Time limits for making retrospective claims

Executive summary

Companies do not always claim their full entitlement to tax incentives.  This could be because they were not aware of the full scope of their entitlement or simply because they don’t have sufficiently robust processes in place to consistently capture all qualifying expenditure.  Similarly, neither is it uncommon for companies to make claims by mistake, either for expenditure they are not entitled to, maybe due to a misinterpretation of the legislation or not having sufficient information to support a claim.

Understanding the statutory time limits for making or amending these claims, as well as HMRC’s powers to open enquiries, is essential for effective tax planning and risk management. This insight sets out some of the key time limits for making retrospective claims for tax incentives including land remediation relief (LRR), capital allowances (CAs) and R&D expenditure credits (RDEC).

Technical context

The rules governing time limits for submitting and amending a company tax return are contained in FA1998 Sch 18 part 2. The statutory time limit for submitting a company tax return is generally 12 months after the year end to which the return relates for accounting periods not longer than 18 months. This is known as the filing date. A company is then able to amend its tax return any time up to 12 months after the filing date. Similarly, upon notice, HMRC can raise an enquiry into a tax return any time during the same 12-month period.  If a company submits a return before the filing date, and is not part of a group, then the HMRC enquiry period is 12 months from the earlier submission date.  The only other rule that is worth noting is that if an amended return is submitted after the filing date, then HMRC have 12 months after the first HMRC quarter day (31 Jan / 30 Apr / 31 Jul / 31 Oct) following the submission to raise an enquiry which is likely to be longer than 12 months.

Significantly, whilst there is some overlap, the general provisions for the making of claims, including LRR, CAs and RDEC, are different and separate to those that govern submissions, amendments and enquiries into a company tax return. Time limits for claims are dealt with under FA1998 Sch 18 Part 7 and state that, subject to any provisions to the contrary, a company can make a claim for an overpayment of tax, due to a previous mistake or oversight, for a period, provided the amended tax return is made within 4 years of the end of that period.  As regards other provisions, reference must be made to Parts 9, 9A and 9B which provide specific provisions for claims for CAs, RDEC and land remediation tax credits as well as any provisions within the Corporation Taxes Acts that cover those incentives.

Claims for CAs are dealt with in FA1998 Sch.18 Part 9. Generally, a claim for CAs may be made or amended within 12 months of the filing date of the accounting period in which the claim is made or amended and must be made via a submitted company tax return.

Claims for RDEC are dealt with in FA1998 Sch.18 Part 9A. Generally, a claim for RDEC may be made or amended within 2 years beginning on the last day of the period of account to which the claim relates for periods up to 18 months. Again, a claim can only be amended by amending a company tax return.

Claims for land remediation tax credits are dealt with in FA1998 Sch.18 Part 9B. The time limits are the same for CAs, namely 12 months after the filing date for the accounting period being amended.  However, these provisions only affect claims for land remediation tax credits, not land remediation relief.  Tax credits are relevant only if a company makes a loss, or that loss is increased, by virtue of a land remediation relief claim being made.  In such instances, a company may elect to surrender that loss for a 16% payable tax credit but must do so within the two-year time limit.

The next step is to consider any specific time limits in the Corporation Taxes Acts, and there are several worth noting:

• Capital Allowances Act 2001: s.52 states that new expenditure that qualifies for first year allowances (FYAs) can only be claimed in the year the expenditure is incurred. If that period is out of time, then the qualifying expenditure must be added to the plant and machinery main or special rate pools and claimed, instead, at the default writing down allowance of 18% and 6% respectively.
• Corporation Tax Act 2009 Part 14: s.1147 of the act provides for a claim to be made on capital expenditure incurred on qualifying land remediation expenditure.  To make a claim, a company must elect to treat any qualifying capital expenditure as an allowable deduction in computing the profits of the company, in the year the expenditure is incurred.  The time limit restriction is that the election must be made within two years of the year end in which the expenditure was incurred.
• Corporation Tax Act 2009 Part 13: s.1129 introduces a potential exception to the general time limits for making an RDEC claim on costs incurred on connected externally provided workers. The reason being that there is a requirement in 1129(4)(b) for a staff provision payment to be made within 12 months of the year end in which the staff provision payment is brought into account in determining the company’s profit or loss. This additional condition means that unless the payment was made by default then it won’t be possible to amend a claim 2 years after the year end by making the payment retrospectively.

If a company wishes to make a claim for a period that is outside the specific time limits for amending a claim via a company tax return but within the general 4 year time limit, then the procedure is to make an overpayment relief claim in accordance with FA1998 Sch.18 Part 6. S.51 contains the provisions for claiming a repayment of overpaid tax and s.51B(1) reiterates the general 4-year time limit that applies. A claim for overpayment relief must be made in writing to an officer of HMRC rather than through an amended tax return if the time limits for amending the relevant company tax return are out of time.

Key messages

The timing and procedures for making retrospective claims for tax incentives are highly prescriptive and nuanced making it easy to fall foul of the requirements for making a successful claim. Careful attention is therefore required to both the nature and timing of reliefs and allowances.  Some key messages are as follows:

• FYAs on plant and machinery costs must be claimed in the year the expenditure is incurred.  This means careful planning and annual CA valuations will be required on multi-year new build developments, subject of course to any rules relating to the commencement of a UK property business or trade.
• Except for FYAs, there is no time limit that will bar a company from making a claim for capital allowances relating to expenditure on buildings they still own. The general time limits for capital allowances will therefore apply, meaning you can make a claim for historic expenditure in either, or both, of the two prior accounting periods irrespective of when that expenditure was incurred.
• R&D expenditure credits must be claimed in the year the expenditure becomes an allowable deduction in computing the profits of the trade. It is therefore important to consider the accounting treatment of any qualifying costs as that will ultimately determine when a company is entitled to claim and what time limits therefore apply.  For example, contracted-out R&D undertaken as part of a project is likely to be capitalised to WIP meaning the claim on that expenditure, and the time limits that apply, is deferred from the date of expenditure to the date the expenditure is expensed as a cost of sales in the P&L.
• There are no specific time limits that apply to LRR claims, other than for claims that relate to capital expenditure. This means it is possible to make a retrospective claim on any expenditure allowed as a deduction in calculating the profits of the company in any of the company’s prior four accounting periods.

How we can help

The above is just a summary of some of the key issues that need to be considered when making retrospective claims. There are also rules regarding notifications for making R&D claims which will also need to be considered but are beyond the scope of this insight.

If you believe you have overpaid tax due to previously unclaimed or underclaimed tax relief then we can help with the identification of the correct claim amounts and can guide you through the options and process for making a retrospective claim.

Author: Ben de Waal