Reducing your tax liabilities during COVID-19

As the COVID-19 pandemic continues to affect our personal and business lives in complex and difficult ways, it may be beneficial for business owners and management to now consider certain actions to help manage the cash flow burden of tax liabilities. 

Lower your 2020 preliminary tax

Individual tax returns for the 2019 tax year are due to be filed by 12 November 2020, along with any balance of tax due for 2019 and preliminary tax for the 2020 tax year. The two most commonly used options for meeting your preliminary tax obligation are to pay 100% of the prior year liability (2019) or make a payment of at least 90% of the expected current year liability (2020). A payment equal to one of those options must be made to avoid any interest charges on an underpayment of preliminary tax. 

Under normal circumstances it would be typical for an individual to make a preliminary tax payment for 2020 equal to 100% of their 2019 liability as this provides certainty that you have fulfilled your obligation and protected against any possible interest on underpayment. 

Given the economic impact of COVID-19 in the first half of 2020 and the expected full year impact, it is likely that taxable income will be reduced, potentially significantly, in 2020. This could be as a result of lower trading income and profits, lower investment returns such as dividends, and lower rental receipts if tenants are facing payment difficulties. 

In such cases it is advisable to consider making a preliminary tax payment for 2020 of 90% of your expected liability for 2020. However this option requires careful planning and review to ensure that any payment made meets the 90% threshold to avoid potential future interest costs.

Similar considerations should be given by companies with financial year ends between now and the end of 2020 which are due to make preliminary tax payments (e.g. 30 September 2020 financial year end, with preliminary tax due on 23 August 2020). This is particularly the case where it is expected that annual profits will be reduced or eliminated in 2020. 

Basing this preliminary tax on your expected liability for the 2020 financial year could reduce or eliminate the amount of tax that needs to be paid now. 

Accelerate losses available for corporation tax refunds

Companies that incur trading losses in a financial period are entitled to use those losses in a number of ways. One of the means of using losses is to set these losses back against profits arising in a prior financial year. 

However that is only possible to do so once the subsequent accounting period has ended and the accounts and tax return for that period are prepared.

For a company with a financial year end arising between January and June 2020, the preparation of accounts and corporate tax return should be done as soon as possible to potentially avail of the benefit of corporate tax losses. 

For example:
A company has earned profits of €100,000 in the year ended 30 June 2019 but is on course to record a loss of €100,000 for the year ending 30 June 2020. If the accounts for the year ended 30 June 2020 are finalised as soon as possible in July and the tax return filed, it would be possible to set the losses from 2020 back to 2019 and claim a refund of corporation tax paid. 

For a company with a financial year of 31 December 2020, consideration could be given to changing the financial year end to an earlier date, for example 30 June 2020.

Using another example:
A company has earned profits of €100,000 in the year ended 31 December 2019 but is on course to record a loss of €100,000 for the 6 months to 30 June 2020, with uncertainty over the results for the full year ended 31 December 2020. 

In such cases it may be possible for the company to offset the loss incurred in the year ending 31 December 2020 against the profit earned in 2019 and get a refund of the corporation tax paid on those profits. However the accounts and tax return for that period would not be finalised until 2021 at the earliest. 

Such a company could consider changing its financial period end. Continuing the above example, the company would change to a 30 June 2020 period end, in which case the accounts for the short period can be finalised and the trade loss calculated as soon as possible in July. This loss can then be offset, on a proportionate basis, against profits from the 2019 financial year end. This would accelerate a refund of corporation tax paid for 2019, or avoid having to pay the liability for 2019, depending on timing of the completion of 2020 accounts and making returns for 2019. In our example above this would mean that €50,000 of the profits from 2019 could be shielded by the 2020 losses and a refund claimed over the coming months. 

This would also then extend the timeframe for when the accounts and tax liabilities for the more profitable financial year would need to be prepared and filed. Continuing the example above, if the company used a 30 June 2020 financial period it would then use 30 June 2021 as the next financial year end, with accounts and tax returns for that year due in early 2022. 

There are other considerations to be taken into account in deciding the appropriate course of action, including assessing the company law and filing requirements for the company.

Please contact your team at Crowe Ireland to discuss how we can help you review, plan and execute on the above strategies.

Early repayment of R&D tax credits

Where a company claims a tax credit for qualifying R&D expenditure there are a number of ways in which the resultant tax credit can be utilised. In many cases the tax credit will be refundable over a three-year period in equal instalments beginning with the period in which the credit is first claimed. 

For example:
If a company incurs qualifying expenditure in the year to 31 December 2017 it will claim the credit and typically this will be repayable with the filing of the tax return for 31 December 2017, 31 December 2018, and 31 December 2019. 

In normal circumstances the tax return for the year ended 31 December 2019 will need to be completed and filed to claim the final instalment of the credit in the above example, which would typically be close to the end of 2020 with repayment of the credit taking some time thereafter so possibly into 2021. 

Revenue have indicated that they will accelerate the repayment of such an instalment of R&D tax credits on request by the company, subject to certain checks.

Therefore if you have claimed an R&D tax credit and are due an instalment repayment in 2020 you should consider accelerating the preparation of the current accounts and tax return to facilitate the repayment of the tax credit as soon as possible. For more detail, read our article Early payment of 2020 R&D tax credits.

Deferral of payroll and VAT liabilities 

Revenue have indicated a warehousing arrangement for payroll and VAT-related liabilities arising from 1 March 2020 to the date when sectoral restrictions are lifted. This will allow businesses to defer payment of these liabilities for up to 12 months from the resumption of normal trading, with no interest accruing on the debts in that 12-month period, and a reduced rate of interest of 3% applying thereafter. 

Further details are to be provided by Revenue, but if your business would like to consider this arrangement please contact your team at Crowe to discuss further. 

VAT relief for bad debts

Where a customer has defaulted on full or part payment of an invoice owed to your company and the company has previously accounted for VAT on that sale, the company may be in a position to claim bad debt relief on that supply and get a credit or refund of the VAT paid. 

There are a number of conditions that must be met to be in a position to classify an amount owing as a bad debt for this purposes, including inter alia: the business takes the decision that the debt is irrecoverable, all reasonable steps have been taken to recover the debt, the bad debt will be allowed as a tax deduction in calculating the taxable profits / loss of the business, the debt has been written off for accounting purposes, the person from whom the debt is owed is not a connected party, and all relevant records in relation to the debt and the steps to collect have been retained. 

The claim can be made in the VAT return for the period where the decision has been made to write off the debt, and is claimed by increasing the VAT on purchases figure by the amount of VAT related to the written off debt. 

The result will be a lower VAT liability for the period in which the write off occurs, or an increase in the VAT refund for the period. 

Please contact your team at Crowe to discuss this or any of the above provisions further.