Corporation tax refunds jump £2 billion in one year

The value of Corporation Tax (CT) refunds paid out by HM Revenue and Customs leapt by £2 billion last year to £7 billion, up 40 per cent on the year before.

A refund will become due from HMRC when a business' yearly profits prove to be lower than expected or when a business makes a loss – in this case, businesses are paid a refund from their Corporation Tax paid in previous years.

A smaller/medium sized company may also claim a research and development (R&D) credit if it does not have profits for the period concerned.

Lottery

Roy Maugham, tax partner, at accountants UHY Hacker Young said: "Businesses face a real lottery on Corporation Tax refunds. Quite often, HMRC can be quite slow in returning overpaid tax or tax relief to a business. Some businesses do receive a refund quickly, but others will have to wait months to receive a payment.

"When a business has overpaid Corporation Tax, refund delays can be particularly galling as the money should be in a business' bank account, not sat with HMRC. A missing Corporation Tax refund will aggravate the difficult financial situation a business might be in that led to the need for a refund in the first place.

"Refunds can be worth a significant amount to a business so the missing funds could cause cashflow problems. It's rare, but there have been occasions when a business has gone bust while waiting on a refund to be paid by HMRC. The refund that HMRC is sitting on could be the lifeline that helps a company stay in business."

Corporation Tax refunds can be worth a lot to individual companies. Last year, the average amount paid out for each approved claim was £20,231. 346,000 businesses received Corporation Tax refunds from HMRC last year.

Roy said: "Businesses should always double check to see if they are eligible for a Corporation Tax refund at the end of the year. They may be eligible for an over-payment refund, loss relief or R&D credit relief. A significant amount of money can be at stake and HMRC is unlikely to pay a refund without being asked to first.

"The number of Corporation Tax refund requests that HMRC receives is not that large in the scheme of things – especially when compared to the millions of self-assessment tax returns that HMRC receives – but the organisation still struggles to process them quickly.

"Further cuts to HMRC's budget and the re-allocation of funds to focus on tax avoidance and evasion issues could be leaving HMRC under-resourced for basic processes."

Slow recovery

The jump in the number of refunds issued by HMRC is probably down to the slower than anticipated economic recovery or greater awareness of R&D relief.

Roy said: "The sharp increase in the number of businesses applying for refunds suggests that businesses have been over-confident about their profit predictions recently. Many businesses were clearly expecting the economy to recover much faster than it has done.

"The rise may also include increased Research & Development relief payments made to small businesses following the rise in the value of the relief to 200 per cent from 175 per cent."