suggested method that taxpayers could use, and document, when estimating their loss or allowances for an interim claim.

It explains that you start with the losses that have you incurred from 1 January to date. For most income taxpayers this can be based on income and expenditure for the period. Is there anything in the months from now to December that could change that loss significantly, assuming that the Covid-19 restrictions evolve as set out in Government’s roadmap? It gives the examples of seasonal adjustments e.g. Christmas and who knows what that will look like this year?

If the seasonal period for your business has passed, and you know that you will continue to incur expenses later in the year without any corresponding sales, then the amount of any loss incurred year to date may be less than your full year’s loss. Finally the guidance explains that if your business is normally relatively constant throughout the period, then you may make a claim based on the losses incurred to date, and make an adjustment upwards or downwards as the year goes on.

Where you make an “interim claim” is made then there will be a day of reckoning in that you will be required to make a “final claim” for the relief by the income tax filing date for the appropriate year of assessment e.g. where the interim claim relates to the year of assessment 2020, a corresponding
final claim for relief must be made by the due date for the Form 11 tax return for 2020, which is 31 October 2021. This “final claim” is the actual amount available to be claimed.

As I said in my last column, absent a functioning crystal ball how do you really know what those losses are going to be for that period? Projections at the best of times will never be bang on and we certainly aren’t living in the best of times. The key question is whether you made what the law calls an “excess claim” where you just claimed too much. In those instances, the excess tax refund has to be repaid with interest. However, the guidance explains that for the purpose of determining interest, the date on which the tax is repaid (or offset) in respect of an excess claim will be the date on which the amount of the tax became due and payable. However, where the interim claim was made neither deliberately nor carelessly and the taxpayer reduces the interim claim to reflect the correct amount as soon as is reasonably possible, the date the claim is reduced will be the date on which the tax became due and payable for the purposes of determining interest.

Where the interim claim turns out to have been more than the final claim, but in making the interim claim, the individual estimates the losses and allowances using the methodology mentioned earlier, the assumptions made in arriving at those amounts are not unreasonable, and the individual keeps records of how those amounts were estimated and the assumptions made, then Revenue are prepared to accept that the individual made the interim claim neither deliberately nor carelessly.

Any tax repaid (or offset) on foot of an interim claim will be disregarded for the purpose of determining whether the taxpayer paid the correct amount of preliminary tax. However, this will not apply where the interim claim was overstated either because it was carelessly or deliberately made.

You have to remember that the above only applies to losses arising from the self-employed individual’s trade or profession. Income losses on investment activity and losses reducing a Capital Gains Tax liability are unaffected. This achieves some parity with the tax treatment of trading losses for companies that I mentioned in my previous column.

Of course, there are more Ts and Cs so it’s a case of checking whether you qualify. If you do then consider getting your cash back!

Please note this article first featured in the Business Post on 13 September 2020 and was re-published kindly with their permission on our website.