Legislation has recently been enacted to cater for the July Stimulus Plan measures which enable companies and self-employed individuals to accelerate loss relief for trading losses incurred in 2020. The measures are designed to provide rapid cash flow support to previously profitable businesses which have become loss-making during the COVID-19 period.
1. Previous Position
In broad terms, where companies carrying on trades incur tax adjusted trading losses for a particular accounting period, among the options available for relief are for such losses to be carried back in whole or in part to offset tax adjusted trading profits of the preceding accounting period, and this approach may lead to a corporation tax refund for the previous period. A claim for carry-back of loss relief could usually only be made after the end of the accounting period in which the loss arose and after the submission of the corporation tax return for that period.
For individuals carrying on a trade or profession, the options available for relief after incurring a trading loss or unused capital allowances are broadly as follows:
- Carry forward the unutilised losses and capital allowances for offset against trading profits incurred in future years, or
- Offset the trading loss and unused capital allowances against other sources of income earned in the same year of assessment.
2. New position - Accelerated Loss Relief
Where a company incurs or estimates that it will incur a tax adjusted trading loss for an accounting period which includes all or some of the period commencing on 1 March 2020 and ending on 31 December 2020, the company may make an “interim claim” to carry-back 50% of the estimated tax adjusted trading loss for offset against profits of its preceding accounting period.
Where an individual incurs a trading loss or unutilised capital allowances in the period between 1 January and 31 December 2020 and those losses or capital allowances are available to carry forward to future years, subject to the certain conditions, they are entitled to carry-back any portion of unused amounts and deduct the amounts from the profits or gains from their trade which is assessable to tax for the year of assessment 2019, thus reducing the amount of income tax payable in respect of these profits, although relief is not available in respect of USC or PRSI.
Where an individual’s accounting period has not ceased and an individual expects to incur a trading loss or unutilised capital allowances in the period between 1 January and 31 December 2020, they may make an “interim claim” based on the estimated loss or unutilised capital allowances they expect to incur.
3. Issues to note regarding accelerated loss relief claims
- A company or individual making an interim claim must base the claim on “the best estimate that may be reasonably made”.
- Where an interim claim is made the individual or company must also:
- Make a declaration, which accompanies the interim claim, that they incurred, or may reasonably expect to incur a relevant loss or relevant allowance, as the case may be, and
- Maintain and have available records which determine the expected losses or unutilised capital allowances have been computed in a reasonable manner and to the best of the individual’s knowledge.
- In terms of timing of such accelerated claims:
- A company cannot make a claim earlier than four months from the beginning of the accounting period in which the trading loss is expected to arise, and not later than five months after the end of the accounting period in which the trading loss arises.
- In relation to individuals, an interim claim in respect of the year of assessment 2020, cannot be made after 31 May 2021 and, in respect of the year of assessment 2021, cannot be made earlier than four months from the beginning of the accounting period and not later than 31 May 2022.
- Revised interim claims can be made as a relevant accounting period progresses, including increasing the interim claim where the estimated loss is expected to be greater than the amount previously claimed. There is no legislative limit to the number of times a company or individual can revise its interim claim.
- For individuals, the total amount of losses and unutilised capital allowances that may be carried back to the 2019 year of assessment is limited to €25,000.
4. Procedures for making claims
A claim for the accelerated loss relief is made by making a claim in the corporation tax return for the preceding period. The claim is made by entering an amount up to 50% of the estimated trading loss for the next accounting period in the relevant section of the corporation tax return.
Revenue has indicated interim claims for individuals are to be made by completing the appropriate fields in the Form 11 income tax return for 2019. For this purpose, there is a specific section for “Covid-19 relief”.
4.3 Other Issues
- The claimant company or individual must also make a declaration to Revenue confirming the following:
i. The claim is an interim claim and, in respect of a company, confirmation the amount claimed is no more than 50% of the estimated trading loss,
ii. The company/individual has incurred, or reasonably expects to incur, a trading loss in the next accounting period, and
iii. The company/individual is tax compliant at the date the interim claim is made.
The above declarations are made via “tick the box” in the corporation and income tax returns.
- Procedures also exist for claims from taxpayers who are exempt from the mandatory e-filing process.
- Supporting documentation should not be provided with the interim claim. However, while processing an interim claim, the Revenue Commissioners may request additional material in relation to how the expected losses or unutilised capital
- In order to qualify to make an interim claim, the relevant individual or company must be a “tax compliant individual” or “tax compliant company”. In order to be classified as such, they must have complied with all their obligations in relation to the payment of taxes (including interest and penalties) and the filing of returns. It is important to note that any individual or company availing of Debt Warehousing will, irrespective of the non-payment certain liabilities as permitted, still be regarded as tax compliant provided they have complied with the requirements of the debt warehousing scheme. Details of the debt warehouse scheme may be found here.
- Where an excess claim arises (due to say overestimations of losses/capital allowances), the tax return submitted must be amended to reduce the claim by the excess amount without unreasonable delay, when the over estimation is discovered. Late payment interest arises in respect of such excess claims.
- For companies, once the accounting period in respect of which an interim claim has been made has ended, they should be in a position to prepare the necessary accounts for the period and quantify the actual trading loss incurred in the period. They should then be in a position to carry-back any remaining trading losses for offset in the preceding accounting period in the normal manner. This will involve submission of the corporation tax return for the accounting period the losses were incurred in and submission of iXBRL financial statements for the period, if required. A claim for carry-back of trading losses to the preceding accounting period must be made within two years of the end of the accounting period that the losses arose in.
- Where individuals have made an interim claim for carry-back of loss relief, they are required to make a final claim for relief by the due date of the income tax return the losses arose in (i.e. 31 October 2021 for the year of assessment 2020; 31 October 2022 for the year of assessment 2021).
The above measures should help businesses from a cash flow perspective, and businesses should examine their expected trading position with a view to making a relevant claim. It should be noted that business must be tax compliant to avail of these measures, and businesses should also check their tax compliance position in this regard, and regularise any outstanding issues as required. Tax compliance is also an important feature in relation to availing of other Covid-19 related measures including access to the new EWSS – details of which are contained here.
Details sourced from and correct as at 25th August 2020: https://www.revenue.ie/en/corporate/communications/stimulus/temporary-acceleration-of-corporation-tax-loss-relief.aspx
We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action on the information it contains.
Smith & Williamson Freaney Limited Authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.