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01 April 2020

Ease the Pressure of Covid-19 Impacts on Cash flow

Tax Tips – Business Question:

I’m anticipating ongoing cash flow problems, with the reduction in business due to the Covid-19 pandemic. I’m aware of the financial support available and am planning to furlough some employees.  Is there anything else I should be considering in order to reduce ongoing pressure on cash flow.  I own a successful manufacturing company but business orders have almost come to a halt over the last 2 weeks and I am worried about the future.

‘It is recognised that all businesses will be impacted in some way by COVID-19 and will struggle to meet current commitments through forced closure, reduced orders, breakdown in supply chain, etc, all resulting in a loss of business’

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In order to sustain the business and to be in a position to access the various forms of support available some immediate steps that you can consider include:

  • Prepare emergency cash flows to consider the impact of reduced business.
  • Review variable and fixed costs to see what cost savings can be made.
  • Communicate with staff, suppliers and customers.
  • Keep informed of business supports such as rates relief, grants, Interruption Loan Scheme, Time to Pay scheme with HMRC, Job Retention Scheme
  • Be aware of HMRC and Revenue Commissioners supports and consider payment plans where relevant.
  • Communicate with creditors – payment plans to be agreed.

Some companies may also want to consider extending their accounting period beyond the normal 12-month period, if they haven’t already done this in the previous 5 years in order to reduce their next corporation tax bill.  The extension would allow your company to capture these few months poor trading in your next corporation tax calculation and therefore reduce your next tax liability payment.

The UK operates a “Self-Assessment” regime which places the onus on UK companies to assess their corporation tax liability. Payment of corporation tax is normally due within nine months and one day from the end of the relevant accounting period.  A tax return period for corporation tax (known as a CAP) cannot exceed 12 months. However, under company law, accounts can be drawn up for periods as long as 18 months. The period for which accounts are made up is known as the period of account (POA). Where a POA exceeds 12 months, it must be split into two separate CAPs to calculate the corporation tax. The first will be the first 12 months and the second will be the balance of the period.

For example, if your company has a year-end of 31 December 2019, corporation tax for this 12-month period should be paid no later than the 1 October 2020.  However, if the company extends its accounts to the 18 months ended 30 June 2020, the first CAP will run to 31 December 2019 and the second CAP will start immediately afterwards on 1 January 2020 and will run to 30 June 2020.  What will be helpful however, if you anticipate losses over the coming months, is that the profits for the entire 18-month period will be apportioned across both the 12 month period and 6 month period to create 2 tax returns.  This means that the 12-month tax return for the period ended 31 December 2019 will capture some of the trading losses incurred up to 30 June 2020 and as a result your October 2020 corporation tax payment is likely to be significantly reduced, easing cashflow at this critical time.

Calculations should be prepared and commercial considerations must be discussed before deciding to extend your company’s year-end as it is not possible to provide all the necessary detail in our reply.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Janette

Janette Burns / Associate Tax Director

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