The Covid-19 emergency has demonstrated just how linked global health matters are to economic health, and at this worrying time, governments around the world are frantically looking to provide support to businesses, employers and employees, to ensure citizens have money to feed themselves but also to ensure there is an economy.
In the U.K., we have seen a steady flow of announcements for companies, employees and more recently the self-employed. A list of the most relevant U.K. government support announcements is set out below:
• deferring value-added tax (VAT) and income tax payments;
• a statutory sick pay relief package for small and medium-sized businesses (SMEs);
• a 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England;
• small business grant funding of 10,000 pounds ($12,336) for all businesses in receipt of small business rate relief or rural rate relief;
• grant funding of 25,000 pounds for retail, hospitality and leisure businesses with property with a rateable value between 15,000 and 51,000 pounds;
• a support package for start-ups worth 1.25 billion pounds—the 500 million-pound “Future Fund” and 750 million pounds for R&D SMEs;
• the Coronavirus Business Interruption Loan Scheme offering loans of up to 5 million pounds for SMEs through the British Business Bank;
• a new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge disruption to their cash flows through loans;
• the HM Revenue & Customs (HMRC) “Time to Pay” Scheme.
What Else Can Be Done by Businesses?
Clearly governments around the world, perhaps learning the multiple lessons from the 2008 financial crisis, have sought to adopt adequate measures to prepare for the post-Covid-19 phase. But what else can businesses do for themselves?
In times of financial downturns, businesses will seek to cut costs (beyond employees as a result of the job retention provisions) such as accommodation, utilities, and various discretionary spends such as traveling, marketing, entertaining, training, etc. At present, Covid-19 measures are such that many offices are still closed, and travel seems a distant memory.
In the meantime, most businesses will be busily undertaking reviews of various cash flow models. Alongside those critical exercises, it is important not to forget some of the more basic tax reliefs inherent within the U.K. tax system.
Critical Business Reviews
Companies are already conducting cash flow exercises but further strategic reviews looking at all business aspects are also recommended, including reviews of client relationships, costs (including staffing costs), any associated government support, and areas such as wellbeing to support employees whilst at home.
There is no doubt that the government support packages will ensure that many employees and the self-employed are provided with short-term financial support. There are, however, other general tax reviews or planning that can be useful. The U.K. government has thankfully deferred VAT and self-assessment tax return payments on account, but it may also be possible to identify loss-making business practices or enterprises and secure and allocate resulting losses. It may also be possible to crystallize some of those losses such that they can be set off or carried back, resulting in a potential repayment.
Current Year Trading Losses
There are various options to relieve trading losses. These can be offset in the current tax year against total income (for individuals) and total profits (for corporates) to reduce the amount of tax due for the current period and to manage cash flow. Another option is to carry back the trade losses in order to crystallize a tax refund. When offsetting trade losses against trading profits, there are no restrictions on how far back these can be carried and there is no cap on total claims.
There may be scope in some instances to offset trade losses against total income (for individuals) or total profits (for corporates). These will therefore, again, enable crystallization of cash in the form of tax refunds when being carried back. However, there are restrictions on how far back these can be carried (for individuals and corporates), the order in which they need to be offset (corporates only), and restrictions on the amounts that can be offset (individuals only).
It may also be possible to accelerate the carry back of losses by shortening the accounting period, thereby realizing the losses earlier and submitting a carry back claim earlier. However, this will impact how far back the losses can be taken and will likely restrict the amount of losses that can be carried back.
There is also scope to offset trade losses against capital gains made in the same tax year as a current year/carry back claim is being made, should certain criteria be met (this is for individuals only).
Losses on Cessation of Trading
If you decide to cease trading, Terminal Loss Relief might be available for trade losses that have arisen in the last 12 months of trade. These can be carried back against trade income (for individuals) or total profits (for corporates), for up to the last three tax years (for individuals) or 36 months prior to the start of the accounting period of the loss generating period (for corporates). Specific calculations are required to determine the final loss-making period, the amounts available for Terminal Loss Relief, and where these can be carried back to.
Claims Where Value of Assets Become Negligible
These claims accelerate a claim for capital gains losses, by immediately realizing a capital loss on an asset that has become worthless.
This is done by treating the asset as being disposed of for nil proceeds (or close to nil, if an accurate estimate of its worth is available) and being deemed to reacquire it at zero pounds. This creates a capital loss that can be used as normal with any other capital losses.
If the capital loss is in relation to shares which had been subscribed for in a trading company, then the loss could potentially be offset against total income (for individuals) or total profits (for corporates).
This is also true for any shares that have been subscribed for under any qualifying Enterprise Investment Scheme/Seed Enterprise Investment Scheme (EIS/SEIS). The EIS and the SEIS are two of a number of U.K. government initiatives which encourage innovation by granting private investors a significant tax break when investing in early stage, “high-risk” companies. However, depending on the length of time that the shares have been held and whether a tax reducer was obtained, calculations will be required to calculate the loss available to carry over.
Trading in Early Years (Individuals)
If you have started a new trade and are in the first four tax years of business, you may be able to make an Early Trading Loss Relief claim, which could enable you to carry back some trade losses against total income to the last three tax years. There are restrictions on how this loss is calculated and how you can carry them back.
Company Insolvency or Company Voluntary Arrangements
In cases of serious business downturn, corporates may be faced with the prospect of insolvency or some sort of voluntary arrangement.
Company Voluntary Arrangements (CVAs) can avoid insolvency by creating an official agreement with creditors where a proportion of debts are paid back over time; 75% of the relevant creditors (by value) need to agree to this, but this may avoid a complete closure of the business.
However, should the business face such a severe downturn that there are no other options, liquidators can be appointed in order to correctly allocate assets to creditors in order to satisfy any outstanding debts, and wind up the company.
In difficult times, companies and corporate groups may seek to restructure to preserve sustainable businesses, but close unprofitable ones. Cash rich investors and groups may look to acquire businesses in trouble. Equally, some businesses may well need new capital and seek to merge or find new owners.
The U.K. government announced on March 20, 2020 that there will be a deferral of all VAT payments due between March 20, 2020 and June 30, 2020. Taxpayers will then have until the end of the 2020–2021 tax year to settle any VAT liabilities that have arisen during this period. This is applied automatically. VAT refunds and claims will be processed by HMRC as normal.
If some of your customers are entering liquidation or are struggling to pay, you will be able to reclaim the VAT back on these bad debts. To reclaim this VAT, you must ensure that the VAT on the debt was originally paid to HMRC and that it has been six months since the debt was written off in the accounts.
HMRC recommend that individuals take the appropriate action—as soon as you are aware that debts may not be paid, immediately progress matters.
Where turnover has significantly decreased, de-registration might also be an option. The de-registration threshold is based on the total turnover in the rolling 12 months prior to de-registration. The current de-registration limit is 83,000 pounds and the process can be completed online. You must stop quoting your VAT number and charging for VAT from the date that HMRC confirms you are de-registered. You must remember that you will also no longer be able to claim back VAT on chargeable inputs into your business.
HMRC have set up a specific dedicated help line for individuals and businesses who have concerns about paying their tax or VAT liabilities on time as a result of Covid-19.
If individuals are physically unable to pay, they can discuss their specific circumstances with HMRC to explore the following:
- agreeing an installment plan with HMRC;
- HMRC temporarily suspending debt collection proceedings; or
- canceling penalties and interest where the taxpayer has administrative difficulties contacting or paying HMRC immediately.
Installment plans typically involve a settlement agreement with HMRC whereby payments are agreed over a set amount of time, with forward interest calculated and already built into these payments. This is also commonly known as a “Time to Pay” arrangement.
Self-Assessment Payments on Account
As a temporary measure, the government announced on March 20, 2020 that income tax payments due on July 31, 2020, for individuals will be deferred until January 31, 2021. You need to be self-employed in order to be eligible; however, further clarity regarding this term is required, as it is not currently clear whether this includes all forms of self-assessment (e.g. whether this includes partners).
This deferral is automatic and requires no application from the individual. No interest or penalties will be charged on the deferred payments.
To date the same deferral has not been introduced for companies and it appears that companies must still pay their corporation tax bills as normal. This is usually nine months following the end of the relevant accounting period.
Personal Service Companies
The government had planned to introduce significant legislative changes from April 6, 2020 around the taxation of workers operating through personal service companies. These changes would have meant that many companies where the worker’s relationship is like an employee relationship would need to deduct tax and national insurance contributions (NIC). These changes have now been postponed until 2021, resulting in some much needed cash flow for those affected.
Other Tax Matters
There are a number of strategic issues that also need to be considered. Covid-19 places great stress on short- and possible medium-term transfer pricing models. Possibly, once the immediate term issues have been addressed, companies should undertake analyses of their whole value chains, alongside associated pricing arrangements.
Corporate governance is also extremely important. As well as cash flow issues, companies will need to consider broader matters, such as reputation. Associated with this, from a tax reputational perspective, it will be important to be seen to participate in any of the government’s support packages in the correct spirit and also in a compliant way.
After the short-term difficulties, there is little doubt that HMRC will seek to review that such compliance has taken place. In this regard, it is worth reminding oneself that HMRC introduced a Corporate Criminal Offense in 2017, which enables HMRC to prosecute various bodies where they have failed to prevent the facilitation of tax evasion. Any business therefore flouting the government support will be a target for such action, which can carry an unlimited fine.
What About the Future?
The U.K. Chancellor has made it fairly clear that a review would be required at some stage to look at the tax and NIC benefits afforded to the self-employed. There has always been an argument that these benefits are given to compensate the self-employed for the greater risks they carry. The Chancellor has openly questioned this point, in providing significant support to the self-employed in many similar ways to the employed. Aside from the latest crisis, one would suggest a review of self-employed status was due, given the rise of the gig economy.
The one thing everyone agrees on is that after this crisis, most countries will be left with debt levels not seen since the World Wars, and in the coming years we can expect to see measures taken to reduce some of this debt.
At least part of this, one would suggest, will be higher taxes for all, likely including actions to reduce so-called wealthy inequalities. Before the Covid-19 crisis, the OECD, UN, EU and many others were already starting to look at sustainable and green taxation. Given the need for significant increases to pay down the Covid-19 debt, a completely new approach to taxation should not be ruled out.
Gary Ashford is a Tax Partner of Harbottle and Lewis LLP and a Council Member of the Chartered Institute of Taxation.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.