Terminal Loss Relief from HMRC

Terminal loss relief from HMRC. Author: John A Waller. Reviewed: June 26th,2024.

A significant bad debt or problems with customers and profit often cause a company’s failure.

Terminal losses and VAT bad debt relief remain overlooked when a limited company faces insolvency. This relief applies when business owners complete their VAT returns, though they are not current with VAT rules. 

However, accounting for terminal loss relief from HMRC, along with VAT bad debt relief, could increase creditors’ payments.

So, if your client is in financial difficulties and needs help regarding available insolvency options, or if a business owner is experiencing risky times and can’t pay VAT, what next?

Review taxes for possible claims.

When considering insolvency options or advising your client about the right solution, consider a global tax review of taxes.

If you know of a claim, advise the insolvency practitioner immediately. To obtain maximum relief, therefore, consider the following points before entering an insolvency procedure:-

  • Critical dates for tax purposes.
  • Was corporation tax paid 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 or 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 where the company was registered.

How do I claim Terminal Loss Relief from HMRC?

Claiming your EIS loss relief is a straightforward process. You claim your EIS loss relief as part of your Self-assessment tax return by claiming the losses against either Income or Capital Gains Taxes. You must fill out the SA108 form, which accompanies the main SA100 form.

Terminal loss relief

Overlooking Terminal Loss relief from the HMRC  is expected. 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 in the last 12 months of trading and set them off against any profit made in the three years before 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 are 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 provides goods or services to a customer but is unpaid, it can claim VAT relief for any bad debt incurred.

If the company meets all conditions and has delivered to customers on or after April 1st 1989, it can claim VAT bad debt relief, whether the payment due was in money, goods, or services provided in a swap. 

Nevertheless, they must wait at least six months from the payment due, payable, and delivery date. They cannot claim a return for an accounting period earlier than the one in which they become entitled to the relief.

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