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.

The average UK home sold for more than £250,000 last month, marking the first time the average has crested a quarter of a million pounds.

New data was released in Halifax’s latest House Price Index, a leading authority that gauges the state of the UK property market, showing that prices rose 7.5% higher in October than their average during the same period in 2019 – reaching as high as £250,547. The increase also marks the highest rate of annual growth since the middle of 2016.

The increase follows a surge in house prices in September, with a combination of the stamp duty holiday and a pent up demand from the initial lockdown period pushing the price of the average UK home up to £249,879.

Halifax managing director Russell Galley credited the continuing effects of the pandemic for creating “clear headwinds” for the UK property market. He added that stamp duty cuts and rising interest in moving “supercharged” demand and pushed prices higher.

“Overall we saw a broad continuation of recent trends with the market still predominantly being driven by home-mover demand for larger houses,” Galley said, adding: "The country's struggle with COVID-19 is far from over.”

While Halifax’s new index showed year-on-year growth to be strong, the rate of monthly price gains appeared to be slowing sharply. Prices rose by 0.3% between September and October, a notable decrease from the 1.5% rise seen a month earlier and 1.7% in the previous two months.

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Halifax warned that economic fallout from the COVID-19 pandemic, likely to arrive in early 2021, would put “downward pressure” on home prices.

Many start-up businesses are short on cash, and there is a temptation to try and save money by missing out costs which are deemed non-essential in terms of the day-to-day operation of the business. In reality, legal protection and a sound financial strategy could be the difference between a short-lived project and a long-term success.

Here are 7 ways to ensure your start-up business is legally protected.

1. Structure your business

When you go to register your business with the state, you will need to choose a business structure and the choice you make will decide how much you pay in taxes as well as your personal liability. Your options are: Sole Proprietorship, Partnership, Limited Liability Company (LLC), Corporation, or S Corporation. While your choice will be dependent on many factors, many businesses become an LLC as this separates your personal assets (home, vehicle, savings) from your business assets. You will also need to apply for a tax ID number and ensure you have the appropriate permits and licenses.

2. Get insurance

Although you might think or hope that you will never need it, every business should take out commercial liability insurance. This protects your business financially if your company is sued by a third party such as a customer or vendor. General liability insurance does not cover things that happen to you, your employees, or commercial premises. Additional insurance policies you may want to consider include professional liability insurance (which covers costs incurred because of errors in your work), commercial auto insurance which covers damage to commercial vehicles and property, and workers’ compensation insurance.

General liability insurance does not cover things that happen to you, your employees, or commercial premises.

3. Contracts for employees

Whether you will be taking on employees soon, or in the future, you need to ensure that you are compliant with the law, your responsibilities as an employer, and employee rights. This is a complex topic, so be sure to consult with a legal professional to ensure you have covered all areas including health and safety, code of conduct, discrimination, working hours, etc. If your employees will be working on premises, you also need to ensure that you are providing a safe work environment with all the necessary risk assessments, equipment, and precautions.

4. Working with outside suppliers

If you will be outsourcing aspects of your business to another company, you need to ensure that you cannot be held liable for their actions. For example, if they are not fair to their employees in terms of health and safety, pay, or ethical working practices, you may become tarnished by association.

It is also essential that you read the fine print of any contracts you sign with suppliers, question any points which you are not comfortable with, and do not be afraid to negotiate.

5. Protect your intellectual property

An original business idea may need to be protected by trademark or copyright to prevent another company from taking advantage of your creativity, but this can be complex, so it is best to get advice from an intellectual property lawyer.

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6. Pay your taxes

While keeping track of income and expenditure might be simple in the beginning, as your business grows it will be easy to lose track and make mistakes. A professional bookkeeper will be able to advise you not only on what receipts you need to keep and what taxes you need to pay, but they can also complete your tax returns and ensure you take advantage of any tax benefits you can claim.

7. Cybersecurity

Whether you are running your business from one computer, several computers, or a combination of devices, all your technology needs to be protected against cyberattacks. You not only need to secure your sensitive data and financial information, but the law is increasingly strict regarding businesses which are not protecting customer and employee data adequately.

Steve Cox, Chief Evangelist at IRIS Software Group, explains how tech can be a lifeline for accountants looking to support businesses through the coming months.

Today’s accountants face a litany of challenges, not least navigating through the COVID-19 crisis and increasingly murky Brexit waters - all while keeping up-to-date with the requisite compliance and legislation changes. Though we now have a much clearer idea of what to expect, unlike in the first months of the pandemic, it’s an understatement to say that a huge degree of uncertainty hangs over businesses - and life in general.

The sudden shift to remote working caused chaos among businesses. Some were not prepared for the immediate digital transition, with many struggling to continue business as usual looking to their accountants to guide them through the uncertainty. Accountancy firms have reacted well to this increase in client demands, and while much advice has been given about compliance, the opportunity to change and become better advisors has been cathartic for the industry. But this begs a new challenge.

Reactive advisory was a necessity when we went into lockdown - no one was prepared for a global pandemic - yet accountants were quick to react to the necessary changes, getting their firms running in the cloud with hosting in the early parts of lockdown. But as we head into the next normal, firms need to be proactive. They need to utilise technology and act on the lessons learnt from the pandemic; delivering the strategic, digital-first advisory service businesses now need.

The changing role of technology in accounting

While no silver bullet, technology has, and will continue to play, a central and evolving role in helping accountants support businesses through these uncertain times and throughout the next normal.

Lockdown proved to be difficult for maintaining human interaction between accountants and their clients - something that’s critical in developing a trusting relationship. But harnessing technology meant accountants could carry on as usual, offering first-class digitally powered advisory - approaching problems or opportunities with digital solutions, using tools such as video conferencing. This meant they could continue building relationships with both new and existing clients.

Technology has, and will continue to play, a central and evolving role in helping accountants support businesses through these uncertain times and throughout the next normal.

COVID-19 has unveiled the accountants who have chosen to embrace new, innovative methods of interacting. Those who are proactively utilising digital assets, and interacting in new ways, are noticing that they are interacting far more with their clients than prior to lockdown - calls would have been over the phone rather than video, and meetings may have been cancelled due to lack of convenience.

What’s more, technology has helped accountants understand ‘the perfect marriage’ between human interaction and valuable data. Using data, accountants can compare client history, by accessing real-time information online. This in turn creates a wealth of business understanding, delivering both short and long-term value to all their clients. But, as the role of technology evolves in the accounting world, so too is mandated financial and administrative processes.

Making Tax Digital (MTD) is part of the government’s plans to make it easier for individuals and businesses to manage their records digitally and subsequently their taxes. While at first glance a minefield for many, MTD is a prime example of how harnessing technology can help accountants and their clients automate compliance. That said, compliance is also the traditional safe zone. With the extension of VAT-registered businesses, mandated to keep VAT records in digital form from April 2022, it is far easier to rely on traditional assurance and compliance services, than to invest in a digital-first advisory.

A digital-first advisory

Our world is transforming into digital-first - businesses have been taken online, with many processes automated to manage the new working style. Further, MTD is a clear example of the UK government now jumping on the digital-first bandwagon.

The government’s plans for an economic recovery - the Bounce Back Loan Scheme (BBLS), the Furlough scheme, Kickstart for young people and even the Eat Out to Help out - caused a stir for how businesses manage their funds. And while all designed to speed up our economic recovery, someone has to pay for the billions of pounds spent so far - the Eat Out to Help Out scheme for example has driven UK inflation to a five-year low.

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To pay for this added sum, the UK will most likely see a new tax legislation come into play, so that we can eventually pay off the debt the government has lumped on our economy - with higher rate players paying more. However, with this increase of tax burden, processes need to be streamlined. And this is where MTD steps in.

MTD helps businesses and accountants manage finances efficiently - which right now is vital for survival. Businesses can pay their taxes online - saving time and improving overall business productivity. In turn, businesses now need to work with their accountants and look at their wider business strategy so that it resonates with the new digital compliance. This includes addressing business needs, as well as how they work, employee capacity and all financial outgoings - all of which can be successfully managed through a digital-first advisory approach.

Addressing human business needs

Accountants improve the lives of their clients by addressing human business needs. They are the engines behind their clients’ businesses, and by using technology, can remove cumbersome and time-consuming financial management. However, while accountants have been quick at reacting to addressing these needs, they now need to be proactive and act as a business’s tour guide as we enter the next normal.

The pandemic has created a snapshot of what businesses now need, especially those who relied on old, mandated accounting solutions. Using technology to catch real-time data, accountants can paint a picture of exactly what their clients want and need now and for the future. As experts in their field and the latest legislation changes, accountants are best placed to advise clients on how to navigate these increasingly complex times.

However, every superhero needs a sidekick, and as we enter the next normal, technology will firmly cement itself at accountants’ side. Through automating everyday tasks and processes, accountants will be able to proactively unlock powerful insights into their clients’ businesses; enabling them to move from bean-counter to hero consultant, help clients remain compliant and drive business growth.

In an exclusive report on Sunday, the New York Times released an array of previously unseen information regarding President Donald Trump’s taxes over two decades, revealing new details about his income and companies within his business empire.

According to the report, which cites tax-return data in addition to public and confidential interviews, Trump paid only $750 in federal income tax each year during 2016 and 2017, when he was inaugurated as president. In 10 of the 15 years preceding 2016, he allegedly paid no income tax at all, despite receiving $427.4 million from his work on The Apprentice and various other licensing deals and endorsements.

The Times reported that Trump was able to minimise his tax bill by reporting heavy yearly losses across his various businesses, funding his lifestyle by writing off personal purchases as business expenses. Among various details included in the report were an alleged $70,000 business write-off on “hairstyling for television”, and $747,622 in fees paid to an unnamed consultant for Trump Organisation hotel projects in Hawaii and Vancouver. Ivanka Trump’s public disclosure forms filed upon joining the White House showed that she had received an identical sum that year through a consulting company that she co-owned, the report stated.

Trump also allegedly reported a loss of $47.4 million for 2018, despite claiming an income of at least $434.9 million in a financial disclosure that year.

The Times emphasised that the documents referred to in the report concerned only what Trump revealed to the government about his businesses and did not disclose his true wealth.

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Information regarding President Trump’s taxes had become highly sought after since his 2016 campaign, where he took the extraordinary step of neglecting to release his tax returns, going against a precedent set by every presidential nominee since Nixon.

During a press conference on Sunday, Trump described the New York Times report as “totally fake news.”

Democratic presidential candidate Joe Biden has not yet commented on the report, though his campaign released a short attack ad on Sunday night comparing Trump’s reported $750 income tax bill in 2016 with the sums paid by other professions in the US.

Jamie Johnson, CEO of FJP Investment, looks into the resurgence of the UK property market and how the government could sustain it.

After so many months in lockdown, attracting the investment needed to help bring back market activity to pre-pandemic levels is by no means an easy task. However, there have been some signs that government initiatives have, thus far, been successful in coaxing investors back to the market; most notably in the real estate sector.

Following the introduction of the stamp duty land tax (SDLT) holiday, property listing site Rightmove recorded a massive 75% increase in the number of buyer enquiries recorded on their site. And according to Nationwide’s House Price Index for August, house prices experienced their biggest monthly increase in over 16 years.

While undoubtedly a positive sign for the sector, the big question is whether such momentum can be maintained. Property investors need to feel confident enough that COVID-19 has been successfully handled by the Government and that the country can fully recover from the pandemic.

To gauge investors' sentiments towards the Government’s tackling of the pandemic, FJP Investment recently surveyed over 900 UK-based investors with assets in excess of £10,000; excluding residential property and workplaces pensions. Our research showed that, while the SDLT holiday has proven successful in reassuring some investor’s worries, there is still much more than can be done to help sustain a strong post-COVID economic resurgence for the UK.

Following the introduction of the stamp duty land tax (SDLT) holiday, property listing site Rightmove recorded a massive 75% increase in the number of buyer enquiries recorded on their site.

SDLT holiday a hit

Of the investors FJP Investment surveyed, a quarter (24%) plan on buying one or more properties to take advantage of the SDLT holiday, a figure that rises to 43% for those aged between 18 and 34.

Given that buyers can potentially save up to £15,000 through this tax break, it makes sense that those who may be making their first foray into the housing market would be keen to take advantage of the comparative discounts on offer.

However, a larger proportion of investors––43% of those surveyed––believe that the Government needs to offer further support to homebuyers and property investors beyond the SDLT holiday. Just over half (54%) are in favour of extending the mortgage payment holiday relief scheme beyond 31 October 2020, and 57% believe that more financial relief is needed to support the businesses affect by COVID-19.

It would serve the government well, then, to offer extra assistance to those seeking access to real estate opportunities, be it extending by extending SDLT holiday or providing additional financial relief for those affected by the pandemic.

Long-term worries

Perhaps a more pressing worry, though, is that 54% of UK investors that have lost confidence in Boris Johnson’s government generally based on its handling of the COVID-19 pandemic thus far. Investors will be wary of making any large financial decisions if they do not believe that the pandemic is under control.

Fears surrounding a mishandled second spike may limit the success of the SDLT holiday if the Government isn’t able to inspire confidence amongst homebuyers and property investors. The point is that there is clear demand for residential real estate – the challenge is ensuring buyers are given all the tools and incentives they need to make a fully-fledged return.

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The pressure is very much on Boris Johnson and Chancellor Rishi Sunak to assuage these concerns and boost investors’ confidence in the UK. Doing so will ensure that investors’ feel confident in injecting life back into the financial markets; and subsequently triggering a wider recovery of the UK economy. I am happy to say that current signs are indeed promising.

Jamie Johnson, CEO of FJP Investment, analyses the state of the property market and how it is likely to change in the near future.

On 6 July, chancellor Rishi Sunak delivered the so-called ‘mini-budget’. As part of his announcement, a series of reforms were introduced as part of the government’s strategy to boost economic activity. The real estate market is key driver of national productivity and growth. Recognising this, the chancellor announced the immediate introduction of a Stamp Duty Land Tax (SDLT) holiday.

What this means is that all buyers of property less than £500,000 in England and Northern Ireland are exempt from paying the tax until 31 March 2021. However, additional surcharges for second home purchases still apply.

The government backs property investment

The impact of this new initiative was felt almost immediately. Papers reported a ‘mini-boom’ in UK property as asking prices rose and buyers returned to the market in droves. Property listing site Rightmove recorded a 2.4% increase in the average asking price of properties being listed during the month of June. What’s more, the number of inquiries from potential homebuyers increased 75% year-on-year.

While it is still early days, all this indicates that the government’s policy has so far has proven to be a success. Demand which was previously being suppressed due to COVID-19 concerns is flooding back to the market. After months of property price decline and housing market inactivity, such impetus should be heartily welcomed.

The announcement of the SDLT holiday also followed Prime Minster Boris Johnson’s ‘build, build, build’ speech, pledging £5 billion to invest in housing and infrastructure. Collectively, these measures are part of the government’s broader vision to meet both the future property needs of the country while at the same time instigating a post-pandemic economic recovery.

Demand which was previously being suppressed due to COVID-19 concerns is flooding back to the market.

Priorities are shifting but demand remains the same

Of course, the pandemic will have lasting effects on society at large; and the property market is no different. As working from home becomes the new norm for many, the need to live within commutable distance from your company is being brought into question. The aforementioned statistics provided by Rightmove showed interest in London properties had only risen by 0.5%, implying that many homebuyers are now seeking properties away from London in light of the COVID-19 pandemic.

Other factors may disincentivise buyers away from London as well. Back in March, Rishi Suank announced a very different type of SDLT adjustment, an additional 2% surcharge for overseas buyers – due to come into effect in April 2021. Given just how integral foreign buyers are to the Prime Central London (PCL) property market, accounting for 55% of PCL transactions in H2 2019, the additional surcharge risks discouraging foreign investment into the capital.

With the lucrative PCL property market becoming less and less attractive for high-end developers for the reasons outlined above, house price growth outside the London commuter belt may begin to grow exponentially in the coming years.

But regardless of where your property portfolio is located, UK property is still proving itself to be a resilient asset class in the face of global crisis. Global property experts Savills confidently stuck by their prediction of 15% growth of UK house prices by 2024, even as the UK experienced the worst of COVID-19’s economic impact.

Their reasoning, which I fully agree with, is based on the idea that the strong buyer demand we saw in January 2020 – which facilitated the highest level of property price growth since 2017 - did not simply vanish when COVID-19 arrived. Instead, this demand was suppressed due to pandemic uncertainty, ready to return once coronavirus was in retreat. Now, bolstered by the SDLT holiday, the UK property market is set to enjoy this influx of previously suppressed demand; and house price growth is sure to follow as a result.

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FJP Investment recently carried out a survey of 850 investors to confirm this, and our findings supported this idea. 43% of those whom we spoke to stated they weren’t making any large financial decisions until they believed the coronavirus pandemic to be entirely contained. It follows that as COVID-19 cases in the UK decrease, these investors will gradually return to the market – increasing general activity and facilitating a prosperous property sector once again.

When this demand returns, I look forward to witnessing the changes that COVID-19 has inflicted upon the UK’s property sector. Will this surge in interest of non-London property continue, and where will the new house-price-hot-spots of the UK be? I, for one, am excited about finding out. As COVID-19 case numbers decrease, and investor confidence rises, we’ll all be enjoying the benefits of a resurgence of UK property sooner, rather than later.

The value of the pound fell against the dollar and euro over the weekend, as news emerged that UK ministers were planning new legislation to undercut key provisions of the EU withdrawal agreement, giving rise to fears that the UK will face an end-of-year “no deal” Brexit.

The Financial Times first reported that the “Internal Market Bill” would undermine the legal force of areas of the agreement in areas including customs in Northern Ireland and state aid for businesses, risking a potential collapse of trade talks with the EU. Downing Street later described the measures as a standby plan in case talks fall through.

Political backlash followed as Michelle O’Neill, Northern Ireland’s Deputy First Minister, described any threat of backtracking on the Northern Ireland Protocol as a "treacherous betrayal which would inflict irreversible harm on the all-Ireland economy and the Good Friday Agreement". Scottish First Minister Nicola Sturgeon also stated that the legislation would “significantly increase” odds of a no-deal Brexit.

The pound was down 0.6% against the dollar by 10am on Monday for a total slide of 1% against the dollar in the past 5 days. The pound also slid 0.5% against the euro for a total of 0.7% in the same period.

The value of the pound is now equivalent to $1.319, or €1.1145.

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The eighth round of Brexit talks is set to begin on Tuesday, aimed at forming a deal that will allow companies in the UK and EU to trade without being hindered by customs checks or taxes.

The news follows Prime Minister Boris Johnson’s imposition of a 15 October deadline for securing a Brexit deal, recommending that both sides “move on” if no such agreement is reached by that date. The proposed deadline would come far ahead of the slated end of the transition period on 31 December 2020.

So, how can UK businesses optimise their corporate tax position following the pandemic, while adapting their organisations for post-coronavirus trading? Lucy Mangan, tax partner at accountancy firm Menzies LLP, offers Finance Monthly her thoughts.

Financing the business

The economic turmoil created by the coronavirus pandemic has pushed cashflow management up the corporate agenda. To support this, many businesses will be looking to secure additional loan funding from third party lenders or other group companies but may not be aware that increased borrowing can have a huge impact on their tax liability and therefore negatively affect their cash position.

If a company’s borrowings, either from a group company, or obtained from a third party lender due to support from its wider group (e.g. guarantees) exceed the amount that it could have borrowed from an independent lender on its own, HMRC may consider it to be thinly capitalised. In either scenario, any interest charges on the excessive amount of the loan are disallowed for corporation tax purposes. To stay on the right side of the law, organisations with high debt to equity ratios and/or low interest cover should seek expert advice around the deductibility of their interest charges.

Another important tax point for businesses to be aware of when securing additional funding is the potential for corporate interest restrictions. Where the total net interest charge of all UK companies in a group exceeds £2 million in a 12-month period, their ability to deduct interest for corporation tax purposes may be restricted. The amount of deductible interest will need to be calculated. Any restricted interest is carried forward and potentially offset in later years and it’s also worth noting that groups that do not use their full interest allowance in any period can carry forward any unused balance by filing a formal claim with HMRC. Through careful planning, companies can ensure that they structure their borrowings to maximise the tax deductibility of interest and protect any unused allowances for future use.

Any restricted interest is carried forward and potentially offset in later years.

If borrowing from overseas, companies should also be aware of the UK’s anti-hybrid rules, which can restrict interest deductions. They should also remember to consider withholding tax obligations. If loans become non-recoverable, this could also affect the tax treatment for the lender or borrower, so expert advice should be taken at the earliest possible stage.

Losses and devaluation of assets

Although this will vary between businesses, the pandemic is likely to have negatively impacted the profitability of many organisations. This situation may also be exacerbated by their assets losing value, which in turn could have a knock-on effect on their accounting profit/loss.

An important first step is for companies and groups to have a clear picture of their likely taxable profits or available losses (both for the current year and those brought forward). Tax losses may not be the same as the ‘book’ profits/losses, particularly if assets have been impaired.

Having a clear idea of their likely taxable profits or losses for the year will ensure that the company or group is in the best position to accurately calculate estimated corporation tax payments for the current period, ensure that excessive payments are not made and potentially obtain refunds from HMRC. This could be either due to overpaid tax or claims to carry back losses against prior years’ taxable profits. This approach could prove a valuable means of boosting cashflow in the months ahead.

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Changes to working arrangements – risk of tax presence

Due to travel restrictions, among other factors, many businesses are having to deal with new ways of structuring their operations and their management and employees may have worked from new locations during the pandemic.

This may include changes to the international footprint of the business. If this is the case, it’s important to keep a close track of what is happening and where, as this could result in a new taxable presence for the company in the foreign jurisdiction, potentially by way of creating a Permanent Establishment (PE). It could also create or a shift in the tax residency of the company following changes to the location of the company’s directors or management.

In respect of changes to tax residency, the OECD has advised this is unlikely to be the case if changes have only been made on a temporary basis. Groups should seek to identify where the place of management of each company is likely to reside in the future and whether this could lead to a change to its tax residence. Companies should ensure they keep a clear record of their individual circumstances in case required by a tax authority at a later date

A tax presence can give rise to a wide range of tax liabilities, including payroll, corporate taxes, VAT (or equivalent) and potentially exit charges. To determine whether this is the case, business leaders should carefully review local laws and relevant tax treaties, as well as considering any recent guidance provided by the country’s tax authority.

A tax presence can give rise to a wide range of tax liabilities, including payroll, corporate taxes, VAT (or equivalent) and potentially exit charges.

Transfer pricing

While the current focus of any business must of course be on protecting its future performance and assessing all the current risks to the business and how these can best be managed, it is also important to review how the global business strategies and operations may have changed. Transfer pricing opportunities and risks for the business should also be considered.

Groups may need to quantify and adjust transfer pricing policies for exceptional events such as redundancies, increased expenses or reduced sales as a result of COVID-19. The tax position in each country should then be considered, including the expected profit and loss profiles. Business leaders can then decide what charges are now appropriate, and any steps that can be taken to remove inefficiencies.

Currently, many businesses are still in survival mode, focused on making the changes needed to keep trading and get through the next few months. However, with a longer-term view and effective planning, they can consider the impact of a range of pandemic response strategies on their corporate tax liability, optimising their financial position.

Paresh Raja, CEO of Market Financial Solutions, examines the impact of the SDLT holiday so far and the importance of reinvigorating the property market.

With a value of £1,662 billion, the UK’s real estate market is a vital contributor to economic growth and productivity. That’s why the government’s plan to support the UK’s post-pandemic recovery has focused so heavily on real estate. After all, it was one of the first sectors to benefit from the initial easing of social distancing measures, ensuring that buyers and renters were once again in a position to move homes and initiate new property transactions.

Most recently, Chancellor Rishi Sunak took the bold step of announcing a new Stamp Duty Land Tax (SDLT) holiday applicable to all property transactions until 31^st March 2021. The government estimates that this will see average SDLT bill cut by £4,500, with nine out of 10 buyers purchasing a main residential home exempt from the tax.

The move aims to encourage buyers back to the real estate market, and so far, it has been having measured success. Estate agencies have noted a spike in enquiries – importantly, these enquiries range from first-time buyers to non-UK residents seeking a buy-to-let property. While it is too early to tell whether the holiday will bring about a stable and sustained increase in real estate transactions, the fact prospective buyers have acted immediately following the SDLT holiday announcement is promising.

With a value of £1,662 billion, the UK’s real estate market is a vital contributor to economic growth and productivity.

Unlocking the full potential of the SDLT holiday

The SDLT holiday provides the financial incentives needed to reignite interest in property, but one feels it will only have limited success. This is because homebuyers will still struggle when it comes to finding the right type of finance needed to complete on a sale.

When lockdown measures were first introduced, mainstream mortgage providers decided to retreat from the market by limiting their product and service offerings, freezing new applications and delaying the deployment of mortgages already agreed to in principle. This had dire consequences for those in the middle of a property transaction, increasing the risk of chains collapsing.

In response, brokers and borrowers turned to established specialist finance providers who remained committed to meeting the needs of the market. Bridging loans became a popular option due to their speed, flexibility and ability to be tailored to the individual needs of each borrower. While transactions did decline during lockdown, a proportion of those completed was due to specialist finance.

Now, banks and mortgage providers are once again returning to the market. However, the range of mortgage products available is still limited. There are also fears that these traditional lenders will only deploy loans for a handful of cases in order to minimise their risk exposure. Indeed, there are already reports of banks not deploying mortgages to borrowers who take advantage of the COVID-19 loan repayment holiday scheme.

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Just like we saw in the aftermath of the global financial crisis (GFC), it is during times of economic recovery that the need for creative solutions that support growth and stimulate investment are needed. And similar to what we witnessed in the months and years following the GFC, specialist finance is rising to the call by ensuring that homebuyers are able to act confidently and quickly.

At this critical moment, it is important that buyers and property investors have access to the finance needed for new home purchases. This requires research and a full appreciation of all the products and services available beyond just the high street.

Failing this, there is a real risk of the SDLT holiday only having limited success.

Shell’s Q2 earnings report, released on Thursday, revealed that the company had suffered a net loss of $18.3 billion, a striking departure from its $3 billion profit during the same period in 2020 and a $2.7 billion profit in the first quarter of 2020.

What might have been Shell’s worst quarter in company history was saved by its oil trading business, which went some way towards shoring up profit margins.

Investor attitudes were largely unaffected by the disappointing earnings report; shares were only down by 0.5% in early London trading. A reason for traders’ optimism can be found in Shell’s adjusted income: while the reported $663 million represents an 82% drop from the same period in 2019, it greatly surpassed analysts’ expectations of a $664 million loss.

However, Shell was still forced to downgrade the value of its oil and gas assets, confirming $16.8 billion in post-tax impairments costs in its release.

Shell CEO Ben van Beurden praised the company’s “resilient cash flow in a remarkably challenging environment” in a statement on Thursday.

“We continue to focus on safe and reliable operations and our decisive cash preservation measures will underpin the strengthening of our balance sheet,” he continued.

In April, Shell announced its intention to scrap all executive bonuses for the financial year, in addition to cutting budgets and costs in an effort to save up to $9 billion. It may also consider issuing voluntary redundancies later in the year.

Iskander Lutsko, Chief Investment Strategist and Head of Research for ITI Capital, offers Finance Monthly his perspective on how US markets are likely to trend in the latter half of the year.

Throughout the first six months of 2020, world markets have been volatile to say the least. Global stock index values have so far been characterised by record beating losses and resurgent gains; The Dow Jones and FTSE 100, for example, dropped more than 20% in March, but have already regained much of those losses in the time since. Additionally, the Nasdaq recently hit a record high, and the S&P 500 reached a local high at the start of June below an all-time high on 19 February 2020, and a severe dip in March.

The primary reason for this market volatility is not the US and China trade-related disputes or any other geopolitical market-sensitive tensions which have become an essential part of the global volatility environment since 2018. Quite clearly, markets have been impacted most prominently by COVID-19, and none more so than in the US, which is the world’s largest economy, reserving currency account for 65% of all global transactions – and now also the epicentre of COVID-19, accounting for 26% of total recorded infections worldwide.

All eyes have been on the US in recent weeks. Controversial decisions to reopen certain aspects of society and reduce lockdown measures have seen the number of infection rates rise across the country after a slight decrease. As a result, US equity markets have mostly been driven by HF flows being reallocated into IT stocks, primarily in those that benefited from quarantine. Hence, cyclical companies are trading, on average, 30% below its pre-COVID levels, as opposed to IT companies and biotechnology companies which recorded historical highs.

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However, this is not a second wave; it is a mid-cycle of the first. As in the sea, waves are usually preceded by a trough, and we don’t expect the official trough of the first wave to arrive until at least the end of August. From there, we might expect a second wave of the pandemic to hit in November or December 2020. Of course, this is all speculation, and entirely dependent on weather, vaccinations and lockdown measures – however, as analysts, it’s our job to predict the most likely scenario based on the data that we have, analyse fluctuations and predict market movements accordingly.

Thus, we have crunched the numbers and come to the conclusion that the peak of the current market run will last two months, from the end of July until the end of September, coinciding with a hopefully declining number of cases. Before that, correction and consolidation are likely to dominate, implying that there will be high demand for gold and US corporate bonds, bolstered by a strong US dollar positioning against currencies in Europe and emerging markets.

As soon as investors gain confidence, either through success stories over vaccine trials or new evidence of the infection rate declining in the US and other countries, abundant cash and excess global liquidity from central banks should push the S&P 500 to record highs. However, for that to happen, countries will need to bring back temporary quarantine and policy measures to reduce further risks of the virus spreading.

According to our base scenario, we could see the S&P 500 heading to 3500 points by end of September, pulled by oversold companies from the production and service sectors of the U.S. economy.

As soon as investors gain confidence, either through success stories over vaccine trials or new evidence of the infection rate declining in the US and other countries, abundant cash and excess global liquidity from central banks should push the S&P 500 to record highs.

But risk will not fade away entirely - it’s worth also remembering that the US presidential election is imminent. Even in a ‘normal’ year this election would be considered unique, as former Vice President Joe Biden faces off against Donald Trump, whilst celebrities such as Kanye West have put their two pence in (and quickly withdrawn it), it’s fair to say that US politics has, and will continue to play a role in market volatility in 2020.

If Biden wins, the market will probably see strong sell-off, as his first policy actions will be aimed at restoring corporate taxes to levels seen before Trump's cuts, though it’s worth mentioning that this will be gradual, as it would be unwise to raise taxes at times when 18 million are still unemployed in the USA compared to pre-COVID numbers. Biden also plans to significantly reduce budget spending, which could top contribute to an unprecedented 20% of GDP this year, up from 4.7% in 2019.

Furthermore, if no vaccine will be in place it’s likely that the second wave of the pandemic could come in November or December, coinciding exactly with the presidential election. Hence, markets will be extremely shaky during this period, the extent of which can not be accurately predicted until it’s closer to the time, but certainly worth remembering for keen eyed investors and traders.

Therefore, for short term returns, there are good chances of buying cyclical stocks at the dip now, presenting lucrative opportunity for opportunistic investors. However, in these unprecedented times, almost anything can happen, and it is strongly advised that asset managers and traders looking to expand their portfolio seek professional advice aided by cutting edge technology to ensure that they are making the most informed decision available to them.