Summer Statement

The Chancellor, Rishi Sunak continued with his campaign to support the business and jobs community today, 8 July 2020, as firms engage with the disruption caused by the coronavirus outbreak and the measures taken to control infection.

The main thrust of his announcements during his Summer Economic update concerned his nominated Plan for Jobs 2020, details are listed below.

He also announced measures to support the hospitality and tourism industry including a novel voucher scheme and a temporary reduction in VAT. Again, details are provided in the following update.

In an attempt to boost the flagging property market Stamp Duty is being temporarily reduced in England and Northern Ireland. Separate announcements on this topic are awaited for Scotland and Wales who have their own Stamp Duty regimes.

Details of these announcements follow:

  1. Job Retention Bonus: employers that bring back an employee that was furloughed, and continuously employ them through to January 2021, will be paid a £1,000 government bonus per employee retained. Employees must be seen to be gainfully employed during this period and be paid at least £520 a month, on average, from November 2020 to January 2021. All furloughed employees returned to employment in this way will be available for the £1,000 bonus. 
  2. Kickstart scheme: this new scheme will cover the wages (plus associated costs) of new jobs created for any 16 to 24-year-old – at risk of long-term unemployment – for six months. These will have to be new jobs, of at least 25 hours a week and paid the National Minimum Wage. Employers will need to offer kickstarters training and support to find a permanent job. Employers can apply to be part of this new scheme from next month – August 2020 with first jobs starting in the autumn. Government has made an initial £2bn available for this scheme, but there is no cap on the number of places made available.
  3. Apprenticeships: for the next six months government will pay employers to create new apprenticeships. The amount payable will be £2,000 for each apprentice. A new bonus to take on apprentices aged over 25 has also been announced. This will amount to £1,500 per appointment.
  4. Green jobs initiatives: as an incentive to create jobs in the green jobs’ market a number of new grants have been announced. From September 2020, homeowners and landlords in England will be able to apply for a grant to make their home more energy efficient. The £2bn Green Homes grant will cover at least two-thirds of the cost up to £5,000 per household. For low income households these grants will cover all costs up to £10,000. There will also be a further £1bn allocated to make public buildings greener.
  5. Boost for the housing market: Presently, in England and Northern Ireland (different amounts apply in the regions) no Stamp Duty Land Tax is payable on residential property purchases below £125,000. From today – for a temporary period to 31 March 2021 – this threshold is increased to £500,000. It is projected that this will reduce the average stamp duty bill by £4,500. Regional variations may apply. Purchasers buying a second residential property will still have to pay the 3% Stamp Duty Land Tax for property purchases up to £500,000.
  6. VAT reduction for hospitality and tourism: for the next six months VAT charged on food, accommodation and attractions (such as eat-in or takeaway food in restaurants, cafes, pubs, cinemas, theme parks and zoos) will see VAT reduced from 20% to 5%. This will apply from 15th July 2020 until 12th January 2021.
  7. Eat Out to Help Out discount: for the month of August 2020, meals eaten at any participating business Monday, Tuesday or Wednesday, will be 50% off up to a maximum discount of £10 per head including children. To access the discount businesses will need to register and can do so through a website to be opened next Monday, 13 July 2020. Businesses will be able to claim the money back weekly with the money in their bank accounts within 5 working days. 

As we manage the cautious steps to emerge from lock-down, still wary of COVID-19, the new incentives announced by Rishi Sunak should be welcomed.

As more details emerge on the various schemes announced today they will be published accordingly.

SEISS further update

HM Treasury has published a further Treasury Direction made under the Coronavirus Act 2020, ss. 71 and 76, which modifies and extends the effect of the Self-Employment Income Support Scheme (SEISS).The Direction mainly deals with the expansion of the SEISS for a final three-month period to 31 August 2020, officially referred to as the SEISS extension. The eligibility criteria remains largely unchanged.

The SEISS extension grant will be calculated based on 70% of eligible earnings (previous quarter 80%). This will result in a maximum grant for the three-months of £6,570 (Previous quarter £7,500) paid in a single instalment. The application process for the SEISS extension will open from 17 August 2020 and close on 19 October 2020. The revised guidance provides further details on the amended rules for new parents and reservists.

It is also important to note that claims for the first grant for the quarter March-May 2020 closes on 13 July 2020. In order to claim the first grant, the business in question must have been adversely affected by the pandemic on or before 13 July 2020. Likewise, in order to claim the SEISS extension (June-August 2020) the business must have been adversely affected by Coronavirus on or after 14 July 2020. A self-employed person can claim for the second grant, to August 2020, even if they had not claimed for the first grant.

The new reality

It may be some time before we could state with some certainty that it was back to business as usual; usual being the business environment before the arrival of Coronavirus.

What has changed?

The major change has been the dampening of demand due to lock-down and other government interventions aimed at job retention and support for businesses hardest hit. For example, the hospitality sector.

Food retailers, supermarkets and the online shopping platforms have prospered as we have met our needs for goods by internet shopping from home.

Pubs, restaurants and hotels have been closed and are only recently re-opening.

Social distancing is still making demands of all businesses that need footfall, that need customers through the door. Table covers are much diminished, there are queues to access most stores and sanitation points are demanded to control the spread of infection. As recent events in Leicester have demonstrated, Coronavirus has not gone away. And if there are local flare-ups, the Government will quickly intervene to reintroduce local lock-downs.

As we have previously posted, all of these new demands on businesses need to be considered. At one end of the scale the disruption has been too much, and businesses have closed and will not be reopening. At the other extreme, businesses that have thrived – there are a few – will need to plan in order to avoid the possibility of overtrading.

To survive in this new normal, Coronavirus period planning for best use of business resources is critical. The assumptions that we have taken for granted in the past, for example free movement of customers to access our goods and services, may no longer apply and the costs of adapting (on revenue, costs and cash flow) need to be factored into our business planning.

What is working capital?

Accountants would say that working capital is the difference between current assets and current liabilities. It is the capital of a business used in day to day trading operations.

Current assets are generally those that can be converted into cash reasonably quickly, money in your bank account. For example, stocks and work in progress, amounts due from customers and funds in bank accounts.

Current liabilities are amounts that need to be paid in the short-term: bills from suppliers, current payments due to banks and finance companies, overdrafts that may need to be reduced and so on.

The difference between these two sets of figures is your working capital. In a nut-shell it is the amount of capital that your business can count on at short notice to finance trade.

Interestingly, every business will require its own level of working capital. Businesses that have been prudent in the past and accumulated reserves will have increased their working capital – mostly money in the bank – and will have more resources to counter a downturn in trade.

Firms that have a adopted a more hand-to-mouth approach will have less chance of surviving disruption to their trade.

Coronavirus disruption has made demands on the working capital of many businesses. These demands have generally reduced working capital. Many firms have replaced this loss by borrowing – the government-backed loans for example – or taking advantage of the various grants and job retention support schemes.

Longer-term, affected businesses will need to trade their way back to more sustainable levels of working capital. This will be a challenge that some firms may struggle to meet.

Determining an adequate level of working capital to support your business and devising strategies to achieve this should be a key planning objective. If you need help crunching the numbers please contact us.

Government support for pubs, cafes and restaurants

The government has confirmed a further easing of lockdown as pubs, cafes, restaurants, hotels, hairdressers and cinemas have been given permission to reopen in England from 4 July. The launch date has been dubbed as Super Saturday. These changes will see a further move towards the reopening of certain businesses that can operate by following the COVID-19 guidelines.

The only exception to this easing of lockdown will be local areas that experience a surge in new infections. Recently, this restriction was applied to Leicester.

The government has announced specific support measures for pubs, cafes and restaurants. This includes:

  • Simpler licensing process for outdoor seating for pubs, restaurants and cafes
  • Councils encouraged to reduce red-tape and create more outdoor markets
  • Government plans to support outdoor dining as part of efforts to help the economy bounce back from Coronavirus

For example, many pubs and restaurants will be able to use car parks and terraces as dining and drinking areas, using their existing seating licenses. There will also be temporary changes to licensing laws to allow qualifying licensed premises, such as pubs and restaurants, to sell alcohol for consumption off the premises

The government has also reviewed the two meter social distancing guidelines and will relax this to one-metre with risk mitigation. Without this change it would not be financially viable for many businesses to open especially in sectors such as accommodation, food services and recreation. Some sectors such as nightclubs, indoor gyms and other fitness venues, indoor play areas, swimming pools, spas, and casinos remain closed. There has been no indication given as to when these businesses will be able to reopen.

Updated HM Treasury instructions re: CJRS

On 26 June 2020, the Chancellor, Rishi Sunak made a further (third) Treasury Direction under sections 71 and 76 of the Coronavirus Act 2020 concerning the Coronavirus Job Retention Scheme (CJRS).

There are a number of important changes to the way the revised scheme works that started to come into effect from 1 July 2020, the date that employers can bring back furloughed employees to work part-time and for any amount of time or shift pattern. The Direction is divided into two parts, the first part referring to the original scheme and the second part to the revised scheme.

Under the revised flexible furlough 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. From August 2020, 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 third Treasury Direction confirms

  • An employer will only be able to participate in the revised scheme if they had made a claim under the pre-July scheme in respect of an employee who has been furloughed for a minimum period of three weeks beginning on or before 10 June 2020.
  • There is a special exemption for employees currently on statutory parental leave. This means that in most cases parents on statutory maternity and paternity leave are excepted from the 10 June 2020 cut-off date. This change also applies to those on adoption leave, shared parental leave, parental bereavement leave and to armed forces reservists.
  • The maximum number of employees that can be claimed for under the revised scheme is limited to claims made prior to 1 July (referred to as the high-watermark number). The only exception is for the exemption referred to above.
  • Any new agreement must be in writing with records retained until at least 30 June 2025.
  • How qualifying costs are defined under the revised scheme.
  • How to calculate the amounts that can be claimed under the scheme for employees and what costs employers must bear.

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.

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.

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.

Drawings, profits and tax

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.