On the 6 August 2020, Irish Revenue released an eBrief on the July Jobs Stimulus which outlined accelerated loss relief for companies. A new section 396D in the Taxes Consolidation Act 1997 (TCA) was introduced by Section 11 of the Financial Provisions (Covid-19) (No. 2) Act 2020 (Act). This legislation was signed by the president on 1 August 2020, but the official text of the Act is not yet available.
Section 396D provides for temporary acceleration of corporation tax loss relief for accounting periods affected by the COVID-19 pandemic. It enables companies to estimate their trading losses and carry back up to 50% of those losses against profits of the preceding accounting period on an accelerated basis, thus accelerating a refund of tax paid or a reduction in tax payable.
Without these measures, a company must wait until the corporate tax return is filed for the period in which losses arise in order to carry back losses to the previous profitable period. This can result in a time delay of up to 21 months after the taxable profits are earned and 9 months after the period in which the losses occur.
Accelerated loss relief applies to losses from trades, the profits from which
- are chargeable to tax at 12.5%; and
- are chargeable to tax at 25% (excepted trades).
A trading loss must be quantified on a ‘best estimate’ basis where a company makes a genuine attempt to calculate the amount of the loss based on all the information available at the time the interim claim is made.
Definition of Terms used in Section 396D
These are the definitions used in section 396D:
- Specified accounting period is an accounting period of a company carrying on a trade including some or all the period commencing on 1 March 2020 and ending on 31 December 2020.
- Preceding accounting period refers to the accounting period(s) which precedes a specified accounting period in which the company incurs a trading loss.
- Estimated relevant trading loss is a trading loss incurred, or expected to be incurred, based on the best estimate by a company in a specified accounting period.
- Estimated non-relevant trading loss is a loss incurred, or expected to be incurred, based on the best estimate that may reasonably be made, by a company carrying on an excepted trade.
Timing of Interim Claims
An interim claim may be made 4 months after the beginning and up to 5 months after the end of the specified accounting period. Interim claims may be revised as the accounting period progresses.
Eligibility for Accelerated Loss Relief
The following criteria must be satisfied for a company to be eligible to make an interim claim for accelerated loss relief:
- A declaration must be made that a relevant or non-relevant trading loss has occurred or is reasonably expected to occur in the specified accounting period.
- The company must be tax compliant. Companies qualifying for ‘warehousing’ of certain tax liabilities under warehousing provisions will be regarded as tax compliant provided the company complies with the relevant warehousing legislation and is generally tax compliant.
- There is no requirement to automatically submit supporting documentation for the claim. The company is required to maintain any relevant documentation to demonstrate that the losses have been computed in a reasonable manner and to the best of the company’s knowledge and belief.
Effect of Making an Interim Claim
Where a company makes an interim claim for accelerated loss relief; losses carried back will be used to reduce the taxable profits and / or reduce tax on chargeable profits in the preceding accounting period. Consequently, repayment may become due to the company in respect of tax already paid.
It will be possible to increase or reduce the claim where a company realises it has under or overestimated the amount of the loss.
Where an excess claim is made due to the challenges in accurately projecting losses expected to be incurred, the interest in these cases will run only from the date on which the claim was reduced to the date the tax is repaid by the company and not from the date of the original claim. The excess claim must not be made either deliberately or with carelessness and the excess claim must be corrected without delay.
Submitting a Claim for Accelerated Loss Relief
A carry back of loss relief against profits of preceding accounting periods is made by amending the preceding accounting periods’ corporation tax return (CT1) through ROS.
Finalising a Claim
Once the specified accounting period has ended, the company will be able to prepare the necessary accounts for the specified accounting period and quantify the amount of the actual trading loss incurred. Following the end of the specified accounting period and the quantification of the actual trading loss for that period, the company will be able to make a claim to carry back any remaining trading loss available for the preceding accounting period.
Excess Interim Claims
If a company significantly over-estimated its trading loss, the company is required to adjust downwards the amount of the interim claim no later than the due date for the filing of the return in respect of the specified accounting period in which the loss was made.
Excess Claims and Penalties
Any interim claims for relief which are found to be excessive may be liable for a penalty and regard should be had to the Code of Practice for Revenue Audit and other Compliance Interventions.
Excess Claims and Preliminary Tax
If a company makes an excessive claim for accelerated loss relief, it may result in an underpayment of preliminary tax for the specified period being paid by the company. This would result in interest accruing on the underpayment of preliminary tax.
For further information, please contact any member of the William Fry Tax Advisors team.