The Budget 2021 had some great news for many businesses because it allowed 3 year carry back of losses.
Originally the bill included Furnished Holiday Lets (FHLs) but that has now been changed and FHL’s are now excluded.
The loss relief works as follows………
Legislation introduced in Finance Bill 2021 to extend the period for which trading losses can be carried back against previous profits. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.
Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.
Corporation Tax
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2,000,000 of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This £2,000,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension.
This means a cap of £2,000,000 on the extended carry back of losses incurred in accounting periods ending in the period 1 April 2020 to 31 March 2021 and a separate cap of £2,000,000 on the extended carry-back of losses incurred in accounting periods ending in the period 1 April 2021 to 31 March 2022.
The £2,000,000 cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between its companies.
Income Tax
The amount of trading losses that can be carried back by individuals to set against profits of the preceding year remains unlimited. The current restrictions to carry back losses from a trade against general income will remain.
A separate £2,000,000 cap will apply to the extended carry back of losses made in each of the tax years 2020 to 2021 and 2021 to 2022.
This £2,000,000 limit applies separately to the unused losses of each tax year within the duration of the extension. Income Tax payers will not be subject to a partnership-level limit.
Its a new tax year, small business owners will be deciding how extract their income, lets look at the choices.
Business Expenses
If you personally incur costs for you business, make sure you reclaim them, for example
Business Mileage (keep records of your trips)
Working from Home Costs
Business Travel Costs
If you incur any cost wholly and exclusively for your business you can reclaim it and it tax free to you and tax deductible to the company.
Pensions
Pensions are extremely tax efficient, contributions are normally tax deductible for the company (they can by up to £40k per year), the money grows in the pension tax free and when you reach 55 your can tax up to 25% out tax free.
Electric Company Cars
There are a range of incentives including the Government Plug In Allowance of up to £2,500, very low rates of Benefit in Kind and 100% First Year Capital Allowances.
Interest on Loans
If you have lent money to your company and you borrowed that money and pay interest on it you can claim the interest on your self assessment return for qualifying interest relief.
You company can also pay you interest on the loan but it will need to deduct interest at source at 20% under the CT61 rules.
You can reclaim tax paid on your interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year. Further details at Tax on savings interest – GOV.UK (www.gov.uk)
Salary Options
The tax free allowance is £12,570 (£1,047.50 per month) but National Insurance is the main driver for salary levels
Class 1 National Insurance thresholds
2021 to 2022
Lower earnings limit
£120 per week £520 per month £6,240 per year
Primary threshold
£184 per week £797 per month £9,568 per year
Secondary threshold
£170 per week £737 per month £8,840 per year
Most business owning directors who can take dividends will choose either £737 per month or £797 per month, the £797 qualifies you for state pension, you can check your qualifying years with HMRC
If you are on Furlough (CJRS) you should leave you pay at it previous level and then review it when you return to work.
National Minimum Wage
The national minimum wage does not apply to company directors unless they have contracts that make them workers as defined in section 54(3) of the act.
Dividends and the Dividend Allowance
Dividends are a great choice provided you company has made a profit or has profit reserves (if doesn’t its illegal to pay dividends)
VAT reverse charge started on 1st March 2021 if you buy or sell building and construction services, but what are construction services?
The CIS rules for reverse charge were set out in statutory notice 2019/892 (The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019)
Specified services
4. The services referred to in article 3(1) are construction services as defined in articles 5 to 7 together with any goods supplied with those services which fall to be treated as part of a single supply of services.
5.“Construction services” comprise—
(a)construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
(b)construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
(c)installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
(d)internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
(e)painting or decorating the internal or external surfaces of any building or structure;
(f)services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in paragraphs (a) to (e), including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
6. “Construction services” do not include—
(a)drilling for, or extraction of, oil or natural gas;
(b)extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;
(c)manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;
(d)manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;
(e)the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape;
(f)the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature;
(g)signwriting and erecting, installing and repairing signboards and advertisements;
(h)the installation of seating, blinds and shutters;
(i)the installation of security systems, including burglar alarms, closed circuit television and public address systems.
But the more detailed definitions are in Construction Industry Scheme: CIS 340 Appendix A, B, C
Under the new Construction Industry Domestic Reverse Charge identifying whether the activity is a construction activity is the first test you need to apply.
VAT Reverse Charge has a wider scope than CIS in that it covers Mixed Supplies, these are supplied where part of the supply is a construction activity and part is not but the whole contract is treated as within VAT Reverse Charge.
Services with reverse charge and normal VAT charging
Supplies where the reverse charge element is a minor part
Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. However, if the reverse charge part of the supply is 5% or less of the value of the whole supply this can be disregarded (this is referred to the ‘5% disregard’) and normal VAT rules will apply if the customer makes an end user or intermediary supplier notification.
Supply and fix works will be subject to the reverse charge because the services and goods are part of one supply for VAT purposes. For example, a joiner constructing a staircase offsite then installing it onsite, will be making a reverse charge service even if the charge for installation is only a small (subject to the 5% disregard) element of the overall charge.
In addition, if 2 parties have already had a reverse charge service between them on a construction site, for convenience they can both agree that any subsequent construction supplies on that site can be treated as reverse charge services.
If you are a contractor working for the Public Sector or a Large Business you will be assessed against the Off Payroll rules that took effect in 6th April 2021 its a shift in the way the existing IR35 rules are applied.
Who is likely to be affected and what is it
Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
Recruitment agencies and other intermediaries supplying staff through PSCs.
Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.
A 5% allowance is currently available to those who apply the off-payroll working rules to reflect the costs of administering them. Because responsibility is shifting from the PSC to the engager, this allowance will be removed for those engagements with medium and large-sized organisations. It will continue to be available for engagements with small organisations.
The deemed employer is the person who is responsible for:
deducting Income Tax and employee National Insurance contributions and paying these to HMRC
paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC
How is the money taxed when the contractor’s company gets it?
ESM10030 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how the worker accounts for and reports monies drawn from their intermediary
Remuneration
Remuneration (i.e. such as a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024).
If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for the services of the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker’s self-assessment return.
ESM10035 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting
Example – Corporation Tax
A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.
Turnover (12 x £1,000) = £12,000 (credit income)
Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)
Less Payroll expense (12 x £600) = £7,200 (debit in profit and loss)
Profit = £0
If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:
Turnover (12 x £1,000) = £12,000 (credit income)
Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)
Profit = £7,200
The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.
If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.
The maximum pension contribution is £40k per year and if you haven’t used the allowance in previous years there is a 3 year carry forward of unused contributions.
Most business owners pay this as a company contribution, that should save corporation tax as its a tax deductible expense.
S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009
A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.
One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade.
5 April 2021 – You must have sent your final FPS for the tax year 2020-21 by this date (although you should of course still submit FPS returns on or before the final pay date of the year, as per HMRC rules, which may be before 5 April 2021)
14 April 2021 – last date for March CJRS claims
19 April 2021 – You must have sent your final EPS submission for the year by the year – which serves as your ‘Final Submission’ to HMRC for 2020-21.
31 May 2021 – You need to provide a form P60 (either paper or electronic) to each employee on the payroll who was working for you on the last day of the tax year (5 April). You must do this by no later than 31 May. Make sure that you have the payroll file open for 2020-21, then click ‘Forms – End of Year P60’ to produce these.
6 July 2021 – Expenses and benefits annual returns – If you provide employees with expenses and benefits then P11D and P11d(b) are still sent as a separate submission to HMRC and should be sent by 6 July 2021 where applicable.
Mileage Allowance Payments (MAPs) are what you pay your employee for using their own vehicle for business journeys.
You’re allowed to pay your employee a certain amount of MAPs each year without having to report them to HMRC. This is called an ‘approved amount’.
Most people are familiar with the approved mileage rates of 45p for the first 10,000 miles then 25p per mile but can you claim 10,000 in multiple businesses? not if they are associated
ITEPA 2003, s230 (4)
(4)One employment is associated with another if—
(a)the employer is the same;
(b)the employers are partnerships or bodies and an individual or another partnership or body has control over both of them; or
(c)the employers are associated companies within the meaning of section 416 of ICTA.
For associated businesses its one lot of 10,000 over all the associated businesses
HMRC have now agreed you can have a Virtual Staff Party tax free
So you could organise a Virtual online event, have a hamper delivered to your staff and that would count.
Virtual functions
Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself.
The figure of £150 is not an allowance. For functions that are outside the scope of the exemption (see example at EIM21691) directors and employees, are chargeable on the full cost per head, not just the excess over £150, in respect of:
themselves and
any members of their family and household who attend as guests.
The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend. Divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head.
With the end of the tax year fast approaching, now is a good time to review your business and personal finances to ensure that they are as tax-efficient as possible.
We can help make sure that you don’t miss out on any money-saving opportunities.
Please take some time to read through our 2020/21 Year End Strategies Guide, which contains practical guidance and ideas to implement before 5 April 2021.
With our useful tips and expert assistance, we can help you and your business to increase your profitability and minimise the tax burden.
Some directors will have big decisions to make, both immediately and in the coming weeks and months as the various government initiatives begin to unwind. Such decisions may include which creditors should be paid, whether the losses currently being incurred are sustainable and if the company can continue to trade in its present format.
The current Coronavirus Job Retention Scheme comes to an end on 31 October which means for those businesses with 20-99 employees, any employers looking to make redundancies will hopefully have provided the requisite 30 days’ notice to employees. On 30 September the Government lifted the temporary suspension on personal liability on directors for wrongful or insolvent trading.
In brief, wrongful trading occurs when directors have continued to trade when they knew, or ought to have known, there was no reasonable prospect of the business avoiding insolvency and the directors did not take every step to minimise the potential loss to the company’s creditors. In the event that wrongful trading occurs and the company enters insolvency, the directors could be held liable for the company’s debts from the point they knew or ought to have known the company was insolvent.
The Coronavirus Job Retention Scheme (CJRS) known as Furlough ends tomorrow 31st October 2020 and on the 1st November 2020 the Job Support Scheme (JSS) starts.
When JSS was announced in September, Rishi Sunak, said the scheme would directly support ‘VIABLE’ jobs.
The implication is that if the jobs aren’t viable and the business can’t continue that the business should not claim JSS.
JSS is complicated, take a look at this example from HMRC for an employee on fixed salary
Calculation example 1: fixed hours and fixed salary employee
An employee has worked full time, from Monday to Friday, for A Ltd since 2011, and is paid £2,250 gross at the end of every calendar month. The employee has always been contracted to work 37.5 hours per week. A Coronavirus Job Retention Scheme grant was not claimed for the employee.
A Ltd is a small employer and meets all the eligibility criteria to qualify for Job Support Scheme.
The employee enters into a JSS Open temporary working agreement with A Ltd on 2 November 2020 to work Mondays and Tuesdays (7.5 hours each day, equating to 15 hours per week) from 2 November 2020 to 31 December 2020, at which point the position will be reviewed. The employee’s pay for the working hours in November is £945.
A Ltd calculates the amount of the JSS Open grant for the pay period 1 November 2020 to 30 November 2020 (one calendar month).
The employee’s usual hours are calculated for the days on which the employee is on a JSS Open temporary working agreement within the pay period (2 November 2020 to 30 November 2020). The employee’s usual hours are calculated by A Ltd to be 155 hours:
The steps to calculate the fixed employee’s usual hours are:
The greater of the number of hours contracted for at the end of the last pay period before 23 September 2020 (37.5) and the number of hours contracted for at the end of the last pay period before 19 March 2020 (37.5): 37.5
Divide by the number of calendar days in the repeating working pattern, including non-working days: 7 37.5÷7=5.36
Multiply by the number of days which the employee is eligible to be claimed for under JSS Open: 29 days x 5.36 = 155.44 rounded to 155 usual hours.
The employee did not take any time off in November, so the actual hours worked in November are 67.5 hours. A Ltd calculates that the employee didn’t work for 87.5 hours of their usual hours for November.
To calculate the percentage of hours worked: (67.5÷155) x 100 = 43.55%
A Ltd checks that the employee can be claimed for under Job Support Scheme. In November, the employee worked for 43.55% of their calculated 155 usual hours for November. Because the employee is working at least 20% of their calculated usual hours for November, providing other Job Support Scheme conditions are met, a claim can be made for the employee.
A Ltd calculates the employee’s Reference Salary as £2,250 for the pay period. The maximum Reference Salary that can be covered under the scheme is £3,125 per calendar month. The cap does not affect the calculation here because the Reference Salary is less than £3,125.
To work out the overall amount that A Ltd must pay the employee for their non-working hours in each pay period:
Start with £2,250 (the reference salary for the pay period)
Divide by 30 (the number of calendar days in the pay period)
Multiply by 29 (the number of days subject to a Temporary Working Agreement in the pay period)
Divide by 155 (the number of usual hours for the JSS Open days in the pay period
Multiply by 87.5 (the number of non-working hours for the JSS Open days)
Multiply by 66.67% = £818.59
This is made up of a 5% employer contribution, and a 61.67% government contribution which A Ltd can reclaim.
To work out the government contribution to the employee’s pay for the non-working hours: 1. Start with £818.59 (the total pay for the non-working hours) 2. Divide by 66.67 3. Multiply by 61.67 = £757.20
The employee’s total gross pay for November will be £1,763.59 (£945 + £818.59).
If the business is about to go into liquidation or the directors plan to end the business then the accounts can’t prepared on a going concern basis.
The basis used for businesses which aren’t a going concern would generally be the break up value.
Directors may also include notes in the accounts to explain the status of the company.
In order to prove that business is not insolvent it will need need cashflow projections, budget and business plans, otherwise the directors risk being personally liable if the business fails.
You can now apply for the amount of £1,000 – £3,000 or £5,000 in exceptional circumstances
Dorset LEP – The closing date for applications is the 31st January 2021 or when the total budget of £550,000 is allocated, whichever is first.We advise you to apply as soon as possible as we expect there to be a huge demand.
Dorset SME recovery grant can be used for eligible project costs, which may typically be:
# 1-2-1 specialist advice which SMEs could call on to address their immediate needs in response to the impact of COVID-19 e.g. HR, accountants, legal, financial, H&S, IT / digital or sector specialists etc.
# For the visitor economy, this could also include productivity improvements such as enhanced use of digital tools such as yield management software, mentoring, networking or other measures.
# It could also support to develop innovative delivery in a socially distanced economy – for example, new ways of delivering cultural events and festivals that are so critical to the visitor experience; and / or
# Purchase of minor equipment to adapt or adopt new technology in order to continue to deliver business activity or diversify in response to COVID-19.
