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What is the difference between being a sole trader and being self-employed?

There is very little difference between being a sole trader and being self-employed, so much so that to register as self-employed, you must register as a sole trader. You cannot register as one without the other.

The term sole trade describes a business structure, wherein a person is the exclusive owner of their business and is entitled to all profits after tax. Alternatively, being self-employed simply means that a person does not work for somebody else and that they run a business or trade goods and are responsible for all success or failure that their business may encounter.

If you are self-employed, in order to register to pay tax, you must register as a sole trader with HMRC. There are other ways to work for yourself, including a limited company wherein you run a business but earn a wage and are registered with companies house, or a business partnership.

If you've started your own business and you're looking into the financial side of things, you may well be wondering how to register as a sole trader. Or perhaps you're wondering: is it worth registering as a sole trader?

Why you should register as self-employed/a sole trader

Aside from the legal side, there are a few different reasons you should register as self-employed. For one, it is the simplest way to ensure you are paying the correct amount of tax for your business. Here we cover how to track your accounting/finances as a freelancer which would also be self-employed.

If you set up a limited company, you have to pay corporation tax which you may need an accountant for and you also earn money through wages as opposed to the profits your business makes. When you register as a sole trader, you only have to pay income tax based on a self-assessment tax return that you send in each year, and you are entitled to all of your profits after that.

What happens if you do not register as a sole trader

For those who don't register as a trader or limited company or business partnership, HMRC is likely to fine you. These fines can range from 30% of the tax you owe to 100% of the tax you owe, depending on whether or not a judge determines you purposefully failed to file your taxes or whether it was accidental. On top of the fine, there may well be daily fees and interest.

When do I need to register as a sole trader?

In terms of when in the year to register as a sole trader, you must register and then file for a self-assessment before October. This then allows you to fill out and send your self-assessment tax return by the end of January so that you can pay the correct income tax and national insurance contributions for the next tax year.

You must register as a sole trader as soon as your earnings from April to April exceed £1,000. You may also need to register to prove your status as self-employed or to help you qualify for benefits.

The easiest thing to do is to alert HMRC of your business as soon as you begin to earn profits. That way you don't risk receiving any fines for missed deadlines or incorrect tax.

How to register as a sole trader

The first step in registering as a sole trader is to register for the self-assessment process with HMRC. If you haven't registered for this before, they will send you a code in the post within 10 days to allow you to access the self-assessment. This activation code allows you to prove your identity and complete your self-assessment.

Once registered as a sole trader, you should make sure that all of your invoices and paperwork are in order. You may also want to plan ahead to ensure that you will have all the documents ready for your eventual self-assessment tax return.

What are the responsibilities of a sole trader?

When you decide to start your own business you gain a number of new responsibilities that you are unlikely to have had before. Many of these are tax-related. As a sole trader, you are responsible for:

What to do if you're not sure whether to register as a sole trader

If you're a self-employed person running a small business and you're not sure whether or not to register as a sole trader, there are other options.

As aforementioned, you can opt to register with companies house as a limited company. This is a different business structure to a sole trader, and you will earn a wage as opposed to profits. You will also have to pay corporation tax. However, your personal finances will be legally separate from your business income, whereas sole traders have personal liability for their business' debts.

Alternatively, you could set up a business partnership which is another business structure altogether. You and your partners all share responsibility for the business, unlike limited companies and sole traders. Each partner is entitled to a share of the profits, and each partner will pay tax on their share.

Anyone unsure whether to register as a limited company, sole trader or business partnership can speak to a financial and tax expert, or contact HMRC for advice on which of these categories their small business comes under.

How Will Unincorporated Businesses Be Affected?

The basis period reform will impact those with unincorporated businesses, whether they are a sole trader or a member of a partnership, with accounting periods not ending on either 31 March or 5 April. In introducing the changes, HMRC is looking to prepare for the move to Making Tax Digital by creating a simpler system with a single set of rules for taxing profits and removing the complex rules relating to basis periods and overlap profits.

 The 2023/24 tax year will represent a transition period, where individuals will be taxed on profits for the 12 months to the accounting period which ends during the tax year, plus those from the end of the previous accounting period to 5 April 2024. In the transitional year, HMRC will require tax ‘up front’ on the profits arising in the period from the accounting year-end to the end of the tax year. In effect, this means that there are likely to be significant increases in an individual’s tax liability and careful cash flow planning will be important to ensure this can be funded.

Overlap profit

It's worth bearing in mind that individuals can relieve any overlap profit that they have brought forward. The profit for the 12 months to the accounting period ending in the tax year is referred to as the ‘standard profit’, while the profit from the end of the accounting period to 5 April 2024, is the ‘transitional profit’. The overlap relief is deducted from the latter.  This net profit or loss is then aggregated with the profit or loss realised in the standard period.

Individuals can mitigate the cash flow impact of the basis period reform by spreading the profits earned during the transition period. Where the transitional profits minus the overlap relief brought forward results in a taxable profit, the individual can spread it over a maximum of five years, beginning with the transitional year itself. The Finance Bill 2021-22 also introduced a facility to accelerate the recognition of profits spread in this way. This allows an election to be made for additional profit allocation to kick in at any point during the five-year period. The election must be made within 12 months of the self-assessment filing date for the tax year in which the taxpayer wishes to recognise the additional profits.

Effective tax forecasting

Effective tax forecasting is important for sole traders and members of partnerships; giving them a better understanding of when their tax liabilities will fall, so they can plan ahead. It’s important to be aware that individuals must continue to be self-employed in order to spread profits in this way.  As such, those planning to retire in the near future should seek advice.  Likewise, where the net position is a loss, advice should be sought at the earliest opportunity.

 From 2024/25, the profits of sole traders and members of partnerships will be taxed on a tax year basis. Although it may be simpler in the vast majority of cases, there will not be a requirement to change the accounting year-end.  For example, for those with an accounting period ending 30 June 2024, three months’ profits from the 30 June 2024 accounts and nine months’ profits from the 30 June 2025 accounts will be taxable in the 2024/25 tax year. This means that businesses will have to estimate their profits from the end of the previous accounting period to the following 5 April. Once the accounts to 30 June 2025 are complete, businesses will be required to amend the previous year and report the actual taxable profit that arose during the nine months to 5 April 2025. An amendment to the earlier year will be required for each tax year where the accounting period does not fall in line with the tax year. 

Final Thoughts

HMRC’s basis period reform could see some individuals calculating their tax liability based on almost two years’ worth of profits in one tax year, placing pressure on their cash flow position. By staying abreast of the new rules and planning ahead, unincorporated businesses can prepare to mitigate the cash flow impact of the new rules when they’re introduced. 

About the authors: Amy Cole is a director and Rachael Smith is an assistant manager at accountancy firm, Menzies LLP. 

This represents a record-breaking level of debt for HMRC to collect in a period of financial recovery, with the UK besieged by multiple macro and local economic challenges. Sushil Patel explores them over the next couple of pages.

Overdue Debt

Over the 13 years prior to the 2020-21 financial year, HMRC’s overdue debt averaged £18.1bn, peaking in 2008/09 following the financial crisis, where the debt level approached £26bn. As seen in the figure below, the current level of HMRC debt has increased by £38.5bn (203%) to £57.5bn.  Total overdue debt actually peaked at £72bn in August 2020, before falling to its year-end position of £57.5bn.

Overdue debt as a percentage of tax revenue, which since 2011/12 had stabilised at between 2% and 3%, has also risen to 9.4%.

debt, HMRC

There are several reasons for such alarming levels of HMRC debt and the primary reason being the support measures put in place throughout the COVID-19 pandemic, restrictions placed on HMRC’s ability to utilise its enforcement powers and HMRC changing their stance and overall approach on the collection of debt.

More than half of the £57.5bn overdue debt (£31.3bn) relates to VAT deferred through the coronavirus VAT Deferral Scheme/VAT New Payment Scheme. Here HMRC offered up to half a million businesses the option to defer VAT payments between 20 March 2020 and 30 June 2020 to the following tax year and gave the option to pay overdue VAT over smaller, interest-free instalments.

Revenue Losses

HMRC reported a decrease in revenue losses of £2.12bn from £4.08bn in 2019/20 to £1.96bn in 2020/21, this was due to the reduction in corporate insolvencies. Revenue losses occur when HMRC formally cease collection activity.

The reduction in insolvencies was partly caused by the government measures to financially support businesses during the COVID-19 pandemic and the introduction of temporary restrictions on the use of statutory demands and winding-up petitions.

For the period ended 31 March 2021, there were 9 cases (23 cases in 2019/20) where the loss exceeded £10 million, totalling £320 million (£634 million in 2019/20).

There were six write-offs (19 cases in 2019 to 2020) relating to Insolvency, totalling £126 million (£391 million in 2019 to 2020).

Although it is certain that large numbers of businesses would have failed had it not been for the introduction of government support measures, many of the measures have now ended, and HMRC will be facing pressure from the government to ensure the debts are collected.

TTP Debt Levels

Another reason for the debt levels increase is due to HMRC’s increased willingness to negotiate Time To Pay (TTP) arrangements with businesses. Due to the volume of cases, HMRC set up teams dedicated to dealing with specific types and amounts of HMRC arrears. The teams initially agreed deferrals of tax arrears on the condition that businesses either pay off the debt in full or contact HMRC in the future to negotiate a TTP (i.e.- an affordable repayment plan over an agreed period).

In the tax year 2020/21, HMRC negotiated approximately 864,000 (2019/20: 648,000) TTP arrangements, an increase of 33.3% from the tax year 2020/21. This increase has resulted in the quantum of debt under a TTP rising by 557% to £15.1 billion. The graph below highlights the significance of this increase when compared to the £2.78bn average debt level over the six years prior.

debt, HMRC

The coronavirus pandemic has presented HMRC with the extremely difficult task of assessing businesses future trading prospects in a period of unprecedented uncertainty. Key questions such as business viability and past compliance records will be at the forefront of HMRC’s collection process.

HMRC has been forced to take a much more open view on these questions, as many viable businesses have been plunged into extended periods of losses due to closures, national and regional lockdowns, along with sudden changes in consumer spending and habits.

Producing reliable forecasts has become much more difficult and something that management teams must revisit frequently. In many ways, HMRC’s greatest challenge is to find a somewhat unnatural equilibrium as a collector of taxes whilst simultaneously supporting UK businesses.

Ultimately HMRC will be responsible for deciding which options are best for the UK taxpayer in the orderly collection of overdue taxes while safeguarding employment and the ongoing recovery of the UK economy. The TTP scheme has been a resounding success since it was introduced in 2008/9, and it has facilitated the repayment of billions of pounds of overdue tax debts. What is clear is that the scheme is going to play a vital role in delivering the orderly repayment of overdue taxes over the next three years.

HMRC’s Future Outlook

The accumulation of unprecedented levels of overdue debt, debt tied up in TTP arrangements and the significant reduction in the numbers of insolvencies, puts HMRC in a difficult predicament. It is their responsibility to act in the UK Government’s best interests: to manage the levels of overdue debt whilst also ensuring enforcement action is taken against unviable businesses that are arguably trading to the detriment of UK taxpayers.

Some enforcement tactics against unviable businesses are therefore unavoidable, however, HMRC has shown throughout the pandemic that it is keen to support UK businesses. HMRC’s states in its latest accounts, that it has actively ‘reviewed and altered the tone of (their) communications, with different messaging determined by whether customers had experienced a high or low COVID-19 impact as well as offering ‘more flexible payment options such as longer TTP arrangements and extended review periods’.

Kroll expects this will continue to be the case and HMRC should be accommodating with businesses that submit strong proposals that warrant support and that include evidence of:

Eight people have already been arrested as a result of the investigations by HMRC into fraudulent misuse of the government’s covid-19 business support schemes. The arrests include a man from the West Midlands suspected of furlough fraud of almost half a million pounds. HMRC’s other investigations relate to the furlough programme, the “eat out to help out” scheme, and the self-employment income support scheme (SEISS). BLM uncovered the information as part of a freedom of information request. BLM has said that, moving forward, many more investigations could take place. 

 Data obtained by the Financial Times shows that 28,444 reports of possible furlough fraud were received by HMRC at the start of this month. However, not all of these reports will be investigated. 

Since March 2020, the Treasury has paid up to 80% of furloughed workers’ wages up to a limit of £2,000 per month. The scheme has helped approximately 11.5 million employees so far. However, the furlough scheme, as well as the Kickstart scheme, are currently set to end on 30 September. However, the scheme has been extended in the past.

HMRC has said it expects to recover around £1 billion of mistakenly or fraudulently claimed money over the next two years.

Being faced with long-term illness or disability is incredibly stressful, and can cause serious implications for your finances. For those who have become financially vulnerable due to ongoing illness, or are looking for ways to plan for unexpected circumstances, business growth consultant Daniel Groves has compiled some the resources that can help.

Sick Pay

The first avenue for most people facing illness, injury or sudden disability is going to be sick pay from your employer. Check your employment handbook for details about the policy at your workplace, and communicate (in writing) with your employer’s HR department if they have one.

If there is no specific policy or insurance coverage at your workplace, you can claim Statutory Sick Pay (SSP) as long as you are employed but unable to work and earning an average of at least £120 a week. The current SSP rate is £95.85 a week. If your employer is refusing to pay SSP (or refusing to pay the full amount), contact the HMRC statutory payment dispute team.

When you think you are able to return to work, remember that you can ask your employer for accommodations to help you perform your job safely and comfortably. For example, requesting non-standard equipment that’s adapted for your physical needs.

Legal Compensation

Not every instance of sickness or injury is going to have a legal route to pursue, but if you’re suffering as a result of someone else’s actions (or negligence), you may be entitled to financial compensation.

For example, it’s compulsory for UK workplaces to have Employers Liability Insurance in case of accidents and injuries. Even if you feel partially responsible for an incident, you may be eligible for compensation if your employer is deemed to be mostly at fault, or has failed to follow Health & Safety regulations. In addition to claiming from your employer’s insurance, you may be eligible for Industrial Injuries Disablement Benefit, depending on the severity of your condition.

It’s compulsory for UK workplaces to have Employers Liability Insurance in case of accidents and injuries.

It’s possible to claim compensation if you have become ill or injured at the hands of medical professionals - either due to a procedure being carried out incorrectly, or a misdiagnosis leading to delayed or inappropriate healthcare. This can extend to psychological trauma caused by witnessing medical negligence - for instance, a father present at a traumatic birth. Medical negligence claims do require the expertise of a specialist lawyer, but a free consultation will give you an idea of whether you have a case.

The Government offers compensation to victims of violent crime, including those left with physical injuries, disabling mental injuries and/or a loss of earnings due to an inability to work for more than 28 weeks.

Money and Mental Health

Changes in circumstance are often triggers for mental health deterioration, especially when an ongoing sickness, injury or disability is beyond your control. Money worries will add extra stress, so working on healthy thought patterns and habits is a good idea - for example, tracking your spending and identifying the most stressful situations regarding money. The mental health charity Mind has some excellent guidance for navigating money and mental health

Personal Benefits - ESA, Universal Credit and PIP

If you run out of Statutory Sick Pay, or aren’t eligible, you can apply for new-style Employment and Support Allowance (ESA). ESA is intended to support you if you can’t work, or can only work a few hours a week due to a disability - however, you need to have made National Insurance contributions for the last 2-3 years.

Universal Credit is the new system to replace Income Support, Housing Benefits, tax credits and the previous Employment and Support Allowance scheme. You can claim Universal Credit in addition to SSP and/or ESA, or as an alternative if you don’t qualify.

You can claim Universal Credit in addition to SSP and/or ESA, or as an alternative if you don’t qualify.

Personal Independence Payment (PIP) is financial support for people who struggle with everyday tasks and have difficulty getting about (previously called Disability Living Allowance). If your illness, injury or disability has affected you for at least 3 months, and is expected to last for at least another 9 months, you should qualify.

PIP provides between £23.60 and £151.40 a week, depending on the severity of your condition, but it is not affected by your existing income or savings. Universal Credit is means tested, however, so will be affected by your savings, income, and spouse’s income.

It can be confusing, but the Turn2Us charity is dedicated to helping people experiencing hardship understand what financial benefits they’re entitled to. Their calculator is a good place to start.

Assistance with Housing Costs

Temporary support is available if you need help with paying your mortgage or rent. Homeowners can apply for a loan to help them make interest payments on their mortgage, called Support for Mortgage Interest (SMI). This money is paid 39 weeks after application, and must be paid back when you return to work or sell your home - so it may not be suitable in every circumstance.

Renters can make a claim for housing costs under Universal Credit.

Low-income households are eligible for a reduction of their Council Tax, although specific schemes vary across the UK.

Food Banks

If your circumstances suddenly make it difficult to put food on the table, look for local services, like food banks, that can help you with the basics. The Trussell Trust is a network of 1,200 “community organisations aimed at supporting people who cannot afford the essentials in life”, and will help you locate your nearest options or arrange a food parcel.

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Your nearest food bank may be run by a church or religious group - you can go to them even if you’re not religious, or follow a different religion.

If you’re not sure whether you’re eligible for food bank aid, your local Citizen’s Advice Bureau will be able to help (and give you a referral, if you need one). They may also be able to provide vouchers for clothing, fuel and other essentials.

Support for Carers

Remember that there is a whole other side to long-term illness, which is that your carers may also be eligible for financial support and benefits. For example, the Carer’s Allowance offers full-time carers £67.25 a week, and Carer’s Credit that covers gaps in National Insurance records so that carers can still be eligible for a State Pension.

Also, if your capacity to manage your own money is diminished, there are resources for asking others to support you in making financial decisions, or to become an appointee to make decisions on your behalf.

Ultimately, preparing for the unexpected is very difficult, and there’s no exhaustive list of resources that cover every eventuality. If you find yourself facing financial hardship due to an illness, injury or disability, know that there is always advice and financial assistance available if you ask.

Steve Cox, Head of Accountancy at IRIS Software Group, shares his thoughts on MTD and its implications with Finance Monthly.

HMRC’s prompt decision to delay the next phase of the making tax digital (MTD) rollout in 2020 due to the coronavirus was a welcome move. This now means any businesses who were expected to put digital links in place last year must have this done by the rapidly approaching deadline of April 2021.

Added to this, from April 2022, all VAT-registered businesses will be expected to file their tax returns digitally regardless of their turnover - which was a limitation in the previous phase. For many businesses, this requires a substantial amount of work if the bookkeeping is done manually, on paper records or even not at all, adding to their already full plates as they look to rebuild following the on-going challenges borne from the pandemic last year.

Accountants naturally have a critical role to play in supporting businesses through this next phase of MTD. So, it’s important to have a clear understanding of what needs to be done right now and how to make the transition as simple as possible for clients.

Actions to take now to meet MTD

The first port of call is to evaluate all clients who must comply with MTD before the phase 2 deadline, and review the MTD template built for the first phase. This will help establish a clear strategy of what each client needs to do. Accountants should then begin the transition preparation - communicating with clients about their exact financial positioning, workflow, filing and how to approach switching to digital records.

The first port of call is to evaluate all clients who must comply with MTD before the phase 2 deadline, and review the MTD template built for the first phase.

This is where it is important for accountants to think smart as MTD is a volume play - in both clients and data - when it comes rolling out across a large portion of their client base. One tool that is incredibly valuable and available from software providers, including IRIS, is record digitisation which enables anyone who needs to track receipts, capture photos and digitally process receipts, invoices, purchase orders and bank statements. The physical data automatically becomes a digital record and uploaded to a cloud-based platform, ready for accountants to review and compile VAT returns as required in their process. Such automation tools dramatically increases client efficiency and process productivity, while making life less stressful for accountants and business owners.

Through automation, such systems eliminate the time-consuming everyday chores, ensuring accountants can act smart and get more done. The majority of small business owners end up spending their personal time compiling their records from the week (or month) and would love to get this time back thanks to automation tools. In return, time saved chasing and reconciling client data frees up accountants to focus on client relationships and higher-value advisory services. It also rapidly improves communication speeds, transforming how accountants engage and connect with clients and prospects, ultimately helping them to retain and attract new clients.

Once accountants have successfully evaluated and prepared their clients for MTD and established a clear, proactive plan of action, they then need to make sure all clients have registered for an HMRC Agent Services Account, although proactive accountants could do this ahead of client evaluation. Once this is done, certain HMRC online services, including the MTD, VAT and income tax pilots can be accessed so business owners and accountants can work together to manage the transition efficiently; making it as simple as possible for both parties involved.

By using technology to gain instant access to accurate, real-time data well ahead of this year’s MTD deadline, accountants and business owners can be sure they’re in the best position possible to move forward with confidence.

Future-proofing for challenges ahead

Every client is different and will have their own way of managing their tax - some will have been using paper-based processes for years on end. So, it’s important to frame MTD in a way that isn’t complicated or confusing. Given the rapid digitisation of UK businesses over the last year to survive - and in some cases thrive - during the pandemic, businesses are more likely to be open to a digital records conversation than ever before.

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Yes, the practical side of what’s required and expected with regards to MTD is essential to get right. But MTD is about more than mere compliance, it’s about looking to help future-proof businesses. This is a real opportunity to build relationships with clients on a personal level and move into that trusted advisory role.

Working with clients to lay out a clear roadmap of steps they should be taking ahead of the 2021 MTD deadline - as well as the April 2022 VAT rollout - will enable accountants to help their clients on a real-time basis. And ultimately be of more support to business owners looking to recuperate from the impact of the last year.

By digitising now and creating great efficiencies across the client’s business, accountants can take advantage of improved workflows, increasing productivity and working smarter and help their clients future-proof their business for good. Harnessing technology to streamline tax management and create a single view of the data for all financial records, means accountants will put their clients in the best position to move forward with confidence.

Nic Redfern, finance director at NerdWallet, lays out his predictions for what the Government's priorities will be in the 2021 Spring Budget.

In spite of falling infection rates and the successful rollout of the vaccination programme, the Government is exercising extreme caution in its plans to lift lockdown restrictions.

This approach is understandable. Within the previous 12 months, the UK has faced three national lockdowns, as well as tiered regional restrictions. Keen to avoid a fourth lockdown, Prime Minister Boris Johnson has stressed that the route out of the third lockdown will be gradual, yet irreversible.

Such caution also means that many UK businesses – particularly those within the hospitality, leisure and retail sectors – will remain unable to reopen their doors for several weeks. Consequently, the 2021 Spring Budget is set to be dominated by “continued emergency support” for such organisations.

So, what sort of support can UK businesses expect to be announced by the Chancellor Rishi Sunak on 3 March?

Business rate holiday extension

The Great British high street has been on a well-documented decline over the past decade. However, the pandemic has exacerbated the struggles of bricks and mortar retailer outlets.

Conversely, COVID-19 has facilitated an eCommerce boom as UK consumers, unable to leave their homes, have become more reliant on online shopping. For example, the sales of Amazon UK’s wholesalers rose by an astonishing 51% last year. Put another way: it is predominantly merchants reliant on footfall and instore transactions that have felt the effects of the pandemic the hardest.

COVID-19 has facilitated an eCommerce boom as UK consumers, unable to leave their homes, have become more reliant on online shopping.

Consequently, it is expected that the Chancellor will extend the business rates holiday in an attempt to boost high street stores. Initially intended to end in April 2021, Mr Sunak has come under increasing pressure to extend the holiday for another 12 months.

It is yet to be confirmed exactly how long the business rates holiday will be extended for. However, I anticipate that it will at least extend until non-essential shops, pubs and leisure venues are allowed to fully open.

Extending the business rates holiday will also mean that the Chancellor is likely to hold off on announcing any reform to the business taxation system on Budget day. Last year, a review was launched into “levelling the playing field” between high street and online retailers; for example, introducing online sales tax, targeting tech and eCommerce giants is under consideration. Such changes would have likely been welcomed by high street businesses; however, any concrete decision will likely be postponed until the economy is on a more stable footing.

Nevertheless, while the Chancellor’s immediate priority will be the business rates holiday itself, it is important to note that we could see more dramatic changes to business taxation under this government.

A review of the furlough scheme 

The furlough scheme has undeniably helped to safeguard the livelihoods of millions of employees. According to figures from HMRC, a total of 1.2 million employers had placed staff on furlough, as of December 2020 – costing the government £46 billion.

The Government initially planned for furlough to be a short-term scheme, with the intention being to end the initiative altogether in November 2020 and replace it with a new Job Support Scheme. However, rising infection rates and stricter lockdown measures meant that this could not happen, and the furlough was extended. It is now scheduled to end on 30 April 2021.

The furlough scheme has undeniably helped to safeguard the livelihoods of millions of employees.

With the Prime Minister’s roadmap making it clear that many non-essential organisations will be unable to open until summer, there have been inevitable calls for the scheme to be extended even further.

I expect the Chancellor to use the Budget to announce such an extension – at least for more vulnerable sectors such as hospitality, retail or leisure. Of course, the furlough scheme is expensive; difficult decisions regarding how to pay for it must be made in the near future. However, Mr Sunak will be aware that ending vital support such before vulnerable businesses are able to properly reopen will jeopardise their long-term survival.

Possible extension of the CBILS 

The Coronavirus Business Interruption Loan Scheme (CBILS) provides small and medium sized businesses access to loans and other forms of finance up to £5 million. The Government guarantees up to 80% of the finance to the lender, whilst also paying interest and additional fees over the first twelve months.

This has offered some welcome financial breathing space for many organisations as they attempt to rebuild, post-COVID. However, the scheme is scheduled to end on 31 March.

Perhaps unsurprisingly, the deadline has been met with opposition; a recent poll revealed that almost a third (31%) of businesses are keen to see the scheme extended.

However, Mr Sunak has stressed that businesses will receive more support beyond March 2021. So, whilst it is unclear whether the CBILS will be extended, the promise of further support should offer some comfort to businesses.

Support for the self-employed  

Throughout the pandemic, the Government has received criticism for excluding many self-employed people from its financial support schemes.

It did introduce the Self-Employed Income Support Scheme (SEISS), which offered relief to some. However, those who earned over £50,000 a year, paid themselves in dividends, or recently became self-employed were not eligible. This resulted in approximately 2 million people being unable to access financial support.

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There are rumours that the Government is planning to extend the eligibility criteria of the SEISS, ensuring recently self-employed individuals are able to apply for the grant. Such an extension seems sensible. After all, the self-employed contributed £305 billion to the UK economy in 2019 alone; the Government cannot allow such a prominent economic force fall by the wayside.

It is evident that the Government’s focus for the Budget will be continuing its emergency support schemes for UK businesses. In particular, it is vital that the Chancellor focusses his efforts on safeguarding vulnerable sectors and organisations – those that have been worst impacted and those that will take some time to reopen fully.

Retail, hospitality, leisure businesses, as well the self-employed, have all faced significant challenges throughout the previous 12 months. And without adequate help, their long-term survival will be jeopardised. The Budget is an ideal opportunity to deliver further life support to organisations that need it, easing the transition out of what everyone hopes will be the final lockdown.

Karoline Gore looks at HMRC's tax submission policies and what they mean for January 2021 self assessment filings. 

With the self-assessment deadline looming, around 5.4 million self-assessment customers will be finalising their tax submissions by the end of this month. With the deadline less than a month away, professional bodies and customers have been calling on HMRC to delay the 31 January tax filing deadline. With multiple lockdowns and drastically changing finances for self-employed customers in 2020, many people are struggling to complete their self-assessment on time - or to afford the payments on account. However, HMRC has recently issued a response refuting requests to extend the deadline, but promising to keep the matter under consideration. With the pressure on to get those self-assessments in by midnight on 31 January, many are now beginning to wonder about their options if they cannot meet the deadline, and the consequences should they miss it.

Penalties For Late Filing Of Self Assessment

If you miss the deadline for filing or paying your tax bill, you are liable to receive a penalty of £100 if your self-assessment is less than three months late. Consumers will also have 30 days from filing to pay their tax due, or risk being fined 5% of their tax bill. If you do miss the 90-day late filing window, each additional day your return is late will cost you £10.

It is also important to note that HMRC charges interest on any tax owing. The current late payment interest charge is 2.6% as of April 2020. Penalties for late filing and late payment of your self-assessment tax are also independent, which means failure to submit your self-assessment on time can result in consumers paying both fines at the same time. This presents two important issues that the self-employed must overcome during this tax season: timely filing of their tax return and the payment on accounts.

Options For Late Filing

If you do miss the self-assessment deadline, your options weigh heavily on contacting HMRC as soon as possible. According to the ICAEW, an acceptable practice when the filing deadline cannot be met is to file your self-assessment using provisional figures or estimates of any missing information. However, acceptance of this method depends on the extent of the effort put forth by the client on obtaining the missing information. HMRC has said that it will not accept this if there is proof of little effort being made, or your accountant did not request the details on time.

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If your self-assessment filing has been affected by COVID-19, there may also be grounds for appeal against any penalties. To do this, clients must submit their tax returns and await the penalty notice before appealing. The appeal process is done online for taxpayers and by using an SA370 for agents. Additionally, HMRC has confirmed that circumstances relating to COVID-19 would be considered reasonable grounds for appeal consideration, with fines waived for those who file late due to the pandemic.

Options For Non-Payment Of Balances On 31 January

If taxpayers find themselves unable to pay their balances on 31 January 2021, one of the first options they have is to contact HMRC’s payment hotline to work out a payment plan. According to ICAEW and guidance published by HMRC, the deadline for negotiating extended payment deadlines is 2 March, 2021. Insights from the Tax Faculty recommends taxpayers take proactive steps to increase their chances of getting HMRC to agree to payment schedules, including keeping your paperwork for tariff payments updated and having reliable financial forecasts to aid in their payment plan suggestions.

Alternatively, those with a tax bill of £30,000 or less can apply for time to pay their taxes over 12 months. In October 2020, the UK government raised the tax liability threshold to £30,000 as part of their pandemic response and in a bid to give self-assessment customers access to enhanced payment plans. According to the Financial Secretary to the Treasury, Jesse Norman, “We are supporting jobs by giving more breathing space to up to 11 million Self Assessment taxpayers when managing their tax affairs. Enhancing Time to Pay should ease the financial burdens and protect the livelihoods of these taxpayers as they navigate the months ahead.”

With the clock ticking on the self-assessment deadline, it is now down to taxpayers to become familiar with the options available if they cannot meet the 31 January cut-off. Regardless of their choice, immediate action is recommended.

Alexander Pelopidas, Partner at Rosling King LLP, analyses the changes to come into effect and the impact they are likely to have on insolvency cases.

In any insolvency, there is a statutory hierarchy that determines how creditors are repaid, including HMRC. Since 2003, HMRC has been an ‘unsecured creditor’ after the 2002 Enterprise Act. This however is about to change with far reaching consequences for businesses. Under the Finance Act 2020, HMRC will become a Secondary Preferential Creditor on insolvency from 1 December 2020.

To properly assess the impact of the new policy, it is important to look at the existing (pre-December) hierarchy of creditors. They are as follows:

  1. Fixed charge creditors. These are creditors whose lending to a company is secured against a definable object. This could, for example, be a mortgage on a building, or a company warehouse.
  2. Costs of the insolvency process. This could include staff wages, or even the rent due during the process. Alternatively, it could be the fees of the administrators/liquidators (as applicable).
  3. Preferential creditors. This currently covers some payments due to employees, and money owned as part of the Financial Services Compensation Scheme.
  4. ‘Floating charge’ creditors. These are creditors whose lending is secured against a class of asset. For instance, this could be the ‘stock’ in a warehouse, but not specific items of stock. Asset-based lending is a common type of floating charge lending.
  5. Unsecured creditors. This refers to all other creditors, including pension schemes, customers and trade creditors. HMRC is currently an unsecured creditor.
  6. Shareholders.

While significant, the shift in policy is in fact, in some ways, a return to the pre-2003 policy, when HMRC was classed as a preferential creditor in corporate insolvencies. The 2002 Enterprise Act which made HMRC an unsecured creditor sought to establish a culture of business rescue within which certain ring-fencing was implemented for UK businesses.

The government’s decision to assign HMRC as a preferential creditor once more has sparked considerable anxiety amongst borrowers, who rely on asset-based lending or invoice discounting.

While significant, the shift in policy is in fact, in some ways, a return to the pre-2003 policy, when HMRC was classed as a preferential creditor in corporate insolvencies.

At the core of the problem is that while HMRC remains one of the largest creditors in many insolvencies, at present it sits behind floating charge holders as an unsecured creditor. This means its claim does not dilute the funds available to pay secured lenders. After 1 December 2020 however, this will change and HMRC’s claims for unpaid employer NIC, PAYE and VAT will rank ahead of floating charge holders and unsecured creditors and consequently reduce the pot of money available for distribution in corporate insolvencies.

The impact of this will be substantial due to HMRC’s claims often being significant. In addition, there will be an increase in the cap on the amount of the Crown preference from £600,000 to £800,000 with effect from 6 April 2021. This will mean less cash for businesses as many lenders will likely increase their calculations of the borrower’s solvency to address the impact on returns.

The largest impact will be on asset-based lending or invoice discounting, a very common form of business finance. Typically, a floating charge is all that is taken by way of security. When the changes come in, lenders will have to assess a borrower’s assets and make adjustments based on potential HMRC VAT and PAYE liabilities. These liabilities are hard to quantify but will be significant enough to prompt a Lender to require more security such as guarantees and fixed charges. All of this impacts liquidity for borrowers, and in the event of insolvency, likely means more liquidations than administrations as administrators cannot deal with fixed charge assets in the same way as they do with floating charges i.e. without lender consent.

Under these types of financing, new borrowers will see themselves submitting to greater costs for monitoring and audits by lenders and existing borrowers will be caught by the changes which do not have any transitioning period. This could result in good borrowers being deemed bad borrowers involuntarily, as the new Crown preference will require the lender to make adjustments.

Company Voluntary Agreements (CVAs) may no longer be a viable option for a company where HMRC has preference, as CVAs cannot be used to compromise a preferential creditor. This is a significant insolvency tool, which is particularly being relied upon at the moment by the retail sector, that will now be hampered. Similarly, there exists the possibility that HMRC will become less prepared to negotiate time to pay deals with companies as it has priority ranking, so why would it compromise its new status in the hierarchy of creditors?

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Overall, there are now very real fears that in the medium term there will be a domino effect for SMEs who are already struggling, and on whom these changes will result in even greater distress. The upcoming change may ultimately force the hand of some companies who may reach the uncomfortable yet unavoidable conclusion; namely, that it would be wiser to enter into administration or liquidation before the new rule takes effect.

In the longer term, the effects could impair the UK’s attractiveness as a place to do business. R3, the insolvency and restructuring trade body, has already warned that the changes have potential to cause long-term damage to the UK economy as well as to the UK’s business rescue culture. Moreover, R3 says that it will end up costing the public purse more in lost income and higher expenses than it will ‘save’ in extra taxes returned following corporate insolvencies. As a consequence, the body thus vows to continue to lobby for the legislation to be reconsidered.

Only time will tell if the Government will eventually listen to the unified concerns of business representatives and insolvency professionals and will repeal the impending changes to the Crown preference. However, for now businesses and lenders should prepare themselves for the challenges that the changes will create.

However, directors should be aware of some important changes to the rules and those facing financial difficulties should waste no time in seeking expert support. Simon Underwood, insolvency partner at accountancy firm Menzies LLP, outlines what company heads should know about the Government's support going forwards.

The extension of the temporary insolvency measures put in place to protect businesses during the pandemic reflects the ongoing financial distress that many organisations are facing as the UK enters a second wave of coronavirus. Aligning with a general tightening of government rules, the step provides organisations with “extra time to weather the storm”, in the words of Business Secretary Alok Sharma.

Introduced in March, the original easements sent out a strong message to UK business managers, emphasising that the normal insolvency rules did not apply and that directors should focus simply on keeping their companies from going under. However, the Government’s decision not to extend its relaxation of the wrongful trading provisions indicates a significant change of stance. Directors who should have concluded that there was no reasonable prospect of avoiding insolvent liquidation but continue to trade could be liable for any losses incurred after 1 October, in the event that their business goes into liquidation. Directors in this position who are also applying for government financial support, for example, under the Coronavirus Jobs Retention Scheme, will also be more exposed to the risk of investigations from HMRC.

Businesses facing financial difficulties should also be aware that from December, HMRC will regain its status as a preferential creditor. This is particularly important for directors who have provided personal guarantees to banks or other financial institutions. This may result in the payment of higher sums under personal guarantees in the event of an insolvency, as financial institutions’ ability to recover their debts under floating charges is reduced. The fact that they will be able to recover lower amounts under their security is also likely to make them more risk-adverse when it comes to lending. This could make it more difficult for companies to secure this type of funding and cause banks to increase the cost of borrowing, both of which could have a negative impact on an organisation’s working capital.

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Announced on 16 September, the extension to Government’s commercial eviction ban will also help to provide many businesses with breathing space, protecting those that are struggling to pay their rent as a result of the pandemic from being evicted. However, it’s also vital to bear in mind the challenges this development poses for landlords, especially in the event that tenants have run up significant rental arrears. In the long term, closer collaboration between landlords and tenants and a fresh approach to rental agreements will be required to find solutions to tenants’ financial problems. For example, this could involve the ability for tenants to reduce the amount of space they’re paying for based on their changing commercial needs or switch to a turnover rent model, where rental payments are based on the turnover of individual business outlets.

For those experiencing pandemic-related financial distress, remembering that “cash is king” is key to avoiding insolvency. Three-way forecasting is an essential decision-making tool, enabling directors to calculate their organisation’s likely future financial position and take steps to address any cashflow gaps before it’s too late. This type of modelling involves combining data for the organisation’s profit and loss, cashflow and balance sheets, allowing ‘what if’ planning to be conducted for a number of possible business scenarios. As turnaround measures take time to implement, forecasts should be undertaken for at least the next two to three years. If cash projections indicate the lack of a viable financial future for the organisation, businesses should waste no time in seeking the support of an insolvency specialist, who will be able to suggest the steps needed to transform the company’s financial fortunes and continue trading.

The extension of Government’s temporary insolvency measures will certainly have bought more time for UK business owners and directors feeling the financial effects of the coronavirus pandemic. However, it’s important to note that these measures won’t be around forever and in order to future-proof their organisations, directors must take a proactive approach to strengthening their cash position. By using three-way forecasting effectively and getting expert advice now, businesses can improve their long-term performance and keep insolvency at bay.

Her Majesty’s Revenue and Customs (HMRC) informed MPs on the Public Accounts Committee that, according to their estimates, up to £3.5 billion worth of payments made through the Coronavirus Job Retention Scheme (CJRS) has been paid out in error or claimed fraudulently – as much as 10% of payments made as part of the programme.

Jim Harra, head of HMRC, told MPs that the tax authority would focus on tackling deliberate abuse rather than mistaken claims. “We are not going to set out to try and fine employers who have made legitimate mistakes in compiling their claims,” he said, “because this was obviously something new that everyone had to get to grips with in a very difficult time.”

He added that HMRC was currently investigating 27,000 “high-risk” cases where serious errors are believed to have been made in the amount an employer has claimed.

Harra also advised employees who believe that their employer may have claimed furlough money fraudulently to report it to HMRC via the body’s website.

Originally launched in April, the CJRS allowed employers to place staff on “furlough”, where the UK government would reimburse them for 80% of their monthly salaries (up to £5,000 per month). Furloughed employees are disallowed from working during this period.

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Recent data from the HMRC has shown that around 9.6 million employees have been placed on furlough since the scheme was launched, and £35.4 billion worth of payments have been issued.

The CJRS is in the process of winding down, with employers now expected to pay a portion of furloughed workers’ salaries. The programme will close for good at the end of October.

On 1 September, the Coronavirus Job Retention Scheme (CJRS) entered its final phase.

The scheme, first implemented in March, enabled UK companies to place employees on furlough, meaning they would not work but would have 80% of their salary reimbursed by the government, up to £2,500 per month. The government would also pay National Insurance and pension contributions, though this has been shifted back to employers as of 1 August.

Now, the proportion of wages paid has also shifted, and employers will be expected to pay 10% of furloughed employees’ wages while the government accounts for 70% -- up to a cap of £2,187.50 per month.

New legislation has also ensured that employees who are made redundant while on furlough will be entitled to redundancy pay equal to their normal working pay rather than the proportion of wages they have received while on furlough.

“We urge employers to do everything they can to avoid making redundancies, but where this is unavoidable, it is important that employees receive the payments they are rightly entitled to,” business secretary Alok Sharma said in a statement.

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While originally planned to end earlier in the year, the CJRS will only be fully phased out by the end of October. During that month, the government will pay 60% of employees’ wages, with employers making up 20%.

Chancellor Rishi Sunak has repeatedly ruled out a further extension to the CJRS, saying that it would be “wrong to keep people trapped” in a situation where they would have no job to return to.

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