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COVID-19 – Loss carry-back scheme

If your business was making a profit the in 2019/20 (2018/19) and now you are forecasting a loss in the 2020/21 (2019/20) year you can “move” some/all of that loss into the previous year and reduce the tax that you paid for this year and get it refunded. Here is an example provided;

Wiki Hospitality Limited (Wiki) has had a profitable year for the year ended 31 March 2020. It has not yet finalised its tax return, but it is expected to return $2m net income. Its final provisional tax payment for the expected $2m income is coming up on May 7, where it expects to pay $250,000 in tax (it has already paid $310,000 in early provisional tax instalments).

However, because of COVID-19, it is not operating at the moment and does not know when it will be allowed to resume operating. It is still paying its staff (supported by the wage subsidy scheme) and rent. It seems inevitable that it will make a loss in the year ended 31 March 2021. In early May, the directors meet with the CFO and forecast some scenarios. In all the scenarios, Wiki will make a loss of $1.5m for the year ended 31 March 2021, although some scenarios see it making a $2m loss.

Knowing it will face use-of-money-interest charges if it over-estimates its loss, Wiki decides to carry-back the more certain loss of $1.5m to the 2019/20 year, and re-estimate its income for that year to $500,000 (down from $2m). Because it has already paid $310,000 in tax, it pays nothing on May 7, and receives a refund of $170,000 from its earlier provisional tax payment.

In short, for the 2019/20 year, Wiki returns $500,000 of income and pays $140,000 tax, receiving back its earlier payments as refunds.

What this does is averages out the tax that you pay over the two years which may have a significant tax advantage and improve your cashflow as they will refund some/all of the tax that you paid for the 2019/20 year.

If this is something that you want to investigate, we will need to calculate a budget for 2020/21 it’s not difficult and I can talk you through this. Then I can calculate the tax and cashflow impact of these changes. 

If you would like to discuss this further please get in touch and we can go over it with you.