Tax: an opportunity for businesses to improve cashflow

As a result of the recent downturn in the markets and the ongoing Coronavirus pandemic, many of our clients are already feeling a significant financial impact. For many, their greatest concern is around cash flow management.

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Emily Spooner
Published: 19 Mar 2020 Updated: 13 Jun 2022

As a result of the recent downturn in the markets and the ongoing Coronavirus pandemic, many of our clients are already feeling a significant financial impact. For many, their greatest concern is around cash flow management.

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We have detailed below some measures that you can take to ease some of the financial burden, focusing on VAT, payroll taxes and corporate tax.

More generally, the Government has also announced substantial financial support for businesses which will be delivered using mechanisms such as the Coronavirus Business Interruption Loan Scheme (providing short-term loans of up to £5m to small businesses), a new Bank of England lending facility, a statutory sick pay relief package, Business Rate Relief for small businesses, as well as cash grants for certain retail, hospitality and leisure businesses.

Time to Pay (TTP) - VAT & PAYE

It was announced in the Budget that HMRC is going to dedicate additional resources in respect of TTP agreements: they will be deploying additional staff to meet an expected increase in demand. TTP can enable businesses adversely affected by the Coronavirus to defer payments of VAT and/or PAYE liabilities over several months.

HMRC will discuss the length of time required to pay on a case by case basis, but this is usually between 3-12 months.

Typically, HMRC will allow one month’s PAYE bill to be deferred, but those most severely affected businesses may be able to defer payments in full to a later point in the year.

Our experience dealing with HMRC on TTP has so far been positive – we have noticed HMRC taking a pragmatic and reasonable view. It is important that businesses proactively approach HMRC with any concerns as early as possible.

Businesses should be prepared to explain:

  • The reasons payments cannot be made (e.g. to pay salary costs)
  • How the business is managing this process and attempting to raise funds for outstanding payments (e.g. chasing debtors, seeking loans, negotiating with creditors)
  • How much of the liability (if any) can be paid immediately, plus an anticipated payment plan

PAYE liabilities included within TTP

  • All monthly payments due in relation to employee income tax deductions
  • Class 1A and Class 1B National insurance
  • Student loan repayments
  • Construction industry scheme (CIS) deductions

Other VAT opportunities

  • Payments on Account

    If your business is required to make Payments on Account (i.e. where the annual net VAT payable is over £1.3 million), you can request that HMRC reduces your regular payments on account, if you expect that your total VAT liability will decrease by at least 20% in your next Payments on Account year.

    As an alternative, you can request to submit monthly returns, which may be of benefit if you are in a repayment position as this can speed up the VAT recovery process.

  • Timing of Invoices

    The issue and receipt of invoices can, in some cases, be moved forward, brought back or staggered. This can have an impact on when VAT becomes payable to HMRC or recoverable from HMRC compared to when funds are received from a sales invoice, or payable for a purchase invoice.

  • Bad Debt Relief (‘BDR’)

    You may wish to consider reviewing whether or not there are any bad debts (i.e. over 6 months outstanding) on which BDR has not yet been claimed.

Corporate tax and Research & Development (R&D)

  • Deferral of corporation tax payments

    Corporation tax isn’t currently included within TTP but we understand from discussions with HMRC that a deferment can be requested through the Coronavirus helpline. Similarly, HMRC will consider whether late filing penalties and potentially late payment interest can be temporarily rescinded. A decision will be made on a case by case basis, but based on our experience so far, HMRC is being sympathetic to business needs.

    It is critical in all cases to speak to HMRC proactively and in advance of the payment due date.

  • Quarterly instalment payments (QIPs) and expediting repayments

    If your company is required to make QIPs it will be important to re-calculate your taxable profit estimates for the current period based on revised forecasts. Making the right tax payments now can have a significantly positive impact on cash flow.

    If you are a large business that has paid corporation tax by making QIPs throughout the year but now find that your circumstances have changed and profits have been revised downwards, it is possible to request a repayment of overpaid tax from HMRC, rather than waiting until the tax return is filed and processed by HMRC. This can significantly expedite the repayment process.

  • Capital allowances

    For any tax-paying businesses where significant building refurbishment works or office fit out works have been carried out in the last two financial years (and in some cases even earlier), completing a detailed review of capital allowances could generate significant tax repayments if tax returns are amended and re-submitted to HMRC.

  • Utilisation of losses

    If your company is forecasting an overall loss for the current financial year, these losses may be able to be utilised to offset corporation tax in the previous financial year.

    Ordinarily a loss carry-back claim cannot be made until the tax return for the later period has been prepared and submitted to HMRC. We are in discussions with HMRC to determine whether there is any flexibility to make a loss carry back claim at an earlier time, given the number of businesses that it could support, where losses generated are due to Coronavirus.

Example - loss of utilisation

  • Company X paid corporation tax of £114K on profits of £600K in the year ended 30 April 2019.
  • Company X now expects to make losses of £400K in year ending 30 April 2020
  • Losses of £400K can potentially be carried back to the year ended 30 April 2019, and a repayment of tax of £76K generated, along with credit interest
  • Research & Development (R&D) tax relief claims

    R&D tax relief claims provide an important cash flow lifeline for many businesses, often resulting in cash repayments, for both profitable and loss-making businesses.

- Making an R&D claim:

If your business is not already making an R&D tax relief claim, but you think you may be eligible, we encourage you to consider this opportunity as soon as possible. Note it is possible to look back up to two financial years to make a claim.

- Processing of repayments:

We are actively encouraging HMRC to expedite the approval and payment process for R&D claims under both the Small Medium sized Entity (SME) and R&D Expenditure Credit (RDEC) schemes, which would provide welcome positive cash flow for businesses that have already submitted their claims, or are about to do so.

Example - Interaction of RDEC and QIPs

  • Company Y has a corporation tax liability of £2M for the year ended 31 March 2020
  • Company Y calculates that it is entitled to claim RDEC which would reduce the liability to NIL and generate a repayment of £300K
  • Company Y is required to pay by way of QIPs for the 31 March 2020, based on the pre-RDEC tax liability I.E. a £500K corporation tax payment each quarter, and makes payments of the full £2M liability
  • Once the RDEC claim is submitted to and processed by HMRC (likely to be much later), a repayment of £2.3M will be made

Reducing payments on account for large businesses:

We are encouraging HMRC to take a pragmatic view on the interaction of the QIP regime with the RDEC regime, to temporarily aid cash flow for businesses.

Currently RDEC is ignored for the purposes of calculating QIP amounts, meaning that businesses often must make large corporation tax payments on account, knowing that they will receive repayments at a later stage once the claims are processed by HMRC.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.