Business Support

There is a temptation to treat expenditure as a cost. The Cambridge Online dictionary defines cost as:

“The amount of money needed to buy, do, or make something”

What this definition does not do is to expose the difference between a cost that deals with a current need – to replace a printer cartridge for example – or to provide information or resources to deliver more goods and resources in the future or to improve the quality or range of goods and services that you sell.

The “current need” costs are costs. Those that fall into the latter category are better defined as investments.

There is a tendency to treat costs as something to avoid, especially, as now, when sales are low or non-existent. And this may be a sensible precaution to protect cash-flow at this time. But this process needs to be reconsidered when the brakes start to come off, when lock-down is eased, and when business activity starts to pick-up.

A better classification, when you consider expenditure options, is to favour investments.

For example, you may have computer hardware that is constantly falling over and hindering your efforts to resume trade. Clearly, replacing this kit is an investment that will support your efforts in the future; the expenditure required is, therefore, an investment.

Alternatively, you may have a delivery vehicle that is still road-worthy, but you would like to have a new piece of kit on the road. This expenditure would not add to your resources and allow you to increase sales or reduce other costs, it would, if you like, be a new toy. If so, this expenditure would be a cost to your business.

Costs are necessary but should be minimised. Investments add value to your business plans and should be maximised. How to plan for both categories is a key part of your budgeting process.

As we have written about previously, the Coronavirus Job Retention Scheme (CJRS) provides significant government support to allow employers to furlough employees and apply for a grant that covers 80% of their usual monthly wage costs, up to £2,500 a month – plus the associated Employer National Insurance contributions and pension contributions. The scheme is available from 1 March 2020 for 3 months but will be extended if necessary.

The government guidance includes the following notes:

• Shielding Employees – Employers can claim for furloughed employees who are shielding in line with public health guidance (or need to stay home with someone who is shielding). This includes if your employee is defined as extremely vulnerable. For example, suffering from a severe respiratory condition or with a high risk pregnancy.
• Employees with caring responsibilities – Similarly, employers can claim for furloughed employees who have caring responsibilities resulting from Coronavirus. For example, employees that need to look after children who are home from school.
• If your employee has more than one job – If your employee has more than one employer, they can be furloughed for each job. The government guidance makes it clear that each job is separate, and the cap applies to each employer individually. This means that an employee can be furloughed from one employment but continue to work for another employer and receive their normal wages.

As most self-employed readers will be aware, Self-Assessment tax and NIC payments on account are based on profits earned in the previous tax year and balancing payments due are not payable until the 31 January following the tax year end date.

From a cash flow point of view this is an advantage but only if taxable profits year on year are increasing.

During this unsettled period due to COVID-19 disruption, many self-employed businesses will have lower profits in 2019-20 compared to 2018-19, and even lower numbers in 2020-21 compared with 2019-20.

For these two years – profits arising in 2019-20 and 2020-21 – we recommend the we prepare accounts and submit returns as soon as possible after the end of the tax year. The 2019-20 tax year ended 5 April 2020.

Why do we recommend this?

• If profits have fallen, year on year, we can apply for payments on account (payable January and July each year) to be reduced.
• You will be advised of any balancing tax payments due for the previous tax year – due the following January – well in advance of the payment date, so you have time to save appropriately.

And there is a non-tax advantage to preparing accounts and tax calculations as quickly as is possible after the end of the tax year. If you need to apply for one of the recently announced Coronavirus Business Interruption Loans, your bank may need to see a copy of your most recent accounts. The data will also provide up-to-date information to create a realistic cash flow forecast.

Clients are requested to call as soon as they have updated their accounting records taxable in 2019-20 – for most businesses that will be for the year to 31 March 2020 (or 5 April 2020). 

During periods when demand for your goods and services drop – for example, if your business has been closed down or adversely affected by the recent COVID-19 outbreak – your sales and incoming cash receipts tend to drop at a faster rate than you are able to reduce your outgoings.

Expenses tend to fall into one of two groups:

• Those that tend to vary in direct proportion to your sales: buying raw material or stock for resale, or
• Fixed overheads: rents, rates, wages, and other recurring costs.

Variable costs can be reduced quickly once a downward sales trend is confirmed. Fixed costs can also be reduced but over a longer time period.

During a time when costs overtake income, losses occur. If losses are significant they may exhaust any reserves you have built up in your business. When this happens, you are in danger of becoming insolvent (liabilities exceeding assets).

Consequently, if your business is experiencing a downturn, keeping your accounts up-to-date is of paramount importance. Most accounting software will produce a balance sheet and we can show you how to monitor this report to warn you of approaching insolvency.

Please call if you need help to organise your record keeping and we will provide you with the information you will need. 

HMRC’s guidance on the Coronavirus Job Retention Scheme has recently been updated. HMRC will reimburse 80% of furloughed workers' wage costs, capped at £2,500 per month per employee. The scheme will run for at least 3 months, backdated from 1 March 2020, but will be extended if necessary.

Company directors and other office holders can be furloughed under the scheme. However, only PAYE income – generally salary – can be furloughed, and so the common practice of taking most of directors' earnings as dividends will limit a director's claims to salary only. 

The guidance is clear that where one or more individual directors are furloughed this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned.

Under the scheme no work can be undertaken by furloughed employees who remain technically employed by the company. In many scenarios, especially for sole directors, this would be untenable as all business would have to be technically suspended.

The guidance does make it clear that company directors can do what is reasonably necessary to fulfil the statutory obligations they owe to their company. These actions are not specified but do not include any work undertaken to generate commercial revenue or provide services to or on behalf of their company.

These measures also apply to salaried individuals who are directors of their own Personal Service Company (PSC). Salaried Members of Limited Liability Partnerships (LLPs) are also entitled to be furloughed but should refer to the terms of their LLP agreement in the first instance.

The Coronavirus Job Retention Scheme (CJRS) allows UK employers to access government support to help retain staff that they would otherwise may have considered laying-off, reducing pay / hours or making redundant. If your employee is furloughed, they should not be undertaking any work. This includes providing services or generating revenue.

HMRC has published useful guidance concerning the employees you can claim for. You can only claim for furloughed employees that were on your PAYE payroll on or before 28 February 2020. Employees hired after 28 February 2020 cannot be furloughed and claimed for in accordance with this scheme.

Employees can be subject to any type of employment contract including full-time, part-time, agency, flexible or zero-hour contracts. Foreign nationals are eligible to be furloughed.

To be eligible for the grant, when on furlough, an employee cannot undertake work for, or on behalf, of the organisation. This includes providing services or generating revenue. Employers are free to consider allocating any critical business tasks to staff that are not furloughed. While on furlough, the employee’s wage will be subject to usual Income Tax and other deductions.

Note, that employees who have had their hours reduced, but who are still working, are not eligible for the scheme.

An interesting quirk of the Coronavirus Job Retention Scheme is that furloughed workers are not entitled to the minimum wage. HMRC's guidance categorically states that 'individuals are only entitled to the National Living Wage (NLW)/National Minimum Wage (NMW)/ Apprentices Minimum Wage (AMW) for the hours they are working or treated as working under minimum wage rules.'

This means that workers that earned the minimum wage will end up with less than the hourly minimum wage when they are furloughed. There is also no requirement for their base salaries to be increased to reflect the new minimum wage rates that came into effect on 1 April 2020. These rates would obviously need to be paid if and when the furloughed workers start working again.

However, if time is spent on training whilst furloughed then the relevant Apprenticeship Minimum Wage, National Living Wage or National Minimum Wage must be paid for all relevant hours and the minimum wage increases from 1 April 2020 must also be considered.

If there is a shortfall between the amount paid whilst an employee is on furlough leave and the appropriate minimum wage, the employer will need to cover the difference.

Small-and medium-sized businesses and employers can reclaim Statutory Sick Pay (SSP) paid for sickness absence due to COVID-19. You are eligible for the scheme if your business is UK based, small or medium-sized and employs fewer than 250 employees as of 28 February 2020.

The scheme will cover up to 2 weeks’ SSP per eligible employee, who has been off work because of COVID-19, either because they have Coronavirus or cannot work because they are self-isolating at home.

The Coronavirus Statutory Sick Pay Rebate Scheme will repay employers the current rate of SSP paid for periods of sickness starting on or after 13 March 2020.

The online service to reclaim SSP is not available as yet. HMRC is working to set up the repayment mechanism for employers as soon as possible.

Employers should maintain and hold records of staff absences and payments of SSP for at least 3 years following a claim.

These records include:

• the reason why an employee could not work
• details of each period when an employee could not work, including start and end dates
• details of the SSP qualifying days when an employee could not work
• National Insurance numbers of all employees to whom you have paid SSP

Employees will not be required to provide a GP fit note in order for their employer to make a claim. 

If you are self-employed and qualify for the Self-employment Income Support Scheme you will receive a cash grant from HMRC based on 80% of profits, capped at £2,500 per month. The initial grant will be for the three months, from 1 March through to the end of May 2020, but could be extended for a longer period. The grants are expected to be paid out at the beginning of June.

You can apply if you are a self-employed individual or a member of a partnership and you:

• have submitted your Income Tax Self-Assessment tax return for the tax year 2018-19
• traded in the tax year 2019-20
• are trading when you apply, or would be except for COVID-19
• intend to continue to trade in the tax year 2020-21
• have lost trading/partnership trading profits due to COVID-19

Your self-employed trading profits must also be less than £50,000 and more than half of your income from self-employment. This is determined by at least one of the following conditions being true:

• having trading profits/partnership trading profits in 2018-19 of less than £50,000 and these profits constitute more than half of your total taxable income
• having average trading profits in 2016-17, 2017-18, and 2018-19 of less than £50,000 and these profits constitute more than half of your average taxable income in the same period

There is no need to apply as HMRC will use data on 2018-19 returns already submitted to identify those eligible and will risk assess any late returns filed before the 23 April 2020 deadline in the usual way. If you are eligible, you will be invited to apply.

The government has confirmed that there will be an eviction freeze for commercial tenants who miss rent payments as a result of the Coronavirus crisis. The protection for businesses on commercial leases is one of the measures in the Coronavirus Act 2020.

The measures will stay in place until 30 June 2020. There is an option for the government to extend this deadline if necessary. The protection applies to commercial leases for commercial tenants in England, Wales and Northern Ireland. There are similar measures in place in Scotland extending the notice period from 14 days to 14 weeks.

Many landlords and tenants across the country are already reaching voluntary arrangements regarding rental payments. However, these measures will provide some further assurance to businesses struggling with cashflow due to Coronavirus disruption.

It is important to note that commercial tenants will still be liable for the rent due.