COVID-19: Job Retention Scheme Update

Today, the COVID-19 Job Retention Scheme Update was announced by the government to provide further clarity on how the scheme will operate.

According to the announcement, the scheme will be backdated to 1 March 2020 and provided staff remain employed throughout the crisis the funding will be open to all employers with a PAYE payroll scheme that was created and started on or before 28 February 2020, including charities.

The announcement further explained that the grants will cover 80% of furloughed employees’ (employees on a leave of absence) monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.

HMRC Step by Step Guide for submitting claims

COVID-19: Job Retention Scheme Update

The cashflow dilemma for employers

The major stumbling block for employers is cashflow to fund the March 2020 payroll because the government is expected to cover 80% of both March and April payrolls at the end of April 2020.  

One option is to take out a business interruption loan or overdraft which is being guaranteed by the government and interest free for 12 months. Unfortunately, some banks are requesting personal guarantees which may deter some directors from considering this option.

Employers may also utilise the COVID-19 Time to Pay Scheme and the VAT Deferral scheme to free up cash resources to pay employees while waiting on the government Job Retention Scheme funds.

However, it is almost predictable that the majority of the business interruption loans and overdrafts secured under the government’s 80% guarantee will go bad and get hived off to the British Business Bank as COVID-19 bad loans.

The government’s 80% guarantee doesn’t equate to free money to employers and directors giving personal guarantees. These loans and overdrafts will have to be paid back by employers for as long as it takes or they will go to the wall.

Therefore, the dilemma is whether employers protect their own future or act in the national interest and provide for their staff during the COVID-19 crisis.

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COVID-19: Deferring VAT and Income Tax

The government has announced that they will support businesses during COVID-19 by deferring VAT and Income Tax payments.

VAT will be deferred for 3 months starting from 20 March 2020 until 30 June 2020 and the self-employed will have their Self Assessment advance payment due in July 2020 deferred to January 2021.

All UK businesses and self-employed individuals are eligible to take advantage of the tax deferrals which are automatic and do not require applications.

During the deferral period HMRC will not charge any penalties or interest for late payment.

COVID-19: Deferring VAT and Income Tax

Businesses and Individuals in Temporary Financial Distress

All businesses and individuals in temporary financial distress as a result of COVID-19 can also participate in HMRC Time to Pay offer, see our VAT PAYE and Corporation Tax Help for Covid-19

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COVID-19: Government loan scheme

The government loan scheme has been introduce by the UK government to help businesses to survive the downturn caused by measures to defeat COVID-19.

The Coronavirus Business Interruption Loan Scheme

The Coronavirus Business Interruption Loan Scheme provides access to bank lending and overdrafts in order to support small and medium-sized businesses during the pandemic and is expected to start on 23 March 2020.

Guarantee for loans and interest

The government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The government will not charge businesses or banks for this guarantee, and the Scheme will support loans of up to £5 million in value.

In addition, businesses will be able to access the first 12 months of that finance interest free, as the government promises to cover the first 12 months of interest payments.

Eligibility

The scheme will be supervised by the British Business Bank which maintains an accredited list of lenders that includes all major banks.

Eligible businesses will need to satisfy the following criteria:

  1. Be UK based, with turnover of no more than £45 million per annum
  2. Operate within an eligible industrial sector
  3. Be able to confirm that they have not received de minimis State aid beyond €200,000 equivalent over the current and previous two fiscal years
  4. Be unable to meet a lender’s normal lending requirements for a fully commercial loan or other facility, but would be considered viable in the longer-term.

In order to allow lenders to act quickly, employers are advised to contact their bank or finance provider as soon as possible to discuss their business plans.

In addition, those with existing loan facilities are advised to ask their lenders for a repayment holiday to help with cash flow.

COVID-19: Government loan scheme

Business plans

The coronavirus business interruption loan scheme is a purely commercial arrangement between the business and their lenders with the government providing guarantees. The borrower always remains 100% liable for the debt.

Therefore, businesses will be expected to produce business plans along with cash flow projections to justify their application to access funding under the Coronavirus Business Interruption Loan Scheme.

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HMRC to fund 80% of wages for furloughed staff

On Friday 20/03/2020, The Chancellor made the historic announcement that the UK government was to step in and help to pay the wages and salaries of retained workers up to a maximum of £2,500 a month. This announcement placed the responsibility on HMRC to fund 80% of wages for furloughed staff.

The Coronavirus Job Retention Scheme

The Coronavirus Job Retention Scheme has been set up to allow employers to contact HMRC for grants to cover most of the wages of staff who are not working but are furloughed and kept on the payroll instead of being laid off. The scheme will be backdated to 1 March 2020 and is intended to last for 3 months, initially, after which it will be reviewed.

How will HMRC fund 80% of wages for furloughed staff?

HMRC to fund 80% of wages for furloughed staff

HMRC is currently working on the mechanism for reimbursing employers directly into their bank accounts.

In the meantime, employers need to:

  1. designate affected employees as ‘furloughed workers’ and notify them of this change
  2. submit information to HMRC about the employees that have been furloughed and their earnings through a dedicated HMRC portal
  3. HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month

HMRC Step by Step Guide for submitting claims

Canalitix Accountants would welcome the opportunity to act as your agent in relation to HMRC taxes. Once authorised by HMRC, we will manage the Coronavirus Job Retention Scheme application process on your behalf.

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VAT PAYE and Corporation Tax Help for Covid-19

The government has promised support for all businesses and self-employed people in financial distress, and with outstanding tax liabilities, such as VAT PAYE and Corporation Tax.

The HMRC’s Time To Pay service has been set up to support business with their tax affairs. Eligibility will be assessed on a case-by-case basis and will be tailored to individual circumstances and liabilities.

Covid-19: VAT PAYE and Corporation Tax Help

HMRC dedicated COVID-19 helpline 0800 0159 559 has been set up for those concerned about being able to pay their tax due.

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Entrepreneurs’ relief after March 2020

This article examines the impact of the 90% cut in Entrepreneurs’ relief after the March 2020 budget. This change came into effect on 11 March 2020, the day of the budget.

Reduction in Entrepreneurs Relief Life time limit

Apart from businesses with a net worth of under £1 million, the reduction of entrepreneurs’ relief from £10 million to £1 million is bound to cause serious headaches for retiring entrepreneurs and qualifying investors who plan to dispose of their investments or businesses on or after 11 March 2020.

The government anticipates that the reduction in the entrepreneurs relief lifetime limit could impact 9,000 individuals who dispose of all or part of their business; individuals who dispose of share in their personal company and trustees who dispose of business assets, with gains above the new lifetime limit. Further, they estimate that the majority of the cost of Entrepreneurs’ Relief is generated by a small minority of very affluent taxpayers’ gains.

Entrepreneurs relief after the March 2020 budget

Assuming an affluent entrepreneur makes a qualifying disposal of £10 million, this would give rise to capital gains tax liabilities post- and pre- 11 March 2020 as follows:

Capital Gains Tax Liability – Post 11 March 2020
£1,000,000 @ 10% = £100,000
£9,000,000 @ an assumed marginal rate of tax, of say 40% = £3,600,000
Total CGT liability = £3,700,000

Capital Gains Tax Liability – Pre 11 March 2020
£10,000,000 @ 10% = £1,000,000
Total CGT liability = £1,000,000

Capital Gains Tax Calculators for 2019-20 and 2020-21

The following CGT calculators for 2019-20 and 2020-21 include a section on business disposal and entrepreneurs’ relief. The calculators are provided for research purposes only.

Capital Gains Tax Calculator 2019-20
Capital Gains Tax Calculator 2020-21

Extracting value prior to disposing business assets

Entrepreneurs are now faced with complex tax strategies to extract value prior to disposing their business interests.

Pensions lifetime allowance

Those with time on their hands before retirement may want to consider making use of their pensions lifetime allowance. The lifetime allowance has been indexed linked for 2020 and 2021 to £1,073,100 and the annual allowance of £40,000 kept the same.

Dividends

There’s not much leeway here unless you’re still a basic rate payer after utilising the £2,000 dividend allowance.

Inheritance tax planning

Assuming the entrepreneur can survive rolling 7 year periods, using the inheritance tax gift relief may be a useful tax planning strategy.

In all likelihood, entrepreneurs’ relief after the March 2020 budget will become more of a pain than a relief for the affluent few identified as affected by the budget.

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Fraud and the VAT Reverse Charge

This article entitled Fraud and the VAT Reverse Charge is meant to provide an insight into the changes coming into force on 1 October 2020.

HMRC considered fraud prevention as the primary reason for introducing the VAT reverse charge to the construction and building services industry. The VAT Reverse Charge which was initially planned for 1 October 2019 comes into force on 1 October 2020. This delay was to allow construction industry services (CIS) participants and accounting systems developers sufficient time to be prepare for the change.

This change means that CIS contractors / customer receiving the service will be responsible for paying the VAT due to HMRC instead of the subcontractor / supplier. The subcontractors’ invoices will carry a note stating that the VAT should be paid by contractors to HMRC.

While some contractors may find themselves with cashflow issues at the start of the reverse charge, some subcontractors may find themselves reclaiming VAT on purchases. This is a direct result of shifting the responsibility for payment of VAT on the subcontractor sales invoices onto the CIS contractor.

Fraud and the VAT Reverse Charge

Preparing for the reverse charge

Accountant and their clients need to ensure that they are prepared for the 1 October 2020 introduction by:
1. Verifying whether sales and/or purchases are in scope for the reverse charge
2. Ensuring that accounting systems have been updated to deal with the reverse charge
3. Budgeting for the cash flow implications of paying the reverse charge
4. Providing staff training

Who are excluded from the reverse charge

1. End users (consumers and intermediaries)
2. Professional services of architects and surveyors
3. Extraction of minerals
4. Drilling for oil and gas
5. Repair of building service components
6. Supplies of staff or temporary workers provided by employment businesses who are responsible for paying them. However, if an employment business contracts to deliver a specific construction service, such as installation of windows the reverse charge applies.

By shifting the burden of VAT payment to CIS contractors, HMRC anticipates that the level of VAT fraud will be reduced in the building and construction industry when the reverse charge comes into force on 1 October 2020.

Useful links

Domestic reverse VAT charge for building and construction services

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Why digital accounting is crucial to the modern accounting practice?

In this article, we examine the impact of cloud based technologies on the traditional accounting practice by asking the question: why digital accounting is crucial to the modern accounting practice?

Global accountants headcount

In November 2018, the CCAB reported that globally, as at 2017, there were 536,400 professional accountants from the combined membership of the five CCAB bodies – ICAEW, ACCA, ICAS, CIPFA and Chartered Accountants Ireland. Of this total, the UK was said to have around 326,200 and 38.000 in Ireland.

Practicing accountants

One metric that highlighted the scope for disruption of the desktop accounting software market was the 181,000 UK accountants in practice. This figure does not include the growing number of licensed bookkeepers of which the AAT is the largest with over 2,500 practitioners.

Even though selling desktop software licences to practicing accountants was lucrative at the time, it was never going to be game changing. Also, desktop licences had the disadvantage of not being upgraded by penny-pinching accountants. Therefore, a different strategy was needed by accounting software developers to expand and scale their business.

The market for accounting software

The mass marketing of desktop software to accountants in practice and industry elevated Sage Group plc to FTSE 100 status. However, revenues of £1.8 billion was only the tip of the iceberg when compared to the £59 billion contributed by the accountancy profession to the UK GDP in 2017. However, according to the CCAB, the 100 largest accounting firms including the 5,660 registered auditors accounted for £14.2 billion of this pie. This still left a sizable £40 billion of fee income earned by just over 180,000 practicing accountants to entice the cloud accounting software companies.

DIY Bookkeepers and Accountants

The number of DIY bookkeepers and accountants using cloud accounting software have exploded. Today, millions of non-accountants commit £20-£30 per month for a cloud accounting software licence. It is not unusual to see prime-time TV campaigns glamorizing the benefits of cloud accounting software with some adverts using successful entrepreneurs to sell their products.

Prior to the explosion of cloud accounting software, over 3 million small limited companies and self-employed businesses would spend between £500 – £1,500 with a practicing accountant to finalise their year-end accounts and tax returns. However, with the financial commitment of cloud accounting software eating into their budget, these businesses were forced to source cheap accounting services online and thereby disrupt the earnings potential of the traditional accounting practice.

Digital Accounting

Digital Accounting involves the integration of OCR data capture technology with cloud accounting software along with integration of year-end accounts and tax software to provide a truly digital working environment for bookkeepers and accountants.

Digital Accounting Framework

Cloud Accounting

The last decade has seen the growth of leading accounting software companies, such as Sage, Xero and QuickBooks moving from the traditional desktop products to online Software As A Service (SAAS) solutions or Cloud Accounting.

As with most disruptive technology, the accounting software companies has shifted their strategy from targeting a finite number of accounting practices to the mass market of small and medium-sized business owners. This strategy is commendable when one considers that there are over 3 million registered companies and many more self-employed and partnership businesses.

OCR Technology and Automated Data Capture

Optical Character Technology (OCR) has been adopted by many accountants both in practice and industry to reduce the tedium and expense of manual data entry. Initially, the OCR developers focused on large accounts payable departments where the efficient benefits were easy to justify.

More recently, the OCR developers have began to focus on developing applications to integrate data extraction tools with cloud accounting software products.

Accounting firms have become significant beneficiaries of OCR technology which has revolutionised the processing clients invoices and receipts. In a similar vein to cloud accounting software, OCR data capture product are based on the SaaS subscription model with licence fees costing between £100 to £500 per month.

OCR technology has placed the practicing accountant back in the driving seat by eliminating the cost of manual data entry for accounts payable and receivables.

Integration of open bank technology with cloud accounting

One technology that has contributed to the digitisation of the accounting practice is open banking. This allows real-time updates of client’s bank transactions into the cloud accounting system which removes the tedium of reconciling the accounts with bank statements.

Specialist Tax and Year-end Software

In addition to embracing OCR technology, practicing accountants have benefited from the arrival of specialist cloud based tax and year-end accounting software. Unlike the mass market appeal of cloud accounting software, year end accounts and taxation is the still the preserve of the practicing accountant.

Cloud accounting software companies are now keen to offer massive discounts to practicing accountants to resell software licences to their clients. The main reason for this shift back to the accountant is that business owners are waking up to the fact that running a business and trying to be a DIY accountant is a mugs game where the only winner is the cloud accounting software company.

The modern practicing accountant is now tooled up to reduce the bookkeeping and management reporting overhead of small businesses through OCR data capture, cloud accounting and seamlessly generation of their final accountants and tax requirements. More importantly, the accountant can deliver this end-to-end service to small businesses for less than £1,500 per client per annum. In turn, small businesses can shed the cost of part-time bookkeeping staff, cloud accounting software fees and the distraction of being a DIY accountant.

The future of the high street accounting practice

The high street accountant who hasn’t yet woken up to digital accounting is heading for a dangerous financial awakening. The modern digital accountant is mobile and exploits cloud storage to reduce occupancy costs. In order to survive and stay competitive in the future, the high street accounting firm needs to transform by embracing digital accounting technology.

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The burden of UK taxation on corporations and individuals

In this article we attempt to provide an insight into the contentious question of who should bear the burden of UK Taxation: corporations or individuals?

The Institute of Fiscal Studies (IFS) briefing note for the 2017 General Election entitled “Tax revenues: where does the money come from and what are the next government’s challenges?” predicted that by 2019–20 the share of national income raised in taxes is set to reach its highest level since the early 1980s with almost two-thirds of revenues coming from income tax, National Insurance contributions (NICs) and VAT.

The IFS estimated that tax receipts in 2017–18 were expected to reach £690 billion and this was anticipated to rise slightly between then and 2019–20 before remaining relatively flat until the end of 2019–20.

The IFS forecast for 2017 to 2022 shows the greatest divergence between personal income tax and corporation tax. The IFS time series is based on data sourced from the OBR and adjusted to remove revenues forecast raised from the proposed, but now scrapped, increase in Class 4 NICs. ‘Indirect taxes’ includes VAT, fuel duties, and other indirect taxes. The data includes forecasts for periods after 2015-16.

The above chart shows receipts Corporation tax are expected to decrease sharply by 2021-22 while the decline in income tax receipts are expected to be reversed. However, the burden of taxes on the individual is forecast to increase by 2021-22 through a combination of personal income and capital taxes.

The IFS believes capital taxes are “set to become more important; by 2021–22, the share of revenue they account for will have almost doubled relative to 2010. The increase since 2012–13 largely reflects increases in the underlying value of assets (including residential property). It also reflects an increase in stamp duty land tax as a result of a 3% surcharge on buy-to-let investments and second homes introduced in April 2016.

Receipts from property taxes which consists of council tax and business rates are expected to change very little between 2020 and 2022.

Other taxes show a significant decline by 2022. The IFS defined Other Taxes as “a residual measure, including devolved taxes and environmental levies, which are generally part of government schemes that translate higher revenues directly into higher spending.” The apprenticeship levy shown in the OBR chart below is one such tax.

Why should corporations pay more tax?

There are mixed opinions on why corporations should pay more tax. The IFS briefing note to the 2017 General Election entitled “What’s been happening to corporation tax?” explores the political dimensions of this issue. In 2011, The Guardian published an article in which outlined 10 reasons why we should tax corporations.

In The Guardian article above, the dymanics between income and corporation tax is highlighted in point #2: “Corporation taxes are an essential backstop to personal income tax. Cut them to zero, and wealthy individuals will increasingly reclassify their earnings as corporate income, typically using offshore corporate structures, and escape tax. Gauke’s arguments about employees footing the corporate tax bill are irrelevant.”

The issue of how to balance the burden of UK taxation on corporations and individuals is the perennial question that tests central bank leaders globally. Hopefully, with the assistance of big data and artificial intelligence technology, this question should become easier to solve equitably for all in time.

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