Managing Tax Cashflows

As companies deal with the cash impact of Covid-19, a number are turning to HMRC as a source of funding. Many companies will take advantage of the VAT deferment opportunity and will have agreed time to pay arrangements for PAYE and corporation tax.

However, an increasing number of our clients are also looking to manage their tax cashflows rather than simply deferring them. Extending an accounting period is one method by which this can be achieved, as Sonia Hands and Najma Qamar explain in this article.

In summary, extending an accounting period may enable you to offset losses caused by Covid-19 against profits generated in the last 9-12 months. For most companies, this should reduce the tax payments which would need to be made between now and March 2021, enabling cashflow to be managed as we exit the lockdown and sales begin to pick up again. For companies whose profits are around the £1.5m threshold for quarterly instalment payments or the £20m threshold for accelerated instalment payments, the cashflow benefits could extend into 2022.

Extending the Accounting Period

An accounting period can be extended even if the original period end date has already passed, provided that it is done before the date the accounts are due to be filed at Companies House.  The due date for filing accounts for private limited companies is 9 months after the end of the accounting period. Unfortunately, the year-end can’t be changed when the accounts are overdue.

A few points about the accounting period extension:

• it can only be extended up to a maximum of 18 months
• generally, it can only be extended once every five years (although there are some exceptions)

You can also shorten your company’s financial year as many times as you like – the minimum period you can shorten it to is 1 day.  Whilst this may be beneficial under some limited scenarios, for example to accelerate an R&D claim, this briefing is focused on the wider benefits of extending an accounting period.

The accounting period is extended online using a form AA01: See details here

Corporation Tax effect

If an accounting period is extended, then the long period of accounts is split into two corporation tax accounting periods (“CTAP”) with one filing deadline. For example, if a company that has an accounting year end of 31 December 2019 changes its period end to 30 June 2020, then the first CTAP is twelve months to 31 December 2019 and the second CTAP is the balance, being six months to 30 June 2020 in this example.

The profits for the full 18-month period is split between the two CTAPS on a time basis by reference to days as opposed to an actual basis. Therefore, any losses that are generated in the last few months of the period would be averaged over the full 18-month period which could result in an overall lower profit or in a loss position.

Losses for an 18-month period:

If trading losses have been generated from March 2020 to June 2020, these would be averaged against the taxable trading profits for the period from January 2019 to February 2020.

Example 1.

• Taxable profits for the year ended 31 December 2019: £1,500,000
• Tax losses for the six month period ending 30 June 2020: £(2,000,000)
• Net loss for the 18-month period ending 30 June 2020: £ (500,000)

In addition to no corporation tax being due for the 18 month period to 30 June 2020, a part of the excess loss, £333,333 (representing the first 12 months’ loss out of 18 months), can also be carried back to offset against the previous 12 month period’s taxable profit which would result in a tax refund due to the company (plus HMRC interest).

Tax losses would also be available to surrender within a group if the company has no profits of its own which to offset the loss against, and thus would reduce the group’s tax payable.

Example 2.

• Taxable profits for the year ended 31 December 2019: £1,400,000
• Tax losses for the six month period ending 30 June 2020: £(400,000)
• Net profit for the 18-month period ending 30 June 2020: £1,000,000
• Taxable profits for the six-month period ending 31 December 2020: £400,000

Whilst the overall position has not generated a loss to carry back it has instead resulted in a lower taxable profit.  The first CTAP has taxable profits of £666,667 and the second CTAP has taxable profits of £333,333.  This will generate a cashflow benefit.  Had the accounting period not been extended, the tax payments would have been as follows:

With the accounting period extended, the tax payments are as follows:

The June 2021 period would also include profits made between January and June 2021, of course.  The key benefit is that a tax liability of £266,000 which would have been due on 1 October 2020 has now been spread over three instalments ending in April 2022.

Quarterly Instalment Payments (QIPs)

In Example 2, the taxable profits for each CTAP fall below a threshold of £1.5million. This is the threshold at which a company is deemed to be large and required to pay corporation tax by instalments. Please note that the Quarterly Instalment Payment threshold of £1.5m is:

• proportionately reduced where the accounting period is less than 12 months; and
• divided by the number of total active 51% companies in the group.

For companies whose profits have historically been above that threshold, extending the accounting period to take in losses could remove the requirement to pay the tax liability through the Quarterly Instalment Payment regime. This would result in an even greater timing benefit as shown in Example 3.

Example 3.

• Taxable profits for the year ended 31 December 2019: £ 2,000,000
• Tax losses for the six month period ending 30 June 2020: £ (1,000,000)
• Net profit for the 18-month period ending 30 June 2020: £ 1,000,000
• Taxable profits for the year ended 30 June 2021: £ 3,500,000
• Taxable profits for the year ended 30 June 2022: £ 2,000,000

The overall position has resulted in a lower taxable profit, as it did in Example 2. However, in this example, the company is no longer within the Quarterly Instalment Payment regime in the 18-month period ending 30 June 2020 as the taxable profits have fallen below the threshold of £1.5m.

Had the accounting period not been extended and had the company generated a similar level of taxable profits, albeit with an increase in the six month period ended 31 December 2020, the tax payments would have been as follows:

(*) only includes taxable profits for 6 months for comparison purposes only

With the accounting period extended and the company not required to pay tax through QIPs for each period, the tax payments are as follows:

As can be seen above, extending the accounting period in this scenario reduces the tax payments due before April 2021 from £665,000 to £190,000. Therefore, whilst the tax liability remains the same over the total period, the key benefit is the cashflow advantage in the earlier periods. Tax payments are further delayed because the company would not fall back within the QIPs regime until it generated taxable profits exceeding £1.5 million for two consecutive years, or £10 million in any one year, meaning that the cashflow benefit would last until 2022.

Whilst extending an accounting period results in two CTAPs and thus two tax returns for filing, there is only one filing due date for both tax returns.  Therefore, for an 18-month accounting period ended 30 June 2020, the two tax returns would be due for filing by 30 June 2021.

As the QIPs are based on forecasts, the impact of Covid-19 should be taken into account when deciding on whether to pay QIPs and the amount to pay each quarter.  If some QIPs have already been paid for the current accounting period, a reforecasting of the tax liability could either be used to reduce subsequent instalment payments or to request a refund of any expected overpayment under the Covid-19 measures.

Conclusion

A number of companies will be able to generate cashflow benefits from altering their accounting period.  If you would like to explore how this may be optimised for your company’s circumstances, please contact Sonia or Naj on Sonia.hands@claritastax.co.uk or Najma.qamar@claritastax.co.uk or speak to your normal Claritas contact.