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Coronavirus - Private Equity and the pandemic: Using Tax to help manage cash flow – Global

  • United Kingdom
  • Coronavirus - Tax issues
  • Corporate
  • Tax planning and consultancy

14-07-2020

When I hear “day 110” of lockdown I can’t help imagine it is being said in a Geordie accent and I am trapped in some never ending Big Brother spin off where all the challenges revolve around quizzes on Zoom, invented DIY tasks (I’m currently trying to convert an old sideboard into a cocktail bar) and fitting the phase “new normal” into every conversation.

Unfortunately, however, the challenges we have been facing are far more serious.  Both on a personal and business level the past 4 months have presented enormous challenges.  Hopefully the opening of some pubs and restaurants at the weekend and relaxation around the rules preventing us from seeing friends and family (in England at least) will have started to ease some of the personal issues.  It does still look as though it will be some time before the business “new normal” is something we recognise and feel truly comfortable with.

Although some sectors have thrived during this pandemic and discovered new opportunities to exploit, many have struggled, suffering disrupted access to their customers and supply chains.  One of the key things that business have had to be on top of throughout the pandemic is cash management.  Management of cash is going to be just as important as we (hopefully) start to come out the other side – rarely has the cliché “cash is king” been more accurate. 

Throughout the lockdown there have been several government initiatives to assist with cash flow, such as the Coronavirus Business Interruption Loan Scheme and the COVID-19 Corporate Finance Facility.  Also, the VAT reduction in the hospitality sector and “Eat out to Help out” scheme in August are designed to speed up the economic recovery.

In this weekly bitesize article we will focus on several tax related measures UK corporates can take to try to help their cash flow.  We will also highlight one or two unique tax issues which have arisen from the furloughing of staff and staff having been forced to work remotely / stranded abroad.

For UK based corporates there are several actions related to tax which can be taken to help cash flow.  These include maximising reliefs, minimising instalment payments and maximising tax refunds.

The key points for a UK company to consider include:

Research and development tax reliefs

There are potentially lucrative tax reliefs  available to corporates which incur qualifying expenditure on research and development.  The reliefs are designed to incentivise companies to invest in innovation.   The reliefs are not just available for companies developing new products or process but also potentially available to companies enhancing an existing one – the HMRC criteria are broad and not limited to traditional “innovative” sectors.

The making of a successful research and development claim can reduce a company’s tax bill or may result in a cash payment from HMRC.   There are two regimes – one for SMEs and one for larger companies, each with different qualifying criteria and rate of relief.

Companies which have previously discounted R&D tax reliefs as not worth bothering about or have assumed they do not qualify should consider revisiting the issue as it may present a way of obtaining cash from HMRC (as opposed to the usual direction of cash travelling to HMRC!).  Further, companies which already claim R&D relief should look to accelerating their claims and submitting them to HMRC as soon as possible.

Quarterly instalments of corporation tax

Large corporates who are required to pay their corporation tax in instalments should consider whether they can reduce upcoming quarterly payments.  As instalment payments are based on an estimation of corporation tax for an accounting period, if estimated profits are reduced so should instalment payments.  HMRC do have the power to charge penalties for deliberately making instalment payments which are too small so care should be taken to ensure that any estimates of profits are genuine and backed up with evidence.

Time to Pay

In normal times HMRC offers a “time to pay” facility for taxpayers who are unable to pay their tax when due. This facility allows taxpayers to agree an instalment regime with HMRC. During the coronavirus pandemic HMRC have set up a dedicated helpline for businesses which may be unable to pay their tax when due (0800 0159 559).

VAT planning

One of the simplest ways to help cash flow can be by managing VAT payments.  Steps that businesses should consider include:

  • ensure that input VAT is recovered to the maximum extent possible.  It can often be worth discussing material irrecoverable VAT with a VAT expert to see if any business restructuring is possible, what approach other people in the industry take or whether HMRC can be challenged on the denial of input tax recovery;
  • having systems in place to ensure VAT invoices are timely received and claims for input tax promptly made;
  • taking advantage of any VAT reliefs available if customers are late in paying; and
  • proper management of the issuing of VAT invoices.

Further, following the mini Summer Budget the rate of VAT in the hospitality sector is set to fall to 5%.  The reduced rate will apply to certain supplies of hospitality, hotel and holiday accommodation and admission to certain attractions.  VAT registered businesses in these sectors should see if they can temporarily reduce their VAT rate to 5%.

It is worth noting that the UK Government’s VAT deferral scheme ended on 30 June 2020.  Any VAT which was deferred between 20 March and 30 June 2020 needs to be paid on or before 31 March 2021.

Tax losses

UK companies should consider if there are any steps they can take to create losses (for example by writing down stock or impairing investments).  In addition, companies should consider if they are able to carry losses back to a previous accounting period to obtain a refund of corporation tax already paid.

A technical point to note – if the pandemic has caused any company to change its trade (for example switching to production of PPE or hand-sanitizer) care should be taken as to whether the change limits the availability of any trading losses being carried forward by the company.

Business Rates relief

Last but not least, as widely publicised there are reliefs available for business rates for business of various sizes with enhanced relief for business in certain sectors.  There are different regimes in England, Northern Ireland, Scotland and Wales.  Details can be found here to check you are taking full advantage of the relief.

As mentioned at the start of this article, there are also some very unique tax situations arising as a result of lock down. 

Corporate tax residency

If lockdown or travel restrictions have caused an employee to work in a country which is not their usual place of work, or have prevented directors from travelling cross border to attend board meetings there can be concerns about establishing taxable permanent establishments or altering the tax residency of a company.  In addition, there could be payroll taxes in the country the individual is temporarily working in.   Some countries have introduced temporarily relaxation of their residency rules during the pandemic.  A more detailed article on this topic written by my colleagues Ben Jones and Kunal Nathwani can be found here.

Furlough payments

Furlough payments have been a life line over the past few months.  We are now moving into stage 2 of furlough payments with “flexible furlough” and a proposed £1,000 bonus for employers who bring employees back from furlough.  Employers should be aware that an HMRC consultation into ensuring that employers have correctly treated furlough payments as taxable payment and giving HMRC the power to recover, in certain circumstances, furlough payments from employers closed on 12 June 2020.  The consultation proposed new legislation to ensure that Coronavirus Job Retention Scheme payments received by employers are brought into account in calculating the profits of the business for tax purposes and giving HMRC powers to recover furlough payments in some circumstances and charge penalties. A more detailed article on this topic written by my colleagues Diane Gilhooley and Amanda Dodsworth can be found here. Also, an article on Flexible Furlough can be found here.

Hopefully this has been a useful oversight into how tax management can assist with cash flow and hopefully given you some ideas you can look into further. If you have questions about this article, please contact the Eversheds Sutherland lawyer with whom you usually work, or any member of our UK Private Equity team.

Next week Ceri-Ann McGraa will be discussing directors duties for both management and investor directors.