Helping clients to maximise cash flow
Coronavirus has led to an increased need for cash in hand. The government has deferred the second payment on account due in July 2020, but should self-employed clients automatically do this, and what other options should you be looking at?EndFragment
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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. 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.
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.
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.
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. EndFragment