On 30 April 2020, the Government introduced new legislation to provide relief from the impact of COVID-19 through a new tax loss carry-back scheme. Under the new rules taxpayers will be able to offset actual or estimated tax losses from either the 2020 or 2021 financial years against taxable profits in the one year immediately preceding (i.e. 2019 and 2020 respectively).
The loss carry-back scheme provides an immediate cash flow benefit for the business as taxpayers will receive a refund of income tax already paid during the profit year. The refund can be claimed either through filing the tax return or by notifying the Inland Revenue via myIR. Care should be taken when estimating tax losses as the carry back of those losses (and subsequent refund of income tax) may cause a taxpayer to fall out of the usual Use of Money Interest safe harbour rules.
There is some complexity to the rules, in particular around shareholder salaries and flow on considerations such as overdrawn current accounts and banking arrangements. Also the availability of Imputation Credit Account balances can also restrict the IRD’s ability to refund income tax amounts. Due to these complexities, the tax loss carry-back scheme may not suit all businesses and should be considered on a case by case basis. Where it is not beneficial to carry back the tax loss, the loss would be carried forward subject to shareholder continuity or the “same or similar business” test requirements.
This is a temporary measure relating to COVID-19 but a permanent change will be considered under the normal legislative process later this year.