How to apply for a corporation tax refund

Before we can look at how to apply for a corporation tax refund as a limited company contractor, let’s first set the scene and establish why a corporation tax refund is likely to arise in the first place, writes Matt Fryer, managing director of contractor accountancy firm Brookson.

How do corporation tax refunds arise?

A corporation tax refund will normally arise in one of the following two circumstances:

1. Where your company has paid corporation tax based on an estimated assessment of corporation tax due. Generally this arises if you have paid it too early before the company corporation tax return (CT600) has been submitted.
2. If your company has incurred trading losses in its current accounting period. In this respect, there is the ability to carry back losses against profits of the earlier 12-month period. If the company paid corporation tax in the earlier period, then HMRC will release a corporation tax refund to your company.

Paying your corporation tax early

The benefit of making an early payment for corporation tax may not suit every company, but it is a better option, and less expensive, than making a late payment.

You do have nine months and one day to pay your corporation tax after your year-end. The benefit of paying an estimated amount is that it removes the temptation of spending money owed to HMRC. However, there is a loss of cashflow if you pay the tax too early. In such a case, you need to take steps to obtain your corporation tax refund, if you have overestimated the tax due.

Identifying trading losses to carry back against prior period profits

When your accountancy provider prepares your financial statements, they will also prepare your corporation tax computation and corporation tax return for submission to HMRC.

Your accountant will discuss your company affairs and the options available to you if you do have trading losses.

In effect, you do have the option to carry forward trading losses against future trading income rather than carrying losses back. Pragmatically, most directors do opt to carry back losses to take advantage of the cashflow benefits of the corporation tax refund from HMRC.

How do directors apply for a corporation tax refund?

If you believe you should get a corporation tax refund, then you should use your company corporation tax return to inform HMRC that a refund is due and how you want the “repayment” paid.

There are broadly four main ways to get it paid, notably:

1. Having it paid directly to your company bank account. You should include the account number and sort code on the company tax return.
2. You could use it to pay towards the next corporation tax bill.
3. Alternatively, you could use the corporation tax repayment to pay off other taxes that your company owes (e.g. PAYE or VAT). Please note, if you do not include your bank details, HMRC will automatically use the money you’re owed to offset against any other HMRC company liabilities such as PAYE and VAT.
4. If there are no other HMRC liabilities, then HMRC will ‘sit’ on your refund and offset it against future corporation tax liabilities that may arise.

How do contractors make a claim for a corporation tax refund as a result of trading losses?

You can make a claim to carry back a trading loss when you submit your company tax return for the period when you made the loss. Generally, you can make your claim in your return or in an amendment to the return, as long as you’re within the time limit to amend it. This is usually within 12 months of the corporation tax deadline (i.e. 12 months after the end of your company’s accounting period).

Alternatively, you can also make your claim in a letter to HMRC. A claim should be made within two years of the end of the accounting period when you made the loss. Your claim should include the following details:

· the name of your company or organisation;

· the period when the loss is made;

· the amount of the loss;

· how the loss is to be used.

If the corporation tax refund is substantial, then HMRC will carry out compliance checks to ensure the accuracy of the claim. If all is correct, then HMRC will send you a repayment.

Is my company entitled to interest on any corporation tax refund?

If you have paid your corporation tax early, then HMRC will pay interest from the date you paid your corporation tax to the payment deadline (nine months and one day after the end of the accounting period).

If you have paid more than you owe, then HMRC will pay interest from either when the tax was due or when you paid the tax, if you paid after the due date.

HMRC’s current rate of repayment interest is 4.25%.

Final thoughts (including how long to wait to get a corporation tax refund)

Usually, HMRC processes corporation tax refunds on receipt of each company’s corporation tax return, or via a separate letter if claiming relief for losses outside the period where you can amend a previous return.

Currently, it is difficult to ascertain HMRC timescales for processing corporation tax refunds. Therefore, in most instances, following a six weeks or so waiting period, further phone calls to HMRC may be necessary to escalate the refund process.

However, in most instances, it will be your accountant who will submit your corporation tax return on your behalf.

So it's important that you take advice from your accountancy adviser and check your return to ensure the submission is correct as this will facilitate the speediest possible refund. Good luck!