Director’s Salaries following lockdown

 

You’ve not drawn salary from your company for the last three months because its income was significantly reduced. It’s now improving and you’re restarting your salary next month.

Is it worth paying yourself the arrears?

Back to normal?

If you’re one of the many company owner managers who reduced or took no salary because of the financial fallout of coronavirus, you might now be thinking about the right time to reinstate it. You might also be worrying about the effect the crisis will have on this year’s financial results and if the company will make an overall loss. If so, would it be tax efficient for you to reinstate your salary?

Tax efficiency

There are two tax regimes to consider when thinking about salary and tax efficiency: corporation tax (CT) for the company and personal tax (and NI) for yourself. While they are independent of each other both must be taken into account.

Corporation tax

Your company is entitled to a tax deduction for the salaries it pays. This applies even when the company makes a loss for a financial year. The salary will increase the loss but that doesn’t mean it’s not tax efficient to take it.

Tip. Even while your company has no CT to pay for a loss-making year it can use the loss to reduce its tax bill for the previous year and claim the resulting refund. Or, where it didn’t pay CT for the previous year it can instead use the loss to reduce its next tax bill. Either way your company gets a tax deduction for your salary.

Personal tax

Unlike CT, the tax efficiency of salary isn’t affected by whether or not the company makes a profit. Instead it depends on your total income for the tax year (not that for the company’s financial year).

Taking account of your other income (as best as you can estimate at this time) aim to take a salary that brings your income to at least equal your tax-free allowances and reliefs.

For 2020/21 that’s a minimum of £12,500 but could be more. The NI-free amount is lower at around £9,000 and it can be more tax and NI-efficient overall to limit your salary to this.

Tip. If you’re unsure whether or not to reinstate your salary and/or pay yourself any arrears, you can leave the decision to as late as 5 April 2021 (the last day of the 2020/21 tax year). If you need to take income sooner but can’t take it as dividends, borrow the money and repay it from your salary, when you do restart it (or dividends).

Tip. On the other hand, if the lack of cash available in your company is deterring you from taking a salary from your company to achieve tax efficiency, this needn’t pose a problem.

Your company can pay you a salary in principle but you don’t have to draw the money for it to count as paid for personal tax and deductible for CT purposes. You can leave it on account indefinitely as a credit to your director’s loan account until the company can afford for you to take it. This means tax efficiency can be achieved for the cost to your company of PAYE tax and NI (if any) payable.

Conclusion

The lack of cash or current year’s profits shouldn’t prevent you from awarding yourself a salary. It will be tax efficient as long as your company has enough profits in the previous financial year or any future one. The total salary should at least equal your tax and NI-free allowances. Leave the salary in the company if it hasn’t got enough cash to pay it.

How we can help

If you need support or further information please contact Esther Guy on  01737 652 852.

Are you ready?

You claimed a Self-Employment Income Support Scheme (SEISS) grant. While it wasn’t too tricky to qualify, that’s not the end of the story as HMRC will be checking claims further down the line. What records do you need to back up your claim?

Recording your claim

More information about record keeping for the Self-Employment Income Support Scheme (SEISS) was published in late June. There are two elements: the claim itself, and how coronavirus affected your business.

 

HMRC says you must keep a copy of “all records in line with normal self-employment record keeping requirements including how much you have claimed from SEISS and your claim reference number.”  The records must be kept for at least five years after the 31 January tax return deadline or, if later, four years after you send your tax return.

Tip. Remember to record the SEISS grant as part of your business income. Keep a copy of the SEISS calculation. This can be a screenshot of your online claim.

Effects of coronavirus

Keeping details of your claim is simple enough but the second part of the record-keeping requirements is trickier. You must keep evidence of how your business was adversely affected by coronavirus.

The original guidance implied that once you made a claim, and as part of the process confirmed that your business was “adversely affected” by coronavirus, that was the end of the matter. But the latest guidance says you must have records which demonstrate the nature of the adverse effects to your business operations. What does this mean in practice?

What counts as evidence?

HMRC says that your evidence could include business accounts showing a reduction in turnover, confirmation of any coronavirus-related business loans you have received, dates your business had to close because of lockdown restrictions, and dates you or your staff couldn’t work because of coronavirus symptoms, shielding or caring responsibilities because of school closures.

Examples. HMRC has published examples of what it thinks counts as “adversely affected”, such as having to “scale down or temporarily stop trading because your supply chain has been interrupted, you have fewer or no customers or clients, or your staff are unable to come into work” (see The next step ).

What to record

However, to ensure trouble with HMRC is avoided, we advise you make a more detailed record of negative impacts. That’s not just what has happened but what you expect would have happened but for the crisis:

  • Think about your usual patterns of business and record what’s different this year.
  • Record jobs you expected to be working on, or customers you expected to have.
  • Record cancellations, or cases where work has been postponed.
  • If you have regular clients, regular contracts, record what you would usually be doing, and what you’d usually be charging but haven’t done because of the pandemic Dates, names, addresses, usual charge-out rates etc., will all give credibility.

 

Tip. Record pre-lockdown hours, customers and lost income to back up your claim. Collect evidence of how your business has changed now, in real time, before business gets going again, so you can be sure you get the facts correct.

How we can help

If you need support or further information please contact Esther Guy on  01737 652 852.

Allowable expenses at home

The COVID-19 lockdown has resulted in many individuals working much more from home.  There are, of course, many who are struggling to maintain their income but we thought it would be useful if we set out the tax relief on expenses you may be entitled to claim for.

The tax rules

The legislation which applies to the self-employed states that an expense is only allowable as a deduction if it is incurred ‘wholly and exclusively for the purposes of the trade or profession’.

If an expense is incurred for more than one purpose, the rules allow a deduction for any proportion of the expense which is incurred wholly and exclusively for the purposes of the trade or profession.

Wholly and exclusively does not mean that business expenditure must be separately billed or part of the home must be permanently used for business purposes and not used for any other purpose at any other time. However, it does mean that when part of the home is being used for the business then that is the sole use for that part at that time.

What costs are allowed?

The courts have allowed the apportioning of household expenses and there is often more than one method of arriving at a reasonable apportionment e.g. apportionment by area may be adequately considered by reference to the number of rooms in use but in an open plan environment a calculation by reference to floor area may be necessary.

The factors to be taken into account when apportioning an expense include:

  • Area: what proportion, in terms of area of the home, is used for business purposes?
  • Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
  • Time: how long is it used for business purposes, as compared to any other use?

 

In relation to specific costs, HMRC accept that a reasonable proportion of the following are allowable:

Insurance – an appropriate part of the premium can be allowed.

Council Tax – it may be allowable where other property based expenses are deductible.

Repairs and maintenance – a proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the business e.g. general redecoration of the exterior or repairs to the roof. If a room is used solely for business purposes then the cost of redecorating that room is wholly allowable.

Running costs (light, heat, power) – where there is only minor business use of the home e.g. writing up business records, HMRC will accept a claim based on any reasonable basis. Where there is significant business use it is appropriate to apportion such expenses by reference to the facts of that usage.

Telephone – the cost of business calls is allowable, as is a proportion of the line rental (based on the ratio of business use to total use). Similar rules apply to broadband.

Use of home: example

Mark usually works from business premises and serves customers face to face. During COVID-19 he is operating his business online and managing it from home. He is using the spare bedroom in which there is a desk and computer. The room is solely used as his office between 9am and 5pm daily.

The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.

After apportioning costs by reference to the number of rooms in the house, Mark calculates the room uses £300 of variable costs (electric and gas) and £600 of fixed costs (council tax, insurance). In apportioning these costs by time Mark claims for 8/10 of the costs (8 hours in use for work and 10 hours total use of the room). The total claim is £720.

The claim of 80% of the total costs attributable to the room is seen by Mark as a reasonable basis for future claims, should his circumstances remain unchanged.

It should be noted that the £720 claim is for annual costs. Post COVID-19 he may resume working from business premises but he may well conclude that he can operate his business very well from home and change his working arrangements.

Fixed rate deduction

The calculations above do require some time to be spent analysing actual costs. As a simpler alternative, the tax rules allow a fixed rate claim:

Number of hours worked            Allowable weekly amount

25 or more                                          £10

51 or more                                          £18

101 or more                                        £26

How we can help

If you need support or further information regarding home-working costs, please contact Esther Guy on  01737 652 852.

Delivery & Take-away – how to adapt for VAT

The food and hospitality sector (restaurants, bars, cafes, canteens and similar establishments) have been hit particularly hard by the Covid-19 lockdown.  Businesses are having to adapt quickly to survive, for example, by offering take away or delivery.

In doing so, you can take advantage of the VAT rules which allow VAT to be zero rated on certain qualifying supplies.  However, it is a minefield so care is required.

The basics

The VAT law in respect of food is not a picture of clarity.  The general position is that the supply of food is relieved of VAT by ‘zero-rating’ i.e. a 0% rate of VAT is applicable. However, there are a number of exceptions to the zero-rating for food, for which the standard rate of VAT will apply at 20%.

There has been much debate on what qualifies for 0% VAT and what should have VAT charged at 20%.

For example, food items that are, as a rule of thumb, considered to be ‘luxury goods’ i.e. non-essential food items such as confectionary, crisps and fizzy drinks etc are charged at 20% VAT.

But there are exceptions such as cakes and certain biscuits which are zero-rated.

You then need to consider whether the food is to ‘eat in’ and therefore VAT is charged at 20% or ‘take away’ which can often be zero-rated.

But there is an exception to the exception!  If the take-away food is hot then often this will need to be standard rated with VAT charged at 20%.  But items such as sushi and wraps are not classed as ‘hot’ and can therefore be zero-rated.

Clear as mud!

End of eating in for now?

Understandably, eat in sales have ceased for restaurants, pubs and cafés that have had to remain closed during lockdown.  If you have adapted to offer take away or delivery services then there is an opportunity the reduce your VAT charge on certain sales.

The rules are complex and we recommend looking at your menu on an item by item basis so that take-away supplies can be correctly coded into the till to avoid any costly mistakes.

The HMRC VAT notice 709/1 is a good place to start – https://www.gov.uk/guidance/catering-takeaway-food-and-vat-notice-7091

Remember too that we offer tax fee protection policy, which might give you peace of mind that our accountancy fees would be covered in the event of a VAT inspection down the line.

If you need support or further information regarding VAT and food, please contact Esther Guy on  01737 652 852.

 

Step by Step Guide

The HMRC claim portal went live this week and many clients have already claimed their grant from the government, which is great news.

We are aware that a few people have reported problems and therefore I thought it might help to explain how the process works, using a step by step guide:

 

 

  • You then either need to login using your Government Gateway login details or you need to create a Government Gateway login using the link on the screen.
  • HMRC will verify your identity and therefore the quickest way to be verified is to enter your passport number, so it’s worth having this to hand.

 

 

  • Once logged in to the Government Gateway you will be asked to enter your contact details
  • HMRC will display on screen the grant amount available to you and how this was calculated

 

 

  • You will be asked to enter your bank account details
  • Finally, you need to make a declaration that the claim is accurate
  • Click Accept and Submit
  • Once the claim has been submitted you should receive funds in your bank account within 6 working days.

 


Problems?

We are aware that some people are being told that they are not eligible, when they believe they should be.  We also know of people told they are eligible but then unable to pass the identity verification process.  And we have some clients with no access to a computer to make the claims online.

In each instance the advice from HMRC has been to call the dedicated helpline number below.  Claims are being processed over the phone where people are having computer issues.

You may need to wait to get through (up to an hour was reported yesterday) but once your call is answered the HMRC team are friendly and very helpful:

0800 024 1222

Opening times:
Saturday 16 May 2020: 8am to 4pm
Monday to Friday: 8am to 4pm


More Support

For more help with your grant claim or any other accounting matters please don’t hesitate to get in touch with the team at a4c:

Call 01737 652 852 or email info@a4cgroup.co.uk


How can employers can support staff returning to work?

After our A4C zoom meeting last week, many of our clients voiced their concerns about employees not wanting to go back to work.  It is a completely understandable reaction according to mental health experts who are warning about a large spike in anxiety and fear for returning to “normality”.

The Fear

For seven weeks we have been encouraged to fully isolate, to fear the disease and avoid anyone outside our households.  It is unsurprising that we should feel nervous and anxious for a second wave of infections, the lack of PPE and the unrealistic social distancing rules for many small businesses.

Doctor Nick Taylor, a clinical psychologist and CEO and co-founder of Unmind (a digital workplace mental health platform) explains, “We’ve witnessed the world turn upside down due to COVID-19, (so) there is no doubt this has affected people’s mental health”.

So, what can you, an employer, do to make the work transition easier?

A news article published by Lydia Smith called ‘Coronavirus: How employers can support people’s mental health as they go back to work’ highlights four steps for employers to follow to ease the transition back to work for those who are worrying:

1. Communicate well

Much anxiety stems from a lack of understanding and knowledge of this disease. Employers “must be able to continuously provide concrete, clear updates from trustworthy sources to their teams” as Dr Taylor explains. Speculation can cause anxiety and it is the employer’s job to minimise misinformation.

2. Check in with your team

It is vital to listen to your staff and provide support. Dr Taylor explains “Consistent two-way communication will be critical for employers and employees to understand the concerns that may arise as the return to work process takes hold.”

3. Check in with people

It is vital to listen to your staff and provide support. Dr Taylor explains “Consistent two-way communication will be critical for employers and employees to understand the concerns that may arise as the return to work process takes hold.”

4. Be flexible

Although the news article put ‘Be empathetic’ and ‘Be flexible’ into one heading, it is vital to stress the importance of each separately. “Being flexible” could mean offering support those who will have difficulty in finding childcare support, those who cannot travel to work without public transport and other issues that shall prevent availability to return to work.

In conclusion

The main advice for both employees and employers is to be “empathetic, understanding, and supportive towards one another,” in order for an easier return to “normality” in the workplace.

To read the whole article, please refer to this link How Employers Can Support People Going Back to Work

For courses on mental health awareness, check out the courses at Engage in Learning

Borrow between £2,000 and £50,000

The government have launched a new scheme to support smaller businesses, aimed at those who were struggling to obtain financing via the Coronavirus Business Interruption Loans (CBIL).

The government guarantees 100% of the bounce back loans and there won’t be any fees or interest to pay for the first 12 months.

Key Features:

  • Borrow between £2,000 and £50,000 (up to 25% of turnover)
  • No personal guarantees required
  • No Repayments for the first 12 months
  • Interest rate fixed at 2.5%
  • 6 year term with no early repayment fees
  • No fees to access the loan

Eligibility

You can apply for a loan if your business:

  • is based in the UK
  • has been negatively affected by coronavirus

How to Apply

Bounce Back Loans are being provided by the major banks and you should start by approaching your own banking provider via its website.

You will need to complete a short online application form and there will be the usual checks surrounding anti-money laundering and fraud.  Assuming you are accepted the funds should be in your account in a few days.

Life doesn’t have to stop because of the Coronavirus Pandemic!

At a4c we’ve been embracing online video calls to keep in touch as a team and to continue meetings with our clients, where they would normally have come to the office in Newdigate.

There are lots of software options available and so we’ve explained below why we chose Zoom (and not just because we love a bit of Aretha Franklin!)

Why Zoom?

If you are working from home, you may be familiar with online meeting rooms and webinars where you can have online meetings from your phone, desktop or tablet. But which is the best conferencing software?

Skype is ideal for its video capabilities and Join.me is good for screensharing and audio, MS Teams works nicely but has limitations on numbers.  However, we have found that Zoom combines HD video conferencing, online business meetings, webinars, and mobile capabilities into one solution.

Here are four reasons why we love this online meeting software:

1)       It is free!

2)      The app can be downloaded in minutes.

3)      Easy to use and for a range of purposes.

4)      Only one person must have an account on zoom.  Everyone else can simply click on a meeting link and jump right in from their phone, tablet or computer.

It also offers screen sharing, annotation, messaging, recording, webinars, client meetings, zoom rooms… and so much more!

This is why A4C loves Zoom above all other online meeting platforms.

Joining a meeting:

There are two easy ways to join a meeting once you have downloaded the Zoom software onto your computer, tablet or phone:

1)      Click the link which has been sent to you via email and it will take you directly into the meeting. (You do not need to sign in for this option)

2)      Sign into zoom and click the ‘join’ button and enter your meeting ID number and display name in. (You do need to sign in for this option)

Scheduling a meeting:

If you want to host your own meetings then register for a free account.  Log in and click ‘schedule a meeting’ in the top right-hand corner of the screen. It will then take you onto a different screen where you fill out a form of your meeting preferences.

It is a very easy and quick process.

For more information visit https://zoom.us/

 

What are the key rates and bandings for the year ahead?

The Personal Allowance, the amount you can earn before paying any Income Tax, remains at £12,500 for the 2020/21 tax year.

The threshold for paying the Higher Rate of Income Tax (which is 40%) also remains at £50,000.

Income tax

All UK except Scotland (see below) 2019/20 2020/21
Basic rate 20% 20%
Higher rate 40% 40%
Additional rate 45% 45%
Starting rate for savings rate (applicable to savings income up to £5,000) 0% 0%
Basic rate taxpayers £1,000 £1,000
Higher rate taxpayers £500 £500
Additional rate taxpayers N/A N/A
Higher rate applies to taxable income above (up to £150,000) £37,500 £37,500
Additional rate applies to taxable income above £150,000 £150,000
Dividend nil rate band (the amount on which 0% tax applies) £2,000 £2,000
Dividend rate up to basic rate limit 7.5% 7.5%
Dividend rate up to higher rate limit 32.5% 32.5%
Dividend rate on income above higher rate limit 38.1% 38.1%

The tax-free dividend allowance remains at £2,000. The dividend you receive is the gross amount.

Basic rate taxpayers are able to receive up to £1,000 of savings income tax free. The limit is £500 for higher rate taxpayers. There is no savings allowance for additional rate taxpayers.

Income tax allowances and reliefs

  2019/20 2020/21
Personal allowance £12,500 £12,500
Transferable personal allowance (marriage allowance) £1,250 £1,250

Personal allowances. Since 5 April 2010 personal allowances are withdrawn from those with taxable income above £100,000 at the rate of £1 for each £2 of taxable income received above that amount.

One spouse or civil partner can transfer up to 10% of their unused personal allowances to their partner as long as neither is liable higher or additional rate tax. Claims can be backdated for up to four years where conditions are met.

Scottish income tax

The Scottish tax rates apply to earned income only. Where a Scottish rate taxpayer has investment income the same rates apply to it as they would to taxpayers in the rest of the UK.

  2019/20 2020/21
Personal tax-free allowance £12,500 £12,500
Starter rate 19% on income between £12,501 and £14,549 £12,501 and £14,585
Basic rate 20% on income between £14,550 and £24,944 £14,586 and £25,158
Intermediate rate 21% on income between £24,945 and £43,430 £25,159 and £43,430
Higher rate 40% on income between N/A N/A
Higher rate 41% on income between £43,431 and £150,000 £43,431 and £150,000
Additional rate 45% on income above N/A N/A
Top rate 46% on income above £150,000 £150,000

National Insurance

Description 2019/20 2020/21
Lower earnings limit, primary Class 1 (per week) £118 £120
Upper earnings limit, primary Class 1 (per week) £962 £962
Primary threshold (per week) £166 £183
Secondary threshold (per week) £166 £169
Upper secondary threshold for under 21s (per week) £962 £962
Apprentice upper secondary threshold for under 25s £962 £962
Employees up to the primary threshold and employers up to the secondary threshold. 0% 0%
Employees’ Class 1 rate between primary threshold and upper earnings limit 12% 12%
Employees’ Class 1 rate above upper earnings limit 2% 2%
Married women’s reduced rate between primary threshold and upper earnings limit 5.85% 5.85%
Married women’s rate above upper earnings limit 2% 2%
Employer’s secondary Class 1 rate above secondary threshold 13.8% 13.8%
Class 2 rate (per week) £3.00 £3.05
Class 2 small earnings exception (per year) £6,365 £6,475
Special Class 2 rate for share fishermen (per week) £3.65 £3.70
Special Class 2 rate for volunteer development workers (per week) £5.90 £6.00
Class 3 rate (per week) £15.00 £15.00
Class 4 lower profits limit (per year) £8,632 £9,500
Class 4 upper profits limit (per year) £50,000 £50,000
Class 4 rate between lower profits limit and upper profits limit 9% 9%
Class 4 rate above upper profits limit 2% 2%

Rent-a-room relief

Rent-a-room relief amount is set at £7,500. Individuals letting accommodation in their only or main residence, whether or not they are resident at the same time, as furnished accommodation are exempt on rental and related income (rent-a-room receipts) up to a limit of £7,500 a year.

Receipts in excess of £7,500 are taxed in full, but the taxpayer can elect to be taxed instead on either the full rent less expenses incurred under a normal rental business computation; or to be taxed on the rents in excess of the rent-a-room relief amount.

Trading allowance and property allowance

With effect from 6 April 2017 two new tax-free allowances are available to individuals with small amounts of income from trading or property rental sources. A “trading allowance” and a “property allowance”. Both allowances are £1,000 each.

In each case the £1,000 allowance applies to “income” (the receipts of the trade or property rental business) not profits.

Trading allowance

The trading allowance can be used against business income and certain miscellaneous income from providing assets or services in the course of a trade. Elections can be made so that the allowance is not given partially or at all. The amount of relief depends on whether the trading income exceeds £1,000.

If the income is less than £1,000, there is complete exemption and there is no need to notify HMRC or enter it on a tax return

If the income is more than £1,000 there is a choice. Either deduct actual business expenses or elect to treat the £1,000 as tax deductible in place of the actual expenses incurred.

A decision whether or not to elect can be made on a year-by-year basis.

There is no relief if the income has been received from:

an employer, or spouse’s (or civil partner’s) employer

a partnership in which you (or a connected party) are a partner

a close company in which you (or an associate) are a participator.

Property allowance

The property allowance can be used against rental income and certain miscellaneous income from providing assets or services in the course of a trade. Elections can be made so that the allowance is not given at all, or partially. The amount of relief depends on whether the income exceeds £1,000.

if the income is less than £1,000 there is complete exemption and there is no need to notify HMRC or enter it on a tax return.

if the income is more than £1,000 there is a choice. Either deduct actual property expenses or elect to treat the £1,000 as tax deductible in place of the actual expenses incurred.

A decision whether or not to elect can be made on a year-by-year basis.

The property allowance cannot be claimed where:

rent-a-room relief applies or could apply to the income; or

where the restriction (which took effect on 6 April 2017) on tax-deductible loan interest and other costs used to buy or improve residential accommodation applies.