Utilising tax incentives to maximise cash flow

Given the impact of the COVID-19 pandemic and the associated lockdown, it is more vital than ever for businesses to ensure they are maximising their reliefs and take full advantage of the Government’s offering. These incentives and reliefs can reduce tax payments owed to HMRC to retain cash or potentially generate cash repayments from HMRC.

There are a range of valuable options available. They provide generous tax deductions that reduce profits or increase taxable losses, some of which can be converted into cash payments.

Many businesses will have accrued tax debts during the second quarter of 2020 simply due to the automatic deferral of VAT payments between 23rd March and 30th June 2020 which HMRC have implemented.  Many businesses will also use Time to Pay arrangements for PAYE and NIC, and potentially Corporate Tax, and so other tax debts may have accrued. 

The methods of potential relief include:

Accelerating tax claims to reduce payments due to HMRC

Accelerating the work needed to claim the tax relief means that less tax will be payable to HMRC when this becomes due, and future payments may also be reduced because of this.

Companies with profits below £1.5 million pay corporation tax 9 months and 1 day after the end of their accounting period. Companies with profits in excess of this pay in four instalments and are therefore only ever a few months away from their next payment date.

Partnerships and individuals generally make payments on account on 31st January (within the tax year), and 31st July (following the end of the tax year).

A potential method of accelerating the relief available would be to shorten an accounting period. If a company shortens their accounting period, they are able to crystallise the relief at an earlier point and could significantly improve their cash flow. For example:

• A company with a 30 September 2020 year end might choose to shorten an accounting period to 31 March 2020 so that a claim for (eg) R&D tax relief was possible for activities prior to the lockdown.

• A company with a 31 March 2020 year end might choose to prepare the next accounts to 31 December 2020 so that a claim was prepared before the 31 March 2021 payment deadline for VAT deferred between 23rd March 2020 and 30 June 2020.

However, a key action with such a step is that the accounts need to be prepared to support a claim.  Whilst Companies House have put forward the option of extending filing deadlines for accounts, companies who want to accelerate tax claims may find it more beneficial to prepare accounts so that they are able to support tax claims (rather than deferring preparation).

Also, there are rules regarding how often accounting periods can be changed and in which circumstances (and which govern when such a change has to be notified to Companies House). The Companies House rules should therefore be checked before committing to amending an accounting period.

Amending prior year returns to claim repayments

If a claim for relief was overlooked in a recently filed prior year, a business may be able to file an amended return to claim the relief. In this instance, following the inclusion of the relief in the return, tax will have been overpaid so a cash tax repayment can be claimed from HMRC and future tax liabilities may also be reduced because of this work.

Capital Allowances (CAs)

Capital Allowances are available to both companies and unincorporated businesses for capital expenditure. This form of relief can be extremely valuable for commercial property, whether in respect of the acquisition of a freehold or leasehold of a building, or substantial construction works.

By carrying out a retrospective review of expenditure by a capital allowance specialist they will identify significant additional spend that is eligible for tax relief. For any construction works, the claim can go back indefinitely as long as the assets which are included in the claim are still owned and utilised in the business. For an acquisition, this is generally more complex as there is a two-year window in which a claim can be made, however with specialist help it may still be possible to make retrospective claims for expenditure which the previous owner was not entitled to claim on.   

Enhanced Capital Allowances (ECA)

Enhanced Capital Allowances are a sub group of Capital Allowances and are entitled to a full 100% first year allowance on items which feature on the Energy Technology List, Water Technology List or satisfy the criteria for those categories of expenditure which do not directly feature.

This relief ended on 31st March 2020. However it is still possible to amend returns for any recently filed earlier year or also if expenditure was incurred in the current accounting period but before 31 March 2020. Where a company is loss making, this can be surrendered for a cash repayment from HMRC worth 16% of the loss surrendered, up to a cap of £250,000.

Structures and Buildings Allowances (SBA)

Structures and Buildings Allowances are available at 3% of costs which do not qualify for allowances under the Capital Allowances or ECA regime. This relief is available where contracts for construction work were entered into after October 2018 and are available on a straight line basis.

This relief reduces the base cost of the asset for capital gains tax purposes but is a welcome relief in the current economic climate and can significantly improve short term cash flow.

Research and Development (R&D) relief and tax credits

R&D relief is a particularly generous tax relief for companies who incur expenditure in carrying out R&D. R&D is essentially any work that a company is carrying out (or paying somebody else to carry out) to resolve a scientific or technological problem which could not have readily been solved by a professional in the relevant field without carrying out a detailed and systematic project.

Many SME companies are able to claim a deduction totalling 230%, or if loss making for tax purposes can be surrendered for a cash repayment from HMRC which can be worth up to approximately 33% of losses surrendered.

For larger companies, or grant funded R&D projects, an alternative mechanism called the R&D Expenditure Credit can provide a taxable credit worth up to 13% of the qualifying expenditure.

In a small number of cases, companies using COVID-19 support measures could limit their ability to claim R&D tax relief, so it is essential you speak to an adviser.

Supporting you

There are a broad range of tax opportunities which can arise during an economic slowdown. These actions can assist with cash flow, including a reduction to taxes payable and the payment of tax credits.

The tax team at MHA Carpenter Box can provide the guidance to help review your business, provide advice on accessing support and assist with identifying additional options for cash flow needs.

www.carpenterbox.com