The Summer Statement has presented significant issues in terms of our assisting clients so I’ve rather had my head down looking at that. The best I can do in terms of a cheerful start to the thoughts this week is as follows:
We have ducks at the Black House for the first time in 20 years - they've kept me sane in lock down. A bit of nature's normal cycle and they could fly wherever they liked! So, I have to confess to being a tad distressed about 60 ducks and ducklings wandering about on the M25 near Watford. Perhaps we all need to get out more and then the ducks will decide that the grand union canal is more attractive than a motorway! I hope that made you smile before we get into the more serious bits.
There has been an awful lot in the press recently about people working through a limited company and how unfair it is that they can’t get furlough, so I thought I would try and explain why this happens:
A director of a small and limited company is usually remunerated partly by salary (which is subject to PAYE and National Insurance) and partly by dividends which are only available out of the post-tax profits of the company. There is no obligation on a director of a limited company to take any salary whatsoever and so some individuals choose only to take a dividend. The reason for that is that the basic rate tax on the dividend used to be 0% and is now only 7.5% compared with the remuneration which is taxed at 20% and, over a certain limit, has employee’s and employer’s National Insurance contributions applied to it which adds another 23.5% to the tax burden.
It would only be a director who either has no remuneration, or who had no regular remuneration, who would NOT be entitled to furlough. Such an individual could have saved very significant amounts of tax and National Insurance during their time as a director.
However if a director has, for example, a salary of £12,000 i.e. £1,000 a month, subject to personal tax and national insurance, then that individual would have been able to get furlough for up to 80% of that pay.
Taking advantage of a lower tax regime does always have a cost – in the current circumstances that cost is the inability to claim furlough.
Although it’s hard, perhaps it is unrealistic to say that ‘I’ve paid very little tax and now I need the government to help me!’.
Directors I have advised do mainly take a small salary from their companies by way of providing some secure income - a dividend only being possible if the post-tax profits of the company allow it, whereas the salary will be paid as long as the company has funds to do so. These two things are not always the same, as strange as it may seem, as you can have the cash and still not be able to pay the dividend legally!
The biggest question seems to be about the furlough bonus. The furlough bonus applies to any member of staff who has been furloughed at any point during the furlough period whether they be a director or not. In order to be entitled to this bonus the company has to pay that individual an average of £520 a month for the months of November, December and January, which will qualify the company to be able to claim the bonus in February 2021.
The other main item of interest is the drop from standard rated 20% VAT to a temporary reduced rate of 5% VAT on various tourist-based industries. The guidance on this can be found at: https://www.gov.uk/guidance/vat-reduced-rate-for-hospitality-holiday-accommodation-and-attractions.
It is going to be a big help to businesses which have incurred significant additional costs, in terms of premises and staffing, in order for them to be able to trade in a Covid-secure way. The interesting thing is going to be the nature of supplies that become multiple. It has been suggested that a gin and tonic in a glass will be 20%, whereas if you have the gin in a glass and the tonic in a bottle you will pay 20% VAT on the gin and only 5% on the tonic! This is very similar to the fact that Jaffa cakes are zero rated for VAT and chocolate digestive biscuits are standard rated! VAT is a complex tax.
One area worth thinking about for those people who have recently entered the holiday letting or bed and breakfast market and have had very high set-up costs, is that while in most circumstances you would choose to run a holiday let without the burden of VAT, it may be worth paying VAT on your turnover at 5% for six months and then 20% for a further six months and then voluntarily de-registering because in that period you can reclaim VAT on your set-up costs? It’s not a ‘one size fits all’ solution however as you will have to pay back the VAT on the set-up costs at their market value at the point of the de-registration and this needs to be looked at before any decision to register in the first place is made. We have written to all our holiday let clients to let them know whether we think this is something they need to be looking at or not. Any other tourist business that has done major refurbishment recently and is not registered for VAT might consider this too.
If you’re using the flat rate VAT scheme you might want to consider coming off it to benefit from the lower rate. Do be aware however that you will not be able to re-join for a year after switching schemes and by then the subsequent costs may be too great. You will need to do the sums.
Self-assessment payments on account for 2019/20 that are due by 31 July 2020, can be deferred until 31 January 2021. No interest or penalties will be charged on the deferred July payment provided it is paid by 31 January 2021, and you do not have to contact HMRC to ask them if you can do this – you simply do not pay until 31 January 2021 at the latest.
I gather Boris is going to be making a significant announcement today but you’re all going to have to contain yourselves in patience until next week to hear what we think about what he says!
I experienced some more pubs this weekend and how they’re dealing with the business of keeping their staff and customers Covid-secure. I think you probably need someone who acts as maître d who is rather Sergeant Major-ish to keep everyone in order! This seems to me to be a rather more attractive way of dealing with it than a pub in, (I think), Wales where apparently there is an electric fence round the bar to stop people getting too close! Rather a drastic measure.
Until next time