02 Mar Recording a Loss – Good Tax Planning?
Why is recording a loss good tax planning?
When it suits HMRC it will rely entirely on the figures shown on your company’s tax return. A mistake might therefore result in extra corporation tax. A tribunal recently considered this point. What lessons can be learned from its decision?
The facts of the case
The case of Bloomsbury Verlag GmbH v HMRC 2015 (BVG v HMRC) involved a dispute regarding the general four-year time limit for tax claims. The German company had been liable to UK tax since 2003. However, it didn’t submit corporation tax (CT) returns until 2010, in which it claimed CT relief for losses occurred more than four years earlier. It had carried forward unused losses for out of date tax years to reduce its CT bill on profits for later years. Inevitably HMRC opened a tax enquiry. While it did not dispute that BVG had made losses, it said it was out of time to claim relief for them.
HMRC’s view of the law
HMRC’s view was that BVG had not met the conditions for loss relief. These say that the amount of a trading loss must be established before a company can carry it forward (see The next step ). Because the losses arose more than four years earlier BVG was, under the general time limit for tax claims, too late to make a claim.
BVG’s view of the law
The company appealed against HMRC’s decision saying that its view was that the rules allowed for an automatic carry-forward of unused losses and therefore a claim wasn’t strictly necessary. BVG is undoubtedly correct that unused losses from earlier years are automatically allowed against later profits. However, HMRC wasn’t disputing that part of its claim, but that amount of losses for any year must first be determined before they can be carried forward.
The tribunal’s view of the law
As well as the law the First-tier Tribunal (FTT) looked at other rulings where the general four-year time limit had been a factor. It found the answer it was looking for in an income tax case. Because the law regarding general income tax time limits mirrors that for CT the FTT didn’t see any reason why it shouldn’t apply the same principles.
The tribunal’s ruling
The tribunal decided that the later CT returns submitted by BVG determined the amount of losses for earlier periods and so they could be carried forward and claimed in its later tax returns. Good news for BVG.
A lucky break
We think that BVG were slightly fortunate and we expect HMRC to slam the door on such claims by getting the government to change the law. It’s already proposed such a change for income tax, which will become law in July 2016. Because of the BVG case in our view it’s certain that a change to the CT rules will follow. Tip. The message from this case is that if you want to avoid disputes over mistakes or missing figures in a tax return, you must do so within the four-year time limit. Better still, avoid the errors by thoroughly reviewing and understanding the figures on your tax return before it goes to HMRC – even if it has been prepared by your accountant. They can make mistakes too.
Mistakes in tax returns, especially missing claims for tax relief, can only be corrected within four years from the end of the tax year to which they relate. Double check tax returns before they are submitted to HMRC. If you’re unsure of a figure, or lack of one, on a return completed by your accountant, ask for an explanation.