Are your tax planning strategies still relevant in the new world?
Tragically a growing number of businesses are falling victim to the Covid-19 pandemic but tax planning and management could help you weather the storm.
Sadly, none of us could have predicted the global pandemic that would see a rather dramatic end to the 2019/20 tax year.
The economy shrank by a record 20.4% in April 2020 as a result of the Covid-19 outbreak and the national lockdown.
Now we are all adjusting to the ‘new normal’ and establishing what our businesses may look like in three, six, 12 and even 18 months.
Our experts at Jacobs Allen have always exhorted the value of planning ahead and forecasting changes to your business that could impact on your tax liability, and now, more than ever that is key to ensuring your business is fit for the future.
The tax plans you had in place at the end of last year may no longer be relevant to your business in the post lockdown environment, whether that be because your business has soared during the pandemic or taken a major hit as a result.
It is vital that you continue to file your tax returns for VAT, PAYE, construction industry scheme, personal self-assessment or corporation tax on time, even if you are struggling with cash flow.
That way you avoid any penalty charges and are aware of your liabilities. If you are unable to meet those, contact HMRC as soon as possible and see if it is possible to set up a time-to-pay arrangement. You can agree monthly instalments, and although interest will be charged, it will make the payments more manageable and mean you avoid late fees.
If you are running a VAT-registered business, you may have taken advantage of the automatic deferral of VAT payments between 20 March and 30 June 2020. Any liabilities deferred during this period do not need to be cleared in full until 31 March 2021. However, after 30 June 2020, VAT liabilities should be paid in full, unless you have come to an arrangement with HMRC.
It is also worth remembering that you need to pay the associated PAYE and national insurance contributions for any furloughed staff.
Loss relief and reduced taxable profits
Sadly, many businesses will have seen their trading profits drop during the lockdown, and this will lead to a lower tax bill to reflect the lower profits of that period.
This could, however, be used to your advantage and help your business to better manage its cashflow. Companies pay corporation tax based on their taxable profits for the accounting period and payment is due nine months and one day after the accounting period ends. Therefore, a company’s year-end could make a significant difference to the size of its next corporation tax bill depending on how this date falls in comparison with the lockdown period.
If a company year-end was 31 March, they will be faced with a sizeable corporation tax bill due by 1 January 2021 – nine months and one day after year-end.
This could be a struggle if the company continues to experience a sizeable drop in trading over coming months, and although it can be reclaimed if there are trading losses at the next year-end, it does mean a year’s wait for the cash.
Instead, a company can move their year-end date forward by as much as six months to create an 18-month trading period, which would incorporate the initial profitable period plus the lockdown losses, therefore reducing the corporation tax bill immediately.
By holding onto the cash that would have been paid, a company can ensure other demands are met and give themselves more time to rebuild.
Was your business mothballed during lockdown? Did that mean you require the employees to cease the use of company cars and fuel? Are you aware this could impact their tax codes?
If you offer benefit-in-kind incentives, and those altered during lockdown, it could be that your employee’s tax codes will need readjusting for both 2019/20 and 2020/21.
It is possible the codes were too high and too much PAYE was deducted at source, and with the P11Ds now filed for this tax year, anyone affected could be eligible for a tax refund.
Although company cars are the most likely benefit-in-kind to be affected, this will also apply to any company asset normally made available for use by an employee which is subject to a benefit-in-kind and was not available during lockdown.
If you let our team of chartered accountants and chartered tax advisors know how long the cars were unavailable for, we can help to ensure the 2020/21 PAYE tax codes are correct so that moving forward the right amount of PAYE is deducted at source.
While you are looking at the benefits-in-kind you offer, it may be worth thinking about how you can take greater advantage of this tax incentive.
For instance, new rules mean that pure electric cars and certain plug-in hybrid cars are a tax-free benefit-in-kind for 2020/21, so it could be worth considering upgrading your fleet.
In addition, the purchase of these cars can also qualify for first-year capital allowances. This means you can deduct the full cost of the car from your business’s taxable profits before calculating any corporation tax due.
VAT in the hospitality and tourism sectors has been slashed from 20% to 5% in a move designed by Chancellor Rishi Sunak to stimulate consumer demand.
There is an assumption that businesses will lower prices to reflect the savings on VAT. However, it is not mandatory to pass on the savings and cashflow might be improved by not reflecting the full reduction in the sales price and retaining some of it within the business.
For some businesses in these sectors, additional thought will need to be given as to whether their VAT liabilities could in fact be reduced by considering how they account for their VAT. Those that use the VAT flat-rate scheme, for example, may now need professional advice to work out whether the scheme is still worthwhile. This is far from straightforward as once you have left the scheme you cannot rejoin it for 12 months and the VAT reduction has only been put in place for six months.
Speak to our experts and let us explain how this could work for you.
Looking to the future
The Autumn 2020 budget is expected to bring about comprehensive tax changes in a bid to address the fact the UK’s debt is larger than the economy for the first time since 1963.
We have had few hints as to what these might be but it is clear from the Government’s response to the ongoing coronavirus situation that anything could be possible.
There are, however, previously announced tax changes which were put on hold when the pandemic hit. For instance, certain businesses will need to make sure they are up to speed on reverse charge VAT in the construction industry from 1 March 2021 and changes to off-payroll working rules in the private sector, which will take effect from 6 April 2021.