Preparing annual accounts – corporation tax considerations

08 July 2020

With most housing associations in the midst of annual statutory audits, it’s a good time to have a corporation tax ‘spring clean’. Our tax advisers RSM outline some useful considerations.

Annual audits usually involve the preparation of draft corporation tax computations for non-charitable group entities (and sometimes for charitable housing associations themselves) to support the corporation tax and corporate gift aid numbers and disclosures in the financial statements.

In the rush to get the accounts finalised, corporation tax considerations might not be high on the agenda. However, rather than simply replicating what has been done in prior years, there is merit in stepping back and thinking about whether things could and should be done differently.

Inter-company recharges

We continue to see instances where charitable housing associations are charging a mark-up on management services provided to their commercial subsidiaries. This could be considered by HM Revenue & Customs (HMRC) to represent a non-charitable trading activity, in which case the resultant surplus is likely to be subject to corporation tax.

It’s therefore important that charitable housing associations recharge their costs to commercial subsidiaries on a cost-sharing basis. If any charitable housing associations have charged a mark-up on their provision of management services to commercial subsidiaries during the year ended 31 March 2020, consideration should be given to revising the accounts and removing the profit element if possible.

Corporation tax on Feed-in-Tariffs

Feed-in-Tariffs received by charitable housing associations are chargeable to corporation tax as ‘miscellaneous income’. Some charitable housing associations have been paying corporation tax on their Feed-in-Tariffs for many years, without much of a second thought.

It should, however, be possible for most of those associations to set interest costs incurred in prior periods against their ‘miscellaneous income’, reducing it to nil. This might, therefore, mean that it is no longer necessary for charitable housing associations that are in receipt of Feed–in-Tariff income to recognise a liability to corporation tax on that income in their financial statements.

Mitigating profits in subsidiary companies

Traditionally, commercial subsidiaries within social housing groups have eliminated their taxable profits by making donations to a charitable group entity. However, this leaves the commercial subsidiaries with little in the way of working capital.

In many cases, there will be an alternative. Most commercial subsidiaries will be able to eliminate their taxable profits by accessing net interest costs arising in the social housing group as a whole. This would enable them to retain their profits ‘tax free’, thereby enhancing their working capital and increasing the value of their balance sheet.

Requests for corporation tax returns for charities

Charitable housing associations are generally only required to file corporation tax returns if they are in receipt of taxable income, or if they are specifically requested to do so by HMRC. Such requests should be expected every three to five years.

However, we are aware of instances where HMRC has requested charitable housing associations to file corporation tax returns annually, even though the association has no taxable income to report. Often, this is because the association has reported taxable income in the past, but HMRC has not updated its systems to reflect the fact that the source of the taxable income has ceased.

Charitable housing associations that have received a notice to deliver a corporation tax return for the year ended 31 March 2020, and have filed returns in previous periods despite having no taxable income to report, should consider contacting HMRC and asking them to withdraw the notice. This could save unnecessary professional fees and administrative costs. The worst they can do is say “no”.