Businesses that have incurred losses during the Covid-19 pandemic should be able to exchange them for a government cash payment, say leading tax and advisory firm Blick Rothenberg.
Genevieve Morris, a partner at the firm said: “The Government should introduce a method where businesses can surrender their Covid-19 losses in exchange for an immediate cash payment. If the government did this not only would small businesses get the cash injection they so desperately need, but ultimately the measure will raise tax as the losses surrendered for a cash payment would not be available to shelter future profits at the higher corporation tax rate. The mechanism already exists for SME’s that have qualifying R&D claims. Where these businesses have losses after claiming enhanced R&D tax relief, the losses can be sold to the Government in exchange for a cash payment equal to 14.5% of the losses.
Genevieve added: “ Many businesses have suffered substantial losses during the Covid-19 lockdown, and whilst businesses that were profit making in the previous year will be able to carry these losses back and claim a cash tax refund, early stage businesses that have been historically loss making will only be able to carry these losses forward and use them to shelter profits in future years. They will not be able to benefit immediately, unlike previously profit-making businesses and the future use of the losses will remain uncertain.”
“A business with losses of £100k arising from R&D expenditure can sell these and receive a cash payment of £14,500. The alternative for these businesses would be to carry the losses forward to shelter future taxable profits – and businesses doing this would benefit at the current corporation tax rate of 19%, meaning the benefit of carrying forward would be worth more than the immediate cash refund at £19,000. However, many small businesses are likely to prefer receiving the cash benefit today, rather than carry forward the losses to use in the future.”
Genevieve said: “The system is already in place and it wouldn’t take much for company tax return software to be updated to allow businesses to elect to sell their Covid-19 losses, rather than carry them forward.”
She added: “The Government could restrict the relief to SMEs, or as is similar with R&D relief for large companies, provide a similar Covid-19 loss relief to large corporates, but with a reduced cash payment – say 9% rather than 14.5% for SME’s.
They could also cap the amount of losses you’d be able to sell, for example at £5m. £5m of losses sold for 9% would generate a cash refund of £450k – but if these losses were carried forward and used in the future they would shelter profits and save £950k of corporation tax. Allowing businesses to sell these losses now will untimely increase future tax revenue by £500k
“This would then still enable large corporates to benefit if they really need to, but it would be a more difficult decision for business leaders, knowing that they would be losing the 19% corporation tax relief in the future, in exchange for a 9% cash payment now. This would help ensure the system was not abused by larger companies that really do not need the cash now, but still enable some of the larger businesses that are facing crises to benefit when they really need to.”
Genevieve said: “If businesses don’t get the help they need to come out of the Covid-19 crisis in a strong position, there will be no tax revenues in the future from the many businesses that will not survive. It really is in the Government’s interest to continue to help businesses through this challenging time, and the beauty of this option is that it would help businesses survive today, but will ultimately raise tax revenue in the future as the businesses recover and start to make profits and pay corporation tax immediately rather than sheltering this with losses carried forward from previous years.”