What will the impact be on business profits and cash? How can you minimise future cash outflows?
The true impact of coronavirus is not as yet known but finance partners and directors will be having a challenging time forecasting business profits and cashflows and will be expected to take action to minimise the effect.
Finance partners and directors are no doubt being asked what can be done to assist in reducing the burden of cash outflows in future months. They will be thinking about PAYE/NIC, VAT, salaries, rent and a host of other costs but also partner distributions and partners’ tax payments due 31 July 2020.
There is so much information out there regarding support during these challenging times, here is an easy to follow flowchart.
The income tax due by partners due 31 July 2020 have been deferred to 31 January 2021, with no penalties or interest over the deferral period. This is a deferral and will need to be taken into account in your cashflow planning. Although the amount is known, effectively the amount due 31 January 2021 will be the tax liability for the tax year 2019/20 less the 1st payment on account paid 31 January 2020 plus the 1st instalment for 2020/21.
To recap the tax originally due on the 31 July 2020 represented the 2nd payment on account for the tax year 2019/20 and is initially based on 50% of the tax liability for the tax year 2018/19.
If profits are down for the accounting year ending in the tax year to 5 April 2020, then you could consider a reduction claim in respect of the 1st payment on account, that was paid back in January 2020. The difficulty here is that repayments would potentially be paid to the individual partners, although arrangements can be paid for the payments to be made direct to the firm, although additional work, time and effort is required.
If the reduction claim were excessive, then this is likely to give rise to interest on late paid tax and possibility penalties.
A reduction claim would need to be based on taxable profit shares (after taking into account disallowables) less reliefs for each partner, which can be a time intensive exercise to work through.
When revised budgeted figures are known we can help you work through the reduced tax liabilities to help with your cashflow forecasting.
There is an automatic VAT deferral from 20 March to 30 June 2020 for all businesses. The VAT deferred will need to be paid by 5 April 2021. There will be no penalties or interest for late payment will be charged during the deferral period.
For more detail on these measures see the commentary from our VAT specialists.
A number of announcements have been made with regard to supporting businesses with regard to payroll costs and to time to pay arrangements for PAYE and NIC deferral. The detail can be found here.
Usually partners receive monthly drawings and in addition other distributions during the year. There is a possibility that the firm may not have the cash to pay out those additional distributions until the firm knows the full extent and impact of coronavirus on the profits and cash of the business. It may seem obvious, but partners should be on notice now.
Have you pre-warned the partners that the firm may not be in a position to pay out those additional distributions within the normal timescales?
It is just not profits that may be down but also cash which may affect the ability to settle future tax liabilities of the firm and its partners.
With the deferral to 31 January 2021 of the income tax liabilities due by partners, there is currently no need to seek to agree a time to pay arrangement with HMRC in respect of this tax liability at the monment, but if it is required later, then you will need to be looking at this in December/early January. We do not know what HMRC’s stance will be by then.
The UK Government has already announced a multitude of measures to help businesses but many of these have been focussed on smaller entities.
There is however, a tax hotline (0800 0159 559) that can be called to request delays in paying VAT, corporation tax, PAYE/NIC and income tax. HMRC is, we understand, being sympathetic particularly to businesses with a good payment and compliance record. Here is the link to HMRC’s guidance on this hotline.
HMRC may ask for information to support time to pay requests and that could include business plans, with cashflow forecasts and the narrative showing that other finance options had been considered.
We may not be at that point yet, but we are able to assist in preparing cashflow forecasts and to model potential scenarios.
In terms of contacting HMRC, it is often better if the call comes from the firm in the first instance. We can assist you in preparing for the initial call and any subsequent information that HMRC may require.
For firm with a year end after 5 April 2020, eg 30 April, 31 May or 30 June, the 2019/20 tax liability will be based on last year’s profits, not the current COVID-19 hit profits. If the reduction in current year profits is significant enough it might be worth the firm considering changing its accounting date to 31 March 2020. This would bring the current COVID-19 impacted profits into assessment in 2019/20 less the overlap relief of each partner.
What is the impact on the tax position and timing of tax payments by changing your accounting year end date? Modelling can be carried out to work out the impact of such a change on the tax due for the tax year 2019/2020.
In these times of uncertainty to thrive we need to prepare, plan and work collaboratively together.
For more information please contact your usual Crowe contact or view our article, manage the impact of coronavirus on your organisation.
The uncertainty of the COVID-19 pandemic is forcing firms to focus on cashflow. Cash is king - are you maximising your cash in and managing your cash out?
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