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What company's can do with tax losses in the pandemic

Tom Maguire | Business Post 

I’ve been writing in this column about tax measures required to escape the current Jurassic economy for some time now. The president signed the Financial Provisions (Covid-19) (No. 2) Act 2020 (Covid act) into law on 1 August, 2020. That contains the tax bits of the July stimulus. To put that into perspective the law was initiated on Thursday 23 July and it was signed into law less than two weeks later. Revenue published guidance on these provisions recently. That’s fast.

There are provisions in the Act for accelerating the tax treatment of certain losses incurred by a company or by a human. I’ll just look at companies. Before this law, a company would generally have to wait to until its financial year end to calculate tax losses before it could do anything with them. When it did that then it could carry them forward to reduce future year’s profits or it could “throw them back” to previous years and get a repayment of the tax it paid on a similar amount of income from previous years. This last option brought cash flow. The Covid Act speeds some of that up allowing some jam today instead of jam tomorrow.

The Act allows companies to estimate losses for certain accounting periods affected by the Covid-19 restrictions and make an ‘interim claim’ to carry-back up to 50% of those losses against taxable profits of the preceding accounting period on an accelerated basis. This will result either in a repayment of some or all of the corporation tax paid for that period or in a reduction in the corporation tax payable for that period. The idea is to provide cash-flow to previously profitable companies who became loss-making during the period impacted by Covid-19.

Of course, there are various Ts and Cs. Too many to go into here, so here are a couple of key ones. Firstly the accounting period with the loss that can be thrown back has to include some or all of the period commencing 1 March 2020 and ending on 31 December 2020. The Act’s legalese calls this the specified accounting period. Next, the company has to make a declaration that it has or may reasonably expect to incur an estimated loss in the specified period.   

In addition, the company has to be a tax compliant company which means more legalese. Revenue guidance basically explains that the company must have complied with all its obligations under tax law in relation to the payment of taxes and the filing of returns. You’ll recall that the Covid Act allows certain tax liabilities to be put into cryostasis on an interest free basis for about a year. Revenue confirmed that that freezing and indeed where the company has otherwise entered into a phased payment for outstanding tax will still be treated as being tax compliant for the loss relief.

The company doesn’t have to send documentation into Revenue to back this up at the time of the claim. However the company has to “maintain, and have available for inspection upon request” any relevant records for the purposes of demonstrating that the losses have been computed in a reasonable manner and to the best of the company’s knowledge and belief. To be clear if Revenue do come knocking for these records at some point, it won’t be a request, they’re not asking.

But here’s the thing, the company can throw back half of its projected losses for the specified period. So say your company has a 31 December 2020 year end. It can throw back 50% of that year’s losses so absent a functioning crystal ball how do you 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 Act requires that the amount of a loss be quantified on a ‘best estimate’ basis. Revenue explain in their guidance that a company will be regarded as having made a best estimate where a genuine attempt has been made to calculate the amount of the loss based on all the information available to the company at the time the interim claim is made.

The guidance explains that Revenue recognise the inherent uncertainty involved in making a claim for a tax relief on an estimated basis. It says this is the case “particularly as it is not possible at this point to judge how the restrictions arising from Covid-19 will evolve for the remainder of 2020 and their corresponding impact on companies”. It continues that companies should take a practical and proportionate approach in estimating the amount of their trading loss.

Revenue explain that a company should calculate its actual loss incurred up to the date of the interim claim and should project any future losses expected to be made to the best of the company’s knowledge and belief. This could involve, for example, predicting the company’s future financial position based on year-to-date results or by looking to turnover of the company in the preceding accounting period while factoring in known information concerning future circumstances affecting company’s future profitmaking ability and making a reasonable adjustment to the financial position of the company to take account of such factors.

It goes on to give the example, the company may estimate its future income and expenditure streams on the basis that the Covid-19 restrictions evolve as set out in the Government’s roadmap, while factoring in any seasonal peaks (for example Christmas). What will Christmas look like this year? It also says to include any taxable financial supports etc. In my view no matter what you do here you are going to be wrong and if you work out that you’re have over claimed then you should adjust the claim.   

In reality that may be a good thing because the company’s results weren’t as bad as you thought they might be. Still, the guidance explains that where an underpayment of tax arises as a result of a claim which is excessive, then provided the over-claim was not made deliberately or carelessly, interest will apply from the date the claim is reduced until the date the tax is repaid to Revenue. In the case of a deliberate or careless over-claim, interest will apply from the date the tax was refunded./offset

There are more Ts and Cs so it’s a case of checking whether your company qualifies. If it does then consider getting cash back!

Please note this article first featured in the Business Post on 30 August 2020 and was re-published kindly with their permission on our website

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