Businesses that take, or have taken, advantage of government tax holidays, deferral measures and loan schemes to soften the impact of Coronavirus, need to carefully plan for the early part of 2021 when the deferred amounts subsequently become payable.
There is a significant cash flow risk for those businesses that have taken advantage of the various support schemes, but which fail to recognise or plan for the later outflows, which may be significant.
These cash commitments are likely to come on the back of a very difficult trading period, where output/production may have been restricted by social distancing and furloughed staff, consumer confidence has been low and markets and prices have been under pressure. It is highly possible that some businesses could be in an even worse cash flow position than they are now.
HM Revenue & Customs (HMRC) advised that the July 2020 income tax payments on account due through self-assessment (being half of the estimated income tax bill for the 2020-21 tax year) could be deferred to 31 January 2021. The deferred amounts will then coincide with any income tax balancing payments and capital gains tax liabilities for the same period, as well as the first income tax payment on account for the following tax year. Furthermore, VAT payments falling due between 20 March and 30 June 2020 can also be deferred to 31 March 2021. The outcome of this is that essentially a full year’s income tax will need to be paid in one hit, followed very shortly by VAT liabilities from nine months or more ago.
Additionally, for businesses that have secured a loan under the CBILS or Bounce Back schemes, the liability for interest and capital repayments (which are covered by the government for the first 12 months) will start to fall on the borrower from the second quarter of 2021.
The overriding message is therefore that, whilst government support and tax holidays may have represented a welcome lifeline over the past few months, it must be remembered that many of these measures are temporary and that liabilities are only being deferred, not written off.
To assist with cashflow planning, we have drawn up some top tips for businesses to consider as support measures start to be withdrawn:
1. Plan, budget and forecast
Stay on top of finances, reassess cashflow forecasts regularly and include key assumptions and sensitivity analysis. Whilst unpleasant, it is important to look at the worst-case scenario and have a plan in place. You need to know how much cash the business can draw upon (will additional finance be required?) and what the position will be at different intervals. Raise awareness within your business about the importance of cash, as even the most profitable business can fail if they have insufficient reserves.
2. Don’t defer tax payments unless necessary
HMRC’s guidance on the July payment on account deferral changed in the weeks leading up to the payment deadline, with more of an emphasis being placed on taxpayers to meet these liabilities as normal, unless they were “finding it difficult to make the second payment due to the impact of coronavirus”.
It is advisable to meet tax liabilities as they fall due if at all possible, and where funds have not already been earmarked for essential investment elsewhere in the business.
Further, getting an early handle on 2019-20 tax liabilities will allow advance planning for payments falling due in January and July next year.
Paying the tax now won’t win any points with HMRC, but could avoid later potentially unnecessary pressure.
3. Don’t struggle in silence
If you are having difficulty meeting tax payments, speak to HMRC sooner rather than later regarding ‘time to pay’ arrangements, to avoid late payment penalties and additional pressure from the debt management team at HMRC. It is worth remembering that interest will still be due under such arrangements and taxpayers could therefore consider existing financing options as an alternative.
Check the terms of your business insurance policy for any cover on pandemics or government-ordered closure. Is this also an opportunity to review your insurance policy generally, and the cover it provides?
4. Critically review the business’ cost base across the board
Use this as an opportunity to review your regular outgoings and cut anything non-essential. Are all of those subscriptions really required? Are you still ordering stationary and teabags for office staff that aren’t there?
5. Discuss terms with suppliers and customers
Whilst everyone is in the same position, there could be leeway for existing agreements to be re-negotiated, particularly if you have long-standing relationships with your suppliers or customers. Speak with suppliers to determine when they are anticipating payments; go through creditor schedules regularly to try and reduce creditor days, and potential bad debts; and ensure regular communication with key contacts to preserve long-term relationships. Finally, pick up the phone to the bank and seek forbearance on interest rates, capital repayments and terms of current overdrafts.
6. Sharpen your reflexes
Change is occurring at breakneck speed, with new or updated guidance repeatedly being issued. Position the business to be nimble and quickly adapt to the rapidly developing and changing socio-economic situation; this should ensure you are well placed to take advantage of unforeseen market opportunities ahead of your competitors.
7. Identify synergies
Explore opportunities to partner with, and support, other businesses to mutual benefit.
8. Think outside the box and diversify
Does the current situation provide opportunities to develop new income streams? These might be in mail order or click and collect, staycation holiday accommodation, pre-packed picnics, drive-in cinemas and events, or increased demand for public access to the countryside.
9. Communicate with employees
Talk to employees and keep them updated. Wherever possible, include them in discussions and decision making; they may have important points that you had not considered. This is a great time of uncertainty for all and unemployment rates have soared since March. Reassure staff and explore options for flexibility around working arrangements. Employees are often a business’ greatest asset; employee goodwill could be critical to survival in the coming year.
10. Take advantage of other government schemes
Review the range of government-backed support schemes and consider whether existing schemes, tax breaks or grant funding could help launch new projects in areas such as forestry and woodland planting, carbon credits, offsetting and sequestration.
For further advice on any issues raised here, please contact your usual Saffery Champness partner.
Martyn Dobinson, Partner and Lizzie Murray, Senior Manager