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Coronavirus: Tax and deferral of rent charges

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The coronavirus pandemic has resulted in an unprecedented cashflow shock for many businesses and central government has moved to provide support in several areas.  

However, as the threat to the viability of businesses has become increasingly apparent private organisations, e.g. landlords and banks, have started to provide assistance such as rent free periods, rent deferrals and waivers of banking charges. Such measures will have an affect on the profitability of targeted businesses and so the question arises, what will be the tax impact of these measures?

What impact will these measures have?

For various reasons, the short term tax impact of these measures will often be limited, with no particular compliance issues arising from them.  For example, if during a business’ accounting period charges or rents not accrued in previous accounting periods are waived, no tax deduction will have been taken in respect of the sums waived and any current period accrual in the business’ accounting system will simply be reversed, with the accounts and tax returns being prepared in the usual way.  An exception to this treatment will be where previous accounting periods included an accrual in respect of the expense subsequently waived (e.g. where rent is normally paid in arrears).  In such cases, it will be necessary to check whether or not the accrued expense resulted in a tax deduction in the earlier period, as if so, the waived sum will have to be shown as a receipt in the later period to effectively reverse the deduction.  Of course, another reason for the tax impact being limited in the short term would be if the trading activity in the current period results in a taxable loss regardless of any waiver, in which case the effect of reversing earlier deductions will not result in immediate tax charges.

In some cases, where a deferral rather than a waiver is allowed, the tax position may be completely unaffected.  Subject to specific statutory modifications, the profit calculations underlying tax computations are prepared using the normal principles of commercial accounting.  Where a liability is attributable to a period but payment of that liability is deferred to a later period, the accounting principles of accrual and prudence will often require the deferred expense to be reflected in the earlier period and this would quite properly give rise to a tax deduction in that earlier period, notwithstanding the deferral.  Of course, in such a case, later payment of the deferred sum will not give rise to a further deduction.

A final point to remember is that where the tax treatment of deferrals and waivers gives rise to additional cashflow pressure on a business, the central government measures mentioned above, including deferral of tax payments, can be of assistance.

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