Terminal Loss Relief from HMRC
The reason for a company’s failure is often either a significant bad debt or a series of problems with customers and profit.
Terminal losses and VAT bad debt relief remain overlooked when a limited company faces insolvency. It applies when a business owner completes their VAT returns, though not up to date with VAT rules.
Accounting for terminal losses and VAT bad debt relief could however increase creditors’ payments.
So if your client is in financial difficulties and needs help in terms of available insolvency options, or if a business owner is experiencing risky times at the moment.
Review taxes for possible claims
When considering insolvency options or advising your client about the right solution for them, you should consider a global tax review of taxes.
If you are aware of a claim, advise the insolvency practitioner as soon as possible. To obtain maximum relief, therefore consider the following points before entering an insolvency procedure:-
- Critical dates for tax purposes.
- Was corporation tax paid in the three or four years before insolvency?
- All tax allowances and reliefs;
- Are charges held on the business;
- Any assets to be realised by the insolvency practitioner (possible gains);
- Possible transfer of business or sale of assets;
- If a group, company, what about the other members of the group;
- Potential to defer liabilities;
- Accounting standards adopted by the company;
- Centre of primary interest;
- The place the company was registered.
Terminal loss relief
Overlooking Terminal Loss relief is common. However, it is available to limited companies that have ceased trading and made losses in the last 12 months.
Terminal loss relief enables the company to carry back all trading losses that occurred in the last 12 months of trading, and then set them off against any profit made in the three years to the period the business made the loss.
offset each loss before you can return it to previous years, and losses offset in the order made.
Terminal loss relief is complicated, so the HMRC Company Taxation Manual is helpful.
Crown set off
The Insolvency Act 1986 defines that when a limited company liquidates, the mutual agreements between the company and its creditors taken into account. When a business faces insolvency, Crown set-off, therefore, requires consideration.
Suppose the company has a significant tax liability for VAT or PAYE. Therefore, all debts to and from the Crown should be added up and assessed before reaching a net balance, as the insolvency practitioner must ensure a tangible benefit to the estate.
Relief from VAT on bad debts
If a company has provided goods or services to a customer but is unpaid, it can claim VAT relief for any bad debt incurred.
As long as the company meets all conditions and has delivered to customers on or after 1 April 1989, it can claim VAT bad debt relief, whether the payment due was in money, goods, or services provided in a swap.
Nevertheless, they will have to wait at least six months from the time of payment due, payable, and delivery date. They also cannot claim a return for an accounting period earlier than the one in which they become entitled to the relief.