Business Support

If you are self-employed – this article does not apply to the directors and shareholders of limited companies – there is often a mis-match between the amount you draw from your business and your tax bill.

When times are good profits may be high, but you may have decided to keep your personal drawing from the business to a modest amount. If drawings are lower than profits this would allow you to build up cash reserves in your business. 

Which is why self-employed business owners are frequently confused when their tax bills increase even though their personal drawings from the business have not increased.
Why is this?

The simple answer is that the self-employed are taxed on the profits their businesses generate and not the drawings they take from the business.

Fortunately, the opposite result also applies. When your business is making a loss, but you still need to draw on cash reserves to pay your own bills, you may have no tax to pay even though you are still taking drawings from your business.

Obviously, there is no long-term future in withdrawing funds from your business if you continue to make losses or profits lower than your drawings. This process will eventually exhaust your cash reserves and lead to insolvency.

All businesses have customers, According to HMRC, even they have customers…

Sales are the amount of goods and services that you provide your customers and there are three main features that affect your annual turnover:

1. Number of customers
2. Price
3. Footfall

The first is fairly obvious, the more customers you can acquire, the greater the potential to increase sales.

Increase prices and this may increase turnover, but only if you can do this without affecting the number of customers you can retain.

Footfall is a less well known feature. It is the number of times you can encourage customers to return and buy more from you in a particular trading period.

Of the three, maintaining and increasing footfall is probably the most effective way to increase sales. This should be one of your principle strategies for maintaining and increasing sales as you have already met the costs of acquiring the customer (advertising etc). Encouraging a customer to buy from you once a month instead of once a quarter has the potential to increase sales from that customer by an average of 300%.

During the present COVID disruption this may not be possible, but as we emerge from lock-down this may be a strategy you could consider.

The government has announced that the scope of the Self-employment Income Support Scheme (SEISS) will be extended to help new parents. The newly announced measures are designed to help new parents whose trading profits dipped in 2018-19 because they took time out to have children.

The change in the scheme will allow parents, including mothers, fathers and those who have adopted, who took time out of trading to care for their children within the first 12 months of birth of the child or within 12 months of an adoption placement, to use either their 2017-18 or both their 2016-17 and 2017-18 Self-Assessment returns as the basis for their eligibility for the SEISS.

Further details of the changes are expected to be published by the beginning of July. Claimants will also need to meet the other standard eligibility criteria for support under the SEISS.

The SEISS was recently extended by a further three-month period to 31 August 2020 with applications for the quarter due to open in August. The maximum grant for the three-months will be £6,570 (Previous quarter £7,500) paid in a single instalment. Claims for the first quarter (March-May 2020) will close on 13 July 2020, it has not yet been reported if this deadline will be extended for new parents.

The option to defer your VAT payments ends on 30 June 2020. The Coronavirus VAT payment holiday gave businesses the chance to defer the payment of any VAT liabilities between 20 March 2020 and 30 June 2020.

Businesses that took advantage of deferring their VAT payments should consider the following:

• Re-establish any cancelled direct debits in enough time for HMRC to take VAT payments due from 1 July onwards.
• Going forward, ensure that VAT returns are submitted as normal.
• Pay the VAT in full on any payments due after 30 June 2020.

It is important to note that where the payment of VAT has been deferred, any VAT due must be paid by 31 March 2021. Businesses can also make additional payments with subsequent returns. No interest or penalties will accrue on deferred payments that are paid by the new due date.

There is no application process required to request this deferral as permission is automatic and all VAT-registered UK businesses are eligible. The choice to defer VAT payments was optional and businesses could still choose to pay any VAT due as normal. The deferral did not cover payments for VAT MOSS or import VAT. HMRC has continued to process VAT reclaims and refunds as normal during this time.

The HM Government guidance titled Working safely during COVID-19 in shops and branches has been updated. The updates relate to managing product handling and returns, the test and trace service, safer travel and managing security risks.

The guidance is relevant to all retail stores, bank branches, post offices and other open money businesses. This document sets out guidance on how to work safely and has been prepared by the Department for Business, Energy and Industrial Strategy (BEIS). It gives practical considerations of how this can be applied in the workplace.

The guidance includes advice on the following main areas:

• Thinking about risk
• Who should go to work
• Social distancing at work
• Managing your customers
• Cleaning the workplace
• Personal protective equipment (PPE) and face coverings
• Workforce management
• Inbound and outbound goods

The guidance applies to those outlets that are currently open and will help those that are currently closed consider how to adapt their operations when they are allowed to open.

Employers remain legally responsible to protect workers and others from risk to their health and safety and must keep risk assessments for COVID-19 updated as the outbreak risks and government guidance continue to evolve.

Public health is devolved in Northern Ireland, Scotland and Wales so this guidance should be considered in those parts of the UK alongside local public health and safety requirements and legislation.

Last week, we considered one of the issues that employers will likely need to consider in the coming weeks and months: productivity.

This week we have listed other factors that you may need to consider if you presently have staff furloughed under the Coronavirus Job Retention Scheme (CJRS).

From 1 July, it is possible for furloughed staff to return to part-time work. From 1 August, employers will need to finance an increasing proportion of the CJRS costs for time not worked.

Aside from these considerations, employers will need to dust of their business forecasts and figure out what staffing levels they will need as the furlough scheme unwinds and is withdrawn 31 October 2020.

There will be hard choices for employers who may have invested heavily in building their team. Who to retain, who to let go?

Some of the points you may need to consider are:

• What level of sales activity is expected?
• Based on this estimate, what level of staffing is required?
• Which members of your team have the necessary skills?
• Are staff able to accept a gradual return to work; a period of part-time working to allow business activity to re-establish?
• What are the financial consequences of laying-off staff, redundancy pay for example?
• What effect will your decisions have on profitability, cash-flow and funding?

In should be pointed out that every business will need to make decisions based on its own unique circumstances and planning is no longer a luxury that we cannot afford. Please call if you need help preparing and interpreting the necessary forecasts.

While our businesses have been able to maintain or increase profits there has been an unwritten acceptance that we will pay for current taxes out of future cash resources.

For example, if you are self-employed, payments on account for self-assessment taxes on current income are made two months before the end of each tax year and four months after the end of each tax year. And if payments on account are not enough to cover what is due, any balance owing to HMRC is payable some months after the end of the tax year.

Companies are required to pay tax nine months and one day after accounts and tax returns are drawn up.

There is a flaw in the unspoken assumption that funds will always be available to meet future tax payments. It arises if profits and cash resources are falling.

Unfortunately, COVID-19 disruption is creating these conditions for many UK businesses.

The present pressures on cash-flow preclude saving for future tax, but there will come a time when HMRC will come looking for their money.

HMRC have agreed to allow more time to pay and we may be able to help reduce tax due if there are losses available or if payments on account can be reduced.

If this is likely to be a problem for you in the coming months please contact us so we can help you consider your options. 

We reported late last month on the extension of the Coronavirus Job Retention Scheme to 31 October 2020 following the announcement by the Chancellor, Rishi Sunak. At the time, the Chancellor confirmed that further guidance on the workings of the amended scheme, which allows for flexible furloughing from 1 July, would be published on 12 June. This revised guidance has now been published.

The following updated guidance should be noted:

• If you still need to make a claim under the existing Coronavirus Job Retention Scheme (which comes to an end on 30 June) this will need to be done by the 31 July at the latest.
• Claims for the revised Coronavirus Job Retention Scheme will start with the introduction of flexible furloughing from 1 July. The first time you will be able to make claims for days in July will be 1 July, you cannot claim for periods in July before this point.
• From 1 July, employers can bring back employees to work part-time, for any amount of time and any shift pattern. Employers will have to pay employees for the hours they work but can still use the scheme to cover any normal hours your employees are furloughed.
• The revised scheme requires employers with employees who are flexibly furloughed to have agreed the furlough arrangement with the employee (or reached a collective agreement with a trade union) and to keep a written agreement of this fact.
• Employees can stay on full furlough under the revised scheme. The government will continue to pay 80% of costs for normal hours not worked up to the £2,500 cap during the month of July.
• Government support for the scheme will begin to taper from 1 August when employers will be expected to start contributing towards furloughed employees wage costs by paying employers’ NIC and pension costs for any normal hours an employee does not work. There will be further reductions in government support to 70% of capped wages in September and to 60% in October before the scheme is closed on 31 October.
• The government had previously announced that employees who haven’t had a qualifying 3-week period of furlough by 30 June would not be able to benefit from the revised scheme. However, there will an exemption for employees currently on statutory parental leave. The 3-week period for furlough is no longer a requirement of the revised scheme.  
• Employers will need to report both the hours worked and the usual hours that an employee would be expected to work in a claim period.

In the not to distant past business managers were prone to “empire building”. Increasing head count was more important than increasing productivity.

This bygone-age tendency has long slipped away but productivity is likely to remain as a leading consideration when businesses organise their use of human assets to run their businesses in the post-COVID economy.

Productivity should be one of the key considerations as we emerge from lock-down. Employers may need to make difficult choices if their ability to trade has been affected by COVID restrictions.

Who to retain, who to let go…?

Efficiency is a difficult quality to measure. Much depends on the entrepreneur’s ability to manage and release productive endeavour as well as the personal bent of individual employees to work effectively or otherwise.

When business owners start the process, who to retain after furlough ends on 31 October or who to lay-off, they will need to take a range of factors into account:

• At what level will demand for products or services settle?
• Based on this, what infrastructure is required to sustain this level of activity?
• Can the new reality be financed? Is further investment required?

A number of businesses may close their doors. Those linked to the aviation or hospitality sectors will be severely challenged.

Those businesses that can see a light at the end of the tunnel will need to stay sharp. Planning to achieve this cannot be underestimated. During the coming summer business owners need to engage with their advisers and figure out what to do next.

One ingredient that should be considered as part of this process is what choices can be made to create and capitalise on productivity gains.

Dictionary definitions of the word profit tend to include such synonyms as “advantage”, “financial gain” and “financial advantage”.

Longer explanations might say: the difference between the amount earned and the amount spent in buying, operating, or producing something. 

All true to some degree.

A wider definition might include that profits facilitate economic growth if they are used to invest in the businesses that create them.

An issue we may face as we emerge from lock-down is the urge to hoard cash resources. There is nothing quite like the challenge that COVID-19 has created to reawaken the primal instinct to keep wool on your back.

Saving funds in response to these challenges would seem to work against the likelihood that we will recover, instead, they assume the opposite that we will not recover.

Conversely, profits reinvested will strengthen our ability to trade. And in this sense, making profits takes on a completely different role than simply swelling bank deposit accounts.

Initially, as we emerge from lock-down, planning for profits will need to include – for many businesses – the funding of losses where these are necessary to rebuild and re-establish market share. 

Regaining profitability is a worthwhile planning objective, Obviously, unless this can be achieved a sustainable future is unlikely. What you do with those profits should also be a key ingredient in your planning process.