Even the most prepared amongst us will never have foreseen the end to the 2019/20 tax year. It was a dramatic and worrying time.
The Economy shrunk a record 20.4% in April 2020 and 19.1% in the three months to May 2020, all because of the coronavirus.
Coronavirus has had a massive impact on businesses open down the country, and despite the easing of lockdown returning to the old normal is proving difficult for many businesses.
Tax management and planning will play an important role over the next 12 months and helping your business to survive these uncertain times.
It would be wise to start reviewing whether the tax planning strategies of your business are still relevant for 2020/21. Carry on reading the blog below to find out all you need to know.
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What deadlines are there?
The first thing you should be considering is weather your business is remaining compliant, and has been and will be meeting its deadlines, paying any taxes and liabilities due.
Aim to file everything on time, regardless if it’s VAT, PAYE, corporation tax, or anything else you are liable for.
However, many businesses may be experiencing cash flow issues following the lockdown, HMRC know this. Contact them as soon as possible and see if you can set up a time to pay arrangement. this will give you some time to get the extra cash together.
While you still may accrue interest, by agreeing a plan with HMRC rather than not paying and ignoring it entirely, you will avoid late payment penalties that often result in large sums being added to tax bills.
VAT Registered businesses may have taken advantage of the automatic deferral of payments between 20 March and 30 June 2020.
Any of these deferred liabilities do not need to be paid in full until 31st of March 2021. However, after 30 June 2020 VAT liability should be paid in full unless you have come to an arrangement with HMRC.
Those with furloughed staff, ensure that PAYE and National Insurance contributions on these claims are paid, otherwise you may have to find the money to repay it to HMRC.
Loss Relief and Reduced Taxable Profits
When lockdown was imposed, it was almost guaranteed that most businesses would experience a drop in trading profits.
This also means a lower Corporation tax bill, and this could help you manage cash flow better.
Companies pay their Corporation tax based on their taxable profits for the accounting period, with payment then due 9 months and one day after the accounting period ends.
As such, the year end of a company can make a difference the size of its next Corporation tax bill, depending on how the state falls in comparison with the lockdown.
Companies with a year end of 31 March 2020 will feel little or no impact in its trading figures, and as such may find itself having to pay a sizeable Corporation tax bill due by 1 January 2021.
However, this may be a struggle as those nine months in between will have been a struggle with the lockdown, making it hard for the company to pay their liability.
Trading losses can be carried back to the previous accounting year, and they can be used to obtain a refund on any Corporation tax paid for the previous year. Although, the company will have to wait almost a year to access this cash refund.
The company could consider bringing forward the advantage of this loss by simply extending its year end. Companies can extend that year end by up to six months, creating a single 18 month period.
If this is done the new company yearend will be 30 September 2020, meaning the impact of lockdown will be minimised, and then he losses generated during the six months are now taken into the trading profits of the 12 months to 31 March 2020. This will now lower the Corporation tax bill due on 1 January 2021.
What has happened to the benefit-in-kind?
Many businesses may find that benefit in kind charges could be now too high for 2019/20 and 2020/21 due to lockdown and the lack of trading opportunities.
I likely case this can happen is where you and your employees ceased using company cars and fuel, and they weren’t available for use during the lockdown.
For 2019/20 this could mean too much PAYE was deducted at source.
Anyone affected could find that they have a tax refund to apply for, as P11Ds are now filed for this tax year.
Company cars are the most likely benefits in kind to be affected, but these rules will also apply to any company asset, as long as it is usually available to employees but not during lockdown.
Pure electric cars and certain and plug in hybrid cars will now be a tax free benefit-in-kind for 2021, meaning a change to company car fleet can be beneficial.
As well as being very tax efficient, purchasing these cars can also qualify for first year capital allowances.
You can then deduct the full cost of the car from your business is taxable profits before calculating any Corporation tax due.
What about VAT?
Well from 15 July 2020 to 12 January 2021, VAT in the hospitality and tourism sector is being cut from the standard rate of 20% of 5%.
This change in the rate of VAT aims to stimulate consumer demand in these sectors, rather than reducing the tax burden for the businesses. It also does assume that the full reduction in VAT is passed onto the consumer through these lower prices.
Doing this is mandatory and cash flow can still be improved when not reflecting the full reduction in sales price and retaining some of it within the business.
In this sector additional sort is required. It’s important for businesses in this sector to consider whether VAT liabilities could in fact be reduced by considering how they account for VAT.
Businesses that use the VAT flat rate scheme will probably need professional advice to warehouse whether the scheme is still worthwhile. It’s not very straight forward – when you’ve left the scheme you can’t re-join it for 12 months and the VAT reduction has only been put in place for six months.
What is going to happen moving forward?
Over the next few months, comprehensive tax changes across the board are almost a given. The UK’s debt is currently bigger than the economy for the first time since 1963, and that will need to change.
We are expecting to see a major budget announced in the autumn, and there have not been many hints what we should expect, but businesses should be prepared for any situation.
There were previously announced tax changes which were put on hold when they let pandemic hit we will likely see these revisited.
Impacted businesses need to make sure they’re up to date on reverse charge VAT in the construction industry from 1 March 2021 and changes to off-payroll working rules in the private sector, which are in effect from 6 April 2021.
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