More businesses that have suffered due to COVID-19 could be supported now, and tax revenues increased if the Chancellor had allowed businesses that have suffered losses to exchange them for a Government cash payment.
Genevieve Morris, head of Corporate Tax at the firm, said: ‘The recent Summer statement by Chancellor Rishi Sunak outlined the Government’s next stage of response to the COVID-19 pandemic – with a focus on job creation and retention, and targeted measures towards hard hit industries such as hospitality and leisure. However, did he miss a trick that would’ve enabled more businesses that have suffered to be supported now, yet ultimately increase tax revenue in the future?
‘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: ‘While we all accept that taxes will almost certainly have to rise in the future to pay for the support provided during these difficult times, the Chancellor needs to take a long-term view. If the supporting measures such as the furlough scheme are withdrawn and at the same time businesses and individuals are hit with tax rises, the country will fall deeper into recession. Businesses that make losses don’t pay tax, and businesses which are forced to permanently close will never pay tax again.’
‘Many businesses have suffered substantial losses during the COVID-19 lockdown, and while 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 – if and when they make future profits. This puts early stage businesses at a disadvantage and the future remains uncertain for them.
‘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 noted that: ‘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 and sell their COVID-19 losses, rather than carry them forward. 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 corporate, 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.
She concluded that: ‘The beauty of this would be that the Chancellor would ultimately increase the tax revenue if he introduced a scheme like this, while still providing much needed support to businesses. In addition, as the relief would provide a lower cash payment than the losses would be worth if they were carried forward, it would only be accessed by businesses that truly need the support, and ensure the system was not abused by companies that really do not need the cash.
‘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 I hope we will see the measures introduced in the Autumn budget.’
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