Even businesses which made healthy profits in 2019 may now be struggling with cash flow. Where they are predicting losses for 2020, which can be carried back and set against profits of 2019, it is expected they will simply skip paying their 2019 corporation tax liability. Instead it is expected they will accept a small interest charge from HM Revenue & Customs (HMRC), rather than part with the cash now and look to recover it later.
Corporation Tax receipts have already fallen sharply this year and are down £10.4 billion in the period April to August compared to the same period last year. An element of this will be due to timing changes on when very large businesses pay their Corporation Tax liabilities, but the more significant element is going to be the impact of Covid-19 on business profits, including where businesses have agreed additional time to pay their liabilities with HMRC.
October is a huge Corporation Tax collection month – one of the biggest of the year. Companies with December year-ends (the most commonly selected company year-end date) were due to pay their Corporation Tax on 1 October. In addition, large companies within the Corporation Tax instalment regime, who have an accounting year-end date of March, June, September and December will also be due to pay one of their quarterly instalment estimate tax payments on 14 October. In October 2019 alone the Treasury collected over £10 billion in Corporation Taxes, but it won’t be the same this year.
Currently, it’s all about cash and cash management, so it is not surprising that businesses are looking at ways to manage their cash flow, particularly as we head towards a bleak winter and further restrictions.
In addition, calculations of quarterly instalment payments, which are paid in advance and based on estimated profits, will be impacted. Businesses will forecast ahead to their year-end and base their estimated tax payments on that forecast. Where their business has been badly impacted by Covid-19, their tax payments will reflect this.
A large company with a December 2020 year-end date will be due to pay its second estimated tax payment for the year in October 2020. By this date they will have a fair indication of the full year results and will be able to accurately forecast their tax liabilities.
Business owners will be cautious going into the last quarter of the year and won’t be overestimating their tax liabilities. However, they will be taking a cautious approach and accepting they may have a small amount of interest to pay if they have underestimated the payment due.
It will be very interesting to review the tax statistics for October when they are released later this year. It will then be possible to see whether the predicted impact materialises, and just how far behind Corporation Tax receipts are for the same period in 2019.