Covid-19 – practical tax considerations for owner-managed businesses
Covid-19 and the resulting economic downturn is having a profound impact on business operations and decision making. Many businesses, including the owner managed business (OMB) sector will be deciding to put some plans on hold, considering options to ease cash flow, taking stock generally and looking at ways to survive the economic impact of this crisis.
Conversations around pay and benefits
As an employer you may be asking staff and directors to take temporary pay cuts or give up or repay bonuses (or may be choosing to forego salary yourself in order to keep the business afloat). Many businesses are taking decisions on pay without being aware of the unexpected tax consequences. Due to complex tax rules (which are different for directors and employees), the business could still be liable to account for PAYE income tax and NICs based on full salary or bonus. This could be the case unless formal action is taken to record an agreement to reduce or waive salary or bonuses for a period before the employee or director is treated as being entitled to it for tax purposes. Repaying bonuses or salary will not change the tax position.
The Chartered Institute of Tax has asked the Government to relax the strict tax rules on remuneration waivers and repayments during the Covid-19 crisis but it is not known whether this will happen. Advice should be taken in all circumstances.
Employee share plans
Employees are key to the success of any business. At a time when cash flow may be tight and the current environment is likely to adversely impact the ability of a business to offer pay rises or bonuses (indeed, there may be pay cuts), now may be a good time to consider introducing a tax-efficient employee share plan and reward staff with rights to acquire shares in the company. Such rights could be linked to meeting certain targets (which can be time based, performance-related or exit-based). Further, at a time when share values may have dipped in value, any potential tax leakage on giving shares to employees now (instead of options) may be lower.
Postponement of IR35 changes
The Government has announced the postponement of the extension of the IR35 off-payroll working rules to large and medium-sized private sector businesses until 6 April 2021.
The IR35 rules require that employment taxes be paid by people who provide services to a business through an intermediary, usually a personal service company (a PSC) owned by the individual, if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.
The change to the rules, which was due to take place on 6 April this year, will make large and medium-sized businesses engaging contractors via PSCs liable for determining whether the IR35 rules apply and operate PAYE tax and national insurance contributions accordingly. This is already the position for public sector clients.
The postponement is welcome as it will give businesses engaging contractors via PSCs more time to review their contractor arrangements and develop any necessary policies and procedures to manage risk and employment status determinations. Whilst some OMB business may be treated as 'small' under the proposed changes and thus unaffected by the changes, such business will need to monitor the position ahead of the implementation due next year.
Covid-19 Government measures and announcements
Subject to meeting the relevant eligibility conditions, under the Coronavirus Job Retention Scheme employers are able to claim a grant from HMRC to cover 80% of the wages of their staff who remain on payroll but who are temporarily not working during the Covid-19 outbreak. The scheme will now run until the end of October 2020. It should be remembered that such grant funding will be taxable in the hands of the employer (corporation tax or income tax) and the employer will continue to be able to deduct employment costs in determining taxable profits/losses.
Employees can be reimbursed any reasonable additional costs of having to work from home during the pandemic (such as where their place of work is closed or due to self-isolating), such as business telephone calls or the extra cost of gas and electricity (but not expenses where there is both private and business use such as rent or broadband access). Employers can either pay a fixed rate of up to £6 a week (£26 a month) tax-free or higher amounts provided these are no greater than the additional costs (records will need to be kept if this is the case).
Other positive news is that the Government has recently announced a temporary exemption from income tax and National Insurance contributions (NICs) for certain expenses reimbursed by an employer to an employee. For the exemption to apply, the expenses must be incurred on the purchase of equipment for the "sole purpose" of enabling the employee to work from home due to the pandemic and that if the equipment had been provided directly by the employer to the employee, it would have been exempt from income tax under the employment tax legislation. The measure will apply from 16 March 2020 and cease to have effect at the end of the 2020-21 tax year.
Where an employer provides the equipment directly to the employee for their use then provided there is no significant private use, the provision of the equipment will not be treated as a taxable benefit.
Restructuring the business
If you have been considering simplifying your current group structure or creating a group and separating out different business and/or investment activities (potentially with an exit or family succession planning in mind), then such restructuring can give rise to tax charges (subject to any tax reliefs being available).
If asset and share values have dipped, then now may be a good time to restructure the business operations so as to minimise any tax leakage or tax exposure. Alternatively, setting up a family investment company now can be an efficient way (for inheritance tax purposes) of structuring future investments to bring the next generation into the family business.
If you are temporarily having to stop some business activities, it is important to have a clear intention to restart the activity when conditions improve (for example, recorded in a board minute). If not, any trading losses arising before the cessation of the activities may not be available to use to shelter profits when the activity is recommenced.
Cash flow measures
Defer payment of VAT
VAT payments due to HMRC between 20 March 2020 and 30 June 2020 can be deferred until 31 March 2021 without incurring interest or penalties. This is effectively an interest free loan equal to the VAT due. There is no need to notify HMRC but the VAT return has to be submitted by the usual due date and any direct debit to HMRC should be cancelled to ensure payment is inadvertently processed. Any VAT reclaims and refunds will be made in the normal way by HMRC during this period.
VAT payments due after 30 June 2020 have to be paid as normal. However, given the recent announcement extending the Government's furlough support for another 4 months to October 2020, the Government may choose to extend the VAT deferral periods for another quarter and so it is worth keeping an eye on any updates on this.
Defer VAT invoicing
As a supplier, if you issue a VAT invoice before receiving payment then it will crystallise the obligation to account for the VAT to HMRC whether the customer pays or not. If you issue a demand for payment (but not a VAT invoice) then the VAT is only due when the payment is actually made. You may already do this but businesses that do not should consider doing so, particularly if there is a risk that the customer will not pay up before you are obligated to pay the VAT element to HMRC (and taking into account the VAT deferral mentioned above). You may also want to consider changing the payment date/timeframe so that payment is collected at the start of a VAT quarter allowing the business to retain the VAT for the maximum period of time before paying it to HMRC.
Claim VAT bad debt relief
If you have accounted for VAT on amounts which a customer has not paid, you should bear in mind the conditions for claiming bad debt relief, which can be claimed for amounts which are unpaid for 6 months provided the debt is written off in the accounts. The claim can be made in the first VAT return due after the conditions are met.
Approach HMRC to agree a "time to pay" arrangement
HMRC has set up a dedicated helpline to support businesses and self-employed people concerned about not being able to pay their tax due to Covid-19.
If the business anticipates that it will not have funds to meet its tax liabilities as a result of the pandemic it can approach HMRC and seek to agree a 'time to pay' arrangement. If HMRC agrees, it will enter into an instalment arrangement based on the specific circumstances and will suspend debt collection proceedings.
HMRC will also look to cancel penalties and interest where the business has experienced administrative difficulties contacting or paying HMRC on time.
For the self–employed, income tax self-assessment payments due on the 31 July 2020 will be deferred until the 31 January 2021.
As yet, there has been no announcement on any corporation tax deferral.
Mitigating tax costs, maintaining tax compliance and avoiding tax traps now will be ever more important in helping to ease cash flow and help OMBs, their staff and their customers weather the Covid-19 storm and ensure the business is in the best possible position to respond and proposer once this crisis eases. Please do get in contact to discuss how we may be able to help.