Helping clients to maximise cash flow
Payment deferral
The coronavirus crisis has seen unparalleled government support in terms of grants and loans, but there are also a number of tax easements, something also without precedent. The second payment on account for 2019/20 can be automatically deferred from 31 July 2020 to 31 January 2021, which could help with short-term cash flow. To take advantage, clients simply need not pay, and HMRC will not charge any interest on the amount when it is made good in January 2021.
Pro advice. If your clients do take advantage of this measure, ensure you don’t enter the second payment on account when you complete their return using their software. Double check that your package doesn’t automatically mark the payments as “paid”.
Make your clients aware that the deferral is just borrowing by another name. It’s a short-term fix and they will need to factor repayment into their longer-term plans. You may need to help them assess their views of long-term business viability, as there will be some who are better not just kicking the can down the road.
Pro advice. If clients don’t want to defer, they can still pay as usual. HMRC is keen that anyone able to pay does so.
Reducing the July payment
Clients can apply to reduce the July 2020 tax bill, which means they will need to estimate their profits with your assistance. The snag with estimates is they’re risky precisely because they’re estimates. It means clients don’t get closure in respect of their tax position, and businesses could really do with certainty at the moment. If the figures end up changing further down the line, the tax bill could increase.
However, if you can accurately forecast profits, a claim to reduce the payments could mean a refund of some or all of the first payment on account.
Pro advice. This will be especially useful if your client is reasonably sure they will be loss-making.
Time to pay
Another option is to ask HMRC to make instalment payments, i.e. a time to pay arrangement. The guidance has been updated to reflect the current crisis (see Follow up ). Instalments are always arranged to suit individual circumstances: there are no “one size fits all” terms. HMRC should facilitate applications made because of coronavirus. There is a special coronavirus helpline to use for applications - 0800 024 1222. Advise clients that there are fewer telephone operators at present because of safe working practices, but that there is also a web chat facility for those with problems paying tax (see Follow up ).
Cash basis accounting
A further option to consider is to move to cash basis accounting for clients who prepare their accounts on a traditional accruals basis, which matches invoices and receipts to the period they relate to not the period they are paid in.
The cash basis can save clients money because tax is only paid on monies actually received, not on what’s owing. It can be used by sole traders or partnerships where turnover is £150,000 or less. If a client has more than one business, you use the cash basis for all of them, and the £150,000 limit applies to the combined turnover. Landlords can use the cash basis too, but the rules are slightly different.
Pro advice. Limited companies are not permitted to use cash basis accounting.
For detailed commentary on profit computation under the cash basis
Who might benefit?
This could be a winner for clients whose business is usually owed more money from customers than it owes to suppliers. That’s usually true for service industries, but not normally for retail or leisure industries.
However, you should exercise caution. Using the cash basis means that certain tax reliefs, including sideways loss relief, will not be available to clients.
When to opt into the cash basis
Let’s assume you have discussed the matter with your client and they want to go ahead with the switch. When should you do it? With income tax for traders, clients have to opt in, and it’s usually done by ticking a box when you submit the income tax self-assessment return. So you could simply do it on the usual tax return cycle in January 2021. But you could accelerate this.
Pro advice. To get certainty over the tax bill now, and an immediate cash-flow advantage, the 2019/20 tax return could be filed early, claiming the cash basis straight away.
Cash-flow advantage
If a client opts in for the first time, there is the potential to get them a double cash-flow bonus. This is because you won’t include amounts owing for work done at the end of last year, as it will have been included in the previous return. And you don’t include as income amounts owing for work done at the end of this year.
Worked illustration - Derick
Derick makes up accounts to 31 March each year. In the year to 31 March 2020, Derick received £75,000 in sales income. At 31 March 2019 he was owed £6,000 for work done which hadn’t been paid. At 31 March 2020 he is owed £10,000 for work done which hasn’t been paid. He owes minimal amounts to suppliers each year end.
Derick has been preparing accounts on the standard accruals basis. For tax year 2019/20 (his accounts to 31 March 2020), he elects for the cash basis. Derick doesn’t need to pay tax this year on £6,000 owing from last year as it was included as income in his 2018/19 return. On the cash basis he doesn’t pay tax on the £10,000 owing at 31 March 2020 either.
Due to joining the cash basis, Derick is taxed on income of only £69,000 (£75,000 less the £6,000 owing at 31 March 2019, which was included in last year’s return). The £10,000 owing at 31 March 2020 is left out because he has opted for the cash basis. For comparison, on the accruals basis Derick would have been taxed on income of £79,000 (income £75,000 less £6,000 included last year, plus £10,000 owing at 31 March 2020). Thanks to joining the cash basis, Derick pays tax on £10,000 less profit this year.
Depending on the level of business expenses, other income and deductions and impact of devolved tax rates, Derick could save up to £4,200 in tax and NI as a higher rate taxpayer or £2,900 as a basic rate taxpayer.
On the cash basis, Derek can’t claim a deduction in 2019/20 for suppliers’ bills unpaid at 31 March 2019. He’ll get tax relief on suppliers’ bills owing at 31 March 2020 when the bills are paid. So, tax relief on business expenses could be delayed. This reduces some of the cash-flow advantage of moving onto the cash basis, so you need to do the sums carefully.
Pro advice 1. Remember, the cash basis won’t advantage all your clients. And the double cash-flow advantage is a one-off bonus when clients join. It will be reversed if they leave the cash basis.
Pro advice 2. In order to ensure that income and expenditure is only accounted for once, there are specific rules that mean you may need to make transitional adjustments. Refer to HMRC’s guidance at BIM70060 (see Follow up ).
Guidance on time to pay arrangements
HMRC web chat
HMRC guidance - BIM70060
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