Corporation Tax – carrying back losses

Corporation Tax relief may be available where a company or organisation makes a trading loss. The loss may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same or accounting period.

Where the amount of a trading loss exceeds the profits of the same accounting period, the company may claim to carry back the excess against the profits of preceding accounting periods. The preceding accounting periods are those falling wholly or partly within the preceding period.

Losses may only be carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period.

Any claim for trading losses forms part of the Company Tax Return. The trading profit or loss for Corporation Tax purposes is calculated by making the usual tax adjustments to the figure of profit or loss shown in the company’s or organisation’s financial accounts.

If a company ceases to carry on a trade, the preceding period is three years preceding the accounting period in which the loss is incurred. Accounting periods must be taken in order, most recent first.

Spring Budget 2020 – Corporation Tax

The Corporation Tax main rate will remain at 19% from 1 April 2020. The main rate had been expected to reduce to 17%. However, this reduction was always in doubt after the Conservative election manifesto promised to reverse this announcement.

It has also been confirmed that the Corporation Tax main rate will remain at 19% for the following financial year beginning 1 April 2021. The Chancellor in his Budget speech was keen to stress that even at 19% the UK’s Corporation Tax rate remains the lowest in the G7 and G20.

Some businesses within the quarterly instalment payment regime may have made insufficient payments as a result of calculating their Corporation Tax liability by reference to the 17% rate. HMRC has said that they will work to provide guidance as soon as possible and to advise the correct rate.

Spring Budget 2020 – Research and Development Expenditure Credit

It has been confirmed by the Chancellor that the Research and Development Expenditure Credit (RDEC) is to be increased from 12% to 13% on 1 April 2020. The RDEC allows companies to claim an enhanced Corporation Tax deduction or payable credit on qualifying R&D costs. The RDEC replaced the large company scheme that was withdrawn in April 2016. This will help large companies to claim more support for their R&D activities.

There is a separate scheme for smaller companies known as the Small or Medium-sized Enterprise (SME) Scheme. The SME scheme offers more generous reliefs. SMEs can currently claim R&D tax credits of 230% for expenditure.

However, SMEs can elect to claim relief under the RDEC scheme if they are unable to claim relief under the SME scheme because of a grant or subsidy, or because they are carrying out subcontracted R&D work. A company is usually defined as an SME if staff headcount is less than 500 and either turnover is less than €100m, or balance sheet total is less than €86m.

It should be noted that only certain qualifying costs are available for R&D tax reliefs. The government has also said it will consult on whether qualifying R&D tax credit costs should include investments in data and cloud computing.

Spring Budget 2020 – Non-UK resident property companies

Following an announcement at Autumn Statement 2016, and subsequent consultations, the government moved forward with plans to charge Corporation Tax to non-UK resident companies with property income. Currently, these companies are chargeable to Income Tax and not UK Corporation Tax.

This measure will come into effect from 6 April 2020 when any non-UK resident companies that carries on a UK property business or has any other UK property income will become liable to Corporation Tax rather than Income Tax as at present.

This change is part of the government’s aim to ensure that all companies are subject to the same tax treatment and to limit some of the reliefs claimed by foreign companies on UK rental income. Whilst the Corporation Tax rate is lower, the benefit of the falling tax rate may not offset the tighter restrictions faced by non-resident companies claiming tax relief on rental income.

This measure is expected to affect a significant number of non-resident company landlords. The restriction may also affect entities that seek to reduce their tax bill on UK property through offshore ownership.

Spring Budget 2020 – Company cars and vans

Where employees are provided with fuel for their own private use by their employers, the car fuel benefit charge is applied. The fuel benefit charge is determined by reference to the CO2 rating of the car, applied to a fixed amount. HMRC has confirmed that the car fuel benefit charge, fixed amount, will increase in 2020-21 to £24,500 (from £24,100).

The fuel benefit charge is not applicable when the employee pays for all their private fuel use.

The standard benefit charge for private use of a company van will increase to £3,490 (from £3,430). A company van is defined as ‘a van made available to an employee by reason of their employment’. There is an additional fuel benefit charge for a van with significant private use. The limit will increase in 2020-21 to £666 (from £655). If private use of the van is insignificant then no benefit will apply.

Basic Corporation Tax reliefs

There are a significant number of reliefs that can reduce the amount of Corporation Tax your company needs to pay on profits made. Your company can also claim Capital Allowances for assets such as equipment, machinery and cars bought to use in your business.

The basic Corporation Tax reliefs include the following:

Research and Development tax reliefs – There are two schemes for claiming relief for R&D expenditure. The schemes are known as the Small or Medium-sized Enterprise (SME) Scheme for smaller companies and the Research and Development Expenditure Credit (RDEC) scheme for large companies. Large companies can currently claim a 12% RDEC also known as an 'above the line tax credit' for qualifying expenditure, whilst the SME scheme offers even more generous reliefs.

The Patent Box – This relief allows qualifying companies to apply a lower 10% Corporation Tax rate on profits arising from patent exploitation.

Creative industry tax reliefs (CITR) – This is the term for a collection of Corporation Tax reliefs that allow qualifying companies to claim a larger deduction, or in some circumstances claim a payable tax credit when calculating their taxable profits. The relief applies to qualifying expenditure in the production of certain films, high-end television, animation, video games, children’s television, theatre, orchestra and museum & galleries exhibitions.

Relief on goodwill and relevant assets – Since 1 April 2019, the Corporation Tax relief restriction rules for certain acquisitions of goodwill and relevant assets changed. If relief is available, it is at a fixed rate of 6.5% a year on the lower of the cost of the relevant asset or 6 times the cost of any qualifying IP assets in the business purchased.

Loss relief – There are various Corporation Tax reliefs that may be available where your company or organisation makes trading, terminal, capital or property income losses. For example, trading losses may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same or previous accounting period.

Planning point

If you are concerned your company may not be receiving the appropriate amount of tax relief please call so that we can help you consider your options.

Tax implications for construction industry

If you run a construction business and secure the services of sub-contractors, or if you are a building sub-contractor, you will need to comply with a special set of tax rules collectively known as the Construction Industry Scheme (CIS). 

The CIS rules determine the tax and National Insurance treatment for those working in the construction industry. 

Under the scheme, contractors are required to deduct money from a sub-contractor’s payments and pass it to HMRC. The deductions count as advance payments towards the sub-contractor’s tax and National Insurance liabilities.

Contractors are defined as those who pay sub-contractors for construction work or who spent an average of more than £1m a year on construction over a three-year period. Sub-contractors do not have to register for the CIS, but contractors must deduct 30% from their payments as unregistered sub-contractors.

To avoid the 30% deduction, sub-contractors will need to register with HMRC and qualify for a 20% deduction or apply for gross payment status. If gross payment status is secured the contractor will not make a deduction and the sub-contractor will be responsible to pay all their tax and National Insurance at the end of the tax year.

The CIS covers all construction work carried out in the UK. Exceptions to the definition of construction work includes professional work done by architects and surveyors, carpet fitting, scaffolding hire (with no labour) and work on construction sites that’s clearly not construction. The CIS does not apply to construction work carried on outside the UK.

In addition, from 1 October 2020, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This will be known as the Domestic Reverse Charge. The new rules will make the supply of construction services between construction or building businesses subject to the Domestic Reverse Charge. These rules were meant to come into effect from 1 October 2019 but have been delayed allowing the industry more time to prepare.

Overdrawn directors’ loans

An overdrawn Director’s Loan Account is created when a director (or other close family members) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay the personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the Director’s Loan Account (DLA).

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create unwelcome tax and NIC consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 and the loan must be reported on the director’s personal Self-Assessment tax return. There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company.

Where certain DLA's are not paid off within nine months and one day of the company's year-end, there is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount. In most cases, this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company. The claim to have the tax refunded needs to be made within 4 years after the end of the year in which the participator's loan was repaid.

The CT, Income Tax and National Insurance impacts of using a DLA must be carefully considered to ascertain if this is an efficient way for a director to ‘borrow’ money from their company.

Filing deadlines for company accounts

The normal deadline for filing private limited company accounts is 9 months after the company’s financial year end, known as the accounting reference date. For example, many companies have a year-end date of 31 March and are therefore required to file their accounts by 31 December. For public companies, the time limit is 6 months from the year end.

The deadline for filing your first set of accounts with Companies House can be complicated. If the first set of accounts cover a period of more than 12 months, the filing deadlines are as follows:

  • Within 21 months of the date of incorporation for private companies
  • Within 18 months of the date of incorporation for public companies
  • Or (for either company type) 3 months from the accounting reference date, if this is longer than the above time limits. 

For example, a private company incorporated on 1 January 2019 with an accounting reference date of 31 January, has until midnight on 1 October 2020 (21 months from the date of incorporation) to deliver its accounts.

If the first set of private company accounts cover a period of 12 months or less, then the normal filing deadline applies.

There are automatic late filing penalties if your company accounts are delivered late. The penalties depend on how long has passed from the due date for payment and whether the company is private or public.

Changes to Structures and Buildings Allowance

The new structures and buildings allowance (SBA) allows for tax relief on qualifying capital expenditure on new non-residential structures and buildings. The relief applies to the qualifying costs of building and renovating commercial structures.

The relief was introduced with effect from 29 October 2018 and applies where all contracts for the physical construction works are entered into on or after that date. The legislation to provide for this new relief was laid before Parliament and came into force on 5 July 2019 with retrospective effect.

As a result of the consultation process, some features have been amended, including those relating to short-term leaseholds, eligible pre-trading costs, periods of disuse, and reducing claimants’ administrative burdens.

The relief is available at an annual rate of 2% on a straight-line basis (over 50 years). No relief is available where parts of the structure qualify for other allowances, such as Plant & Machinery allowances.

The SBA is intended to support business investment in constructing new buildings, including necessary preparatory costs, and the improvement of existing ones, as well as improving the international competitiveness of the UK’s capital allowances system.