Identifying clients in need of help

Most of us fire-fight on a daily basis. We face distractions from multiple directions and basically have no time to surface from that activity to see what else may require our attention.

Any plans that we had for our day can be dashed by new emergencies leaving us frustrated by lack of progress.

In the face of these realities we still need to make time for clients that will need our help.

One group that will be needy in the coming months are businesses that have staff on the furlough scheme (CJRS). From 1 August, until the scheme is closed 31 October, they may have to make critical decisions about staffing levels and for some whether there is a future for their business.

Which is why identifying those clients and offering support in the coming weeks will be appreciated.

It is doubtful that any person reading this post will have lived long enough to have witnessed disruption to business activity at the present scale. Unemployment will probably exceed the peak of the 1980’s and the full extent of the coming downturn may even exceed the excesses of the great depression of the 1930’s.

This is a key moment. Any support that we can offer clients in the coming weeks will shape our own prospects. Identify the clients you feel may be at risk, call them, and help them make the changes needed to survive these challenging times.

Depreciation

Literally, the word depreciation means a reduction in the value of an asset over time. It recognises the fact that if you buy assets for your business – cars, plant, computers etc – as time marches on the value of those assets will decrease.

In double entry bookkeeping terms, the value of an asset is reduced by the amount depreciated and charged against profits, like an expense.

Another way of looking at depreciation is that it accumulates an amount of profits to replace the asset when it eventually ceases to function. This is why accountants need to determine the useful life of an asset as this quantifies the annual rate of depreciation to charge against profits. A useful life of 10 years would require a rate of 10%, 4 years 25%.

Interestingly, HMRC will not accept depreciation as a valid deduction against your profits when working out how much tax you should pay. They insist that it is written back.

In its place, HMRC allow a deduction called a capital allowance. These range from 2% to 100% of the cost of qualifying assets purchased.

This substitution of depreciation with a capital allowance does present a problem. If you depreciate a plant by 10% a year, but in the first year HMRC allow you to write off the total cost, when you come to dispose of the asset any proceeds would possibly create a tax charge. This would happen because the full cost had been allowed as a deduction when the assets was purchased.

It is worth keeping a record of your business assets to compare the original cost with current valuations (what the assets could be expected to fetch if sold second-hand), and comparing these figures with the written down values in your accounts and the tax written down values as far as HMRC are concerned.

In this way you can see how decisions to replace assets will affect your profits and tax payments.

What are debits and credits?

You may have come across the terms debit and credit and perhaps wondered exactly what do they mean?

Certainly, if you are a bookkeeper or accountant you will or should understand their significance.

The first book on the subject was written by Italian mathematicians in 1494.

Essentially, double entry means that every transaction that can be measured in monetary terms has two effects. For example, if you buy stationery for £25 you incur a stationery cost and reduce your cash in hand. In bookkeeping parlance, stationery costs are debited with £25, cash in hand is credited with £25.

Readers will appreciate that if all transactions can be classified in this way then the total of all debits must equal the total of all credits.

A Balance Sheet is proof that this is the case – total assets (debits) must equal liabilities plus business capital (credits).

So far so good, but why is this important?

Double entry was a useful tool when account’s ledgers were handwritten as it provided proof that all entries made had been considered from a debits and credits perspective. 

In some respects, accounting software takes care of the double entry for you. In the above example when you post a cash payment of £25 you will tell the software it is for stationery and when you click enter, the software will make the underlying double entries for you.

Which is unfortunate. Using account’s software does not require that you understand the debits/credits logic, but if you do understand the logic it is a priceless tool to appreciate the meaning and construction of the accounting reports produced.

Shielding measures to be relaxed in England from 1 August 2020

From 1 August 2020 onwards, it is intended that the shielding programme will be “paused” in England so clinically extremely vulnerable people will no longer be advised to shield. From an employment perspective, this means that, if they cannot work from home, shielding employees can then return to their workplaces, provided they are “COVID-19 Secure”, i.e. they comply with the latest government guidance. Employers should ensure that robust measures are put in place to enable shielding employees to safely return to work, and that they comply with their statutory duty to make reasonable adjustments for disabled employees. It is advisable for employers to speak to shielding employees on an individual basis in advance of their return to discuss the health and safety measures that have been put in place and to agree a plan for their return to work. 

The easing of shielding measures is also likely to mean that shielding employees will no longer be entitled to receive statutory sick pay (SSP) from 1 August 2020 if continuing to shield. If so, amending regulations will need to be published to provide that shielding no longer constitutes deemed incapacity for SSP purposes. The exceptions, where the shielding employee would still be entitled to SSP, are where they are self-isolating because they have coronavirus symptoms, are waiting for a coronavirus test result or have tested positive for coronavirus, they live with someone who has symptoms, is waiting for a test result or has tested positive, someone in their support bubble has symptoms, is waiting for a test result or has tested positive or they have been told to self-isolate by NHS Test and Trace because they have been in contact with a person who has coronavirus. However, it is also possible that a shielding employee’s GP may certify them as unfit to return to work by issuing them with a fit note, and, in that case, they would then still be entitled to SSP under the normal SSP incapacity rules. 

If they have been on furlough under the Coronavirus Job Retention Scheme, shielding employees can remain on furlough from 1 August 2020.

The NHS will maintain the Shielded Patient List and, should levels of COVID-19 increase in communities, those at highest risk may be advised to take more restrictive measures in future to keep themselves safe.

Shielding has been extended in Scotland until 31 July 2020 and in Wales until 16 August 2020. In both cases, the Scottish and Welsh governments are keeping next steps under review.
 

Tax Diary July/August 2020

1 July 2020 – Due date for Corporation Tax due for the year ended 30 September 2019.

6 July 2020 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2020 – Pay Class 1A NICs (by the 22 July 2020 if paid electronically).

19 July 2020 – PAYE and NIC deductions due for month ended 5 July 2020. (If you pay your tax electronically the due date is 22 July 2020)

19 July 2020 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2020. 

19 July 2020 – CIS tax deducted for the month ended 5 July 2020 is payable by today.

31 July 2020 – Self-assessment second payment on account for 2019-20 is due. The government has announced measures that will allow many tax payers to delay this payment until January 2021, if they wish. 

1 August 2020 – Due date for Corporation Tax due for the year ended 31 October 2019.

19 August 2020 – PAYE and NIC deductions due for month ended 5 August 2020. (If you pay your tax electronically the due date is 22 August 2020)

19 August 2020 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2020. 

19 August 2020 – CIS tax deducted for the month ended 5 August 2020 is payable by today.
 

When the cash basis scheme may not be suitable

The cash basis scheme helps many sole traders and other unincorporated businesses who benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The scheme allows qualifying businesses to use the cash basis when recording income and expenditure. However, some small businesses are more suited to using the cash basis than others.

If a business falls within any of the following categories, the cash basis may not be the best option:

  • want to claim interest or bank charges of more than £500 as an expense
  • run a business that is more complex, e.g. have high levels of stock
  • need to obtain finance for the business – a bank could ask to see accounts drawn up using traditional accounting to see what the business owes and is due before agreeing a loan
  • have losses that the owner wants to offset against other taxable income (sideways loss relief)

In a nutshell, the scheme is most suitable for straight forward businesses especially those that provide services. Businesses must have a turnover of £150,000 or less to join the scheme and can continue using the scheme until the business turnover reaches £300,000.

Basis periods if accounting date is changed

The assessment of self-employed or partnerships profits is usually relatively straight-forward if the accounting date, to which annual accounts are prepared, falls between 31 March and 5 April. However, overlap profits can arise where a business year end date is not coterminous with the end of the tax year.

Overlap profits can happen in the first 3 years of the business or in any year in which there is a change of basis period (due to a change of accounting date).

HMRC’s guidance lists the following information about a change of accounting date:

If your accounting date in 2018 to 2019 is more than 12 months after the end of the basis period for 2017 to 2018, your basis period is the period between the end of the basis period for 2017 to 2018 and the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 May 2017 and the new accounting date is 31 August 2018 – your basis period is the 15-month period 1 June 2017 to 31 August 2018.

If your accounting date in 2018 to 2019 is less than 12 months after the end of the basis period for 2017 to 2018, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 December 2017 and the new accounting date is 31 July 2018 – your basis period is the 12-month period 1 August 2017 to 31 July 2018.

Time to revisit VAT Flat Rate Scheme?

The VAT Flat Rate scheme is intended to simplify the way a business accounts for VAT and reduce the administration costs of complying with the VAT legislation. There can also be a decent VAT saving for those using the scheme.

The scheme is only open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. If you have clients whose turnover has reduced to this level as a result of the Coronavirus pandemic, then it may be worth reconsidering the scheme.

Under the Flat Rate scheme, businesses simply pay VAT as a fixed percentage of their VAT inclusive turnover. When using the scheme, the amount of VAT paid on business expenses becomes irrelevant. This is quite different to the normal VAT accounting procedure where simply putting the VAT paid to HMRC is the difference between the VAT charged to customers and the VAT paid on purchases.

The actual percentage used depends on the type of business. There are special rules for those classed as a limited cost business who must use a flat rate of 16.5%. This will negate the benefit of joining the scheme.

In addition to the turnover limit you cannot use the scheme if:

  • You left the scheme in the last 12 months,
  • You committed a VAT offence in the last 12 months,
  • You joined or could have joined a VAT group in the last 24 months,
  • You registered for VAT as a business division in the last 24 months
  • Your business is associated with another business,
  • You have joined a margin or capital goods scheme.

Once you join the scheme you can continue using the scheme once your total business income does not exceed £230,000 in a 12 month period. There are some special rules if the increased turnover is temporary. There is also a first year discount for businesses in their first year of VAT registration of 1%.

New guidance for shop owners

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.

Option to defer VAT payments ends 30 June 2020

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.