The COVID-19 pandemic brought about unprecedented challenges for businesses worldwide. In response, governments implemented various relief measures to support struggling companies and their employees. One such measure was the furlough scheme, designed to provide financial assistance to companies and their employees during lockdowns and economic uncertainty. As businesses received financial aid through the furlough scheme, questions arose about whether they were subject to corporation tax on these funds. In this article, we will explore the intricacies of corporation tax and its applicability to furlough money.
Understanding the Furlough Scheme
The furlough scheme, formally known as the Coronavirus Job Retention Scheme (CJRS), was introduced by the UK government in March 2020 to help businesses retain their employees during the pandemic. Under this scheme, eligible employers could claim a portion of their employees’ wages, up to 80%, to a maximum of £2,500 per month, while employees were placed on temporary leave or furlough. The goal was to prevent mass layoffs and support businesses during the economic downturn caused by COVID-19.
The Furlough Money Dilemma
Many companies received financial assistance through the CJRS to keep their workforce intact during the pandemic. However, the question of whether these funds are subject to corporation tax remains a point of confusion for business owners and tax professionals. To answer this question, it’s crucial to delve into the mechanics of corporation tax.
Understanding Corporation Tax
Corporation tax is a tax levied on the profits of limited companies in the United Kingdom. The tax rate varies, and as of my last knowledge update in September 2021, it was set at 19% for the financial year 2021-22. Companies are required to calculate their taxable profits and then apply the relevant tax rate to determine the amount of corporation tax they owe to HM Revenue and Customs (HMRC).
The key issue surrounding furlough money and corporation tax is whether these funds should be considered as taxable profits.
Tax Treatment of Furlough Money
The general consensus among tax experts and HMRC guidelines is that furlough money received by companies under the CJRS is considered taxable income. However, this income is subject to corporation tax only if it meets certain conditions and becomes part of the company’s taxable profits.
Business Expenses If a company used the furlough money to cover legitimate business expenses, such as employee wages, it would not be subject to corporation tax. The funds are essentially a pass-through mechanism to help companies maintain their payroll obligations.
Profit Element
Any portion of the furlough money that results in an increase in the company’s taxable profits will be subject to corporation tax. For example, if a company claimed more than the actual wages it paid to furloughed employees, the excess amount could be subject to tax.
Impact on Losses: Companies that were in a loss-making position before the pandemic or during it may not be subject to corporation tax on the furlough money. In such cases, the losses may be carried forward and offset against future profits.
Subsidized or Non-Subsidized Employees:
Companies should distinguish between employees who were furloughed and those who were not. Employees who received financial support through the CJRS should not be considered as generating taxable profits.
It is crucial for companies to maintain accurate records of their use of furlough money and ensure that any claims made under the CJRS are in compliance with HMRC regulations.
Additional Considerations
While furlough money itself may or may not be subject to corporation tax, there are other financial implications that companies need to consider:
Employer National Insurance Contributions (NICs): Companies are still liable for employer NICs on the wages of furloughed employees. These contributions are calculated based on the furloughed employees’ earnings and should be paid to HMRC.
Deferred Tax Liabilities If companies choose to defer payment of their corporation tax liabilities, they should be aware that these deferred tax liabilities will eventually need to be settled with HMRC.
Conclusion
In conclusion, companies that received financial assistance through the furlough scheme (CJRS) are generally not subject to corporation tax on the furlough money itself, provided it is used to cover legitimate business expenses such as employee wages. However, any portion of the furlough money that contributes to an increase in taxable profits may be subject to corporation tax.
It is crucial for businesses to maintain accurate records of their use of furlough money and ensure compliance with HMRC regulations. Additionally, companies should be aware of other financial implications, such as employer NICs and deferred tax liabilities, to manage their finances effectively during and after the pandemic.
As tax regulations are subject to change, it is advisable for businesses to consult with tax professionals in the southall or HMRC for the most up-to-date guidance on the taxation of furlough money and related matters. Staying informed and compliant with tax regulations is essential for the financial health and sustainability of businesses in these challenging times.
