The Office for Budget Responsibility has predicted a default rate of 40.4% on bounce back loans (BBL) and Coronavirus business interruption loans (CBIL), with £27.2bn of loans expected to be written off.
It has been suggested that 59% of businesses have borrowed more than 20% of their turnover, a significant measure which according to some, is a sign of impending doom. If you are one of them then it may be time to bring in some outside help. Hard work may not be enough to trade out of that particular hole.
A company is deemed insolvent when it cannot pay bills when they become due, or it has more liabilities than assets on its balance sheet. Many businesses will have seen significant drops in their turnover. This is going to make profits and cash hard to find in the short term.
I found this list of signs that could mean you are running the risk of insolvency and maybe need to take advice.
The insolvency alarm bells:
1. Cash flow problems
All businesses will experience a squeeze in cash from time to time. But, if the problem is frequent or constant, then you’ve got an underlying issue that needs to be resolved.
2. High-interest payments
If, when trying to access a business loan, the interest rates are sky-high – or lenders are insisting on higher levels of personal guarantee – this indicates that they are treating your company with caution.
3. Defaulting on bills
This is not only bad for your relationships with suppliers and your reputation, it is also likely to lead to your creditors taking action against you.
4. Late payments
One of the most obvious early signs of insolvency is when you are continually late in settling up with your creditors, or in collecting payments from your debtors.
5. Falling margins
High sales do not necessarily mean business is booming. If costs are high, too, you could soon end up in the red. Always look at your bottom line, not just your turnover.
There are a number of options open to you. Here are some to consider.
- Turnaround finance or capital – Turnaround financing is a business loan—typically secured by company assets or other collateral—that supports a strategic or restructuring plan intended to help your company return to profitability.
- Refinancing assets or looking to free up capital from property (yours or the companies) by re-mortgaging or extending an existing mortgage.
- Informal creditors arrangement or Time to Pay (TTP) involves the negotiation of verbal agreements with creditors for more manageable repayment terms for outstanding debts.
- Company Voluntary Arrangements are an option if your company is insolvent but could be viable in the future. They involve you renegotiating the terms of your debt with your creditors, then paying them back in one recurring monthly payment over an extended period.
- Administration entails handing temporary control of your company to an insolvency practitioner, who will settle your debts and could restructure your business. If this is an option you want to explore we have a couple of tame insolvency practitioners we can put you in touch with.
If you need to talk, you know where to find us.
How are SEISS Grants Taxable?
All SEISS amounts received will be subject to income tax and National Insurance contributions.
A payment received in 2020/21 is taxed in 2020/21 (irrespective of its treatment for accounting purposes) – with one exception involving partnerships mentioned below.
For sole traders, it will be necessary to add the SEISS payments received in 2020/21 to the trading profits or losses that form the basis of the year to 5th April 2021.
For example, if you are a sole trader who draws up your accounts to the year to 30th June 2020 making a trading profit of £10,000 for that year and receives SEISS payments totalling £13,070 in June and August 2020, you will be taxed on a total of £23,070 in the 2020/21 tax year.
If you made a trading loss in the year to 30 June 2020, the SEISS grants received in 2020/21 would be netted off against the loss and any resulting loss can be relieved subject to the normal trade loss relief rules.
There can be different rules applying to partners in a partnership depending on whether or not the SEISS grants are retained by the partner or distributed to the partnership.
Where a partner receives SEISS payments in 2021/21 and retains them all, the partner will be taxed on the total of their share of the partnership profits plus the SEISS payments received in 2020/21.
Where the SEISS grants are not retained by the partner but distributed to the partnership, the grant becomes part of the partnership trading income which is taxed according to the profit sharing arrangements in the basis period ending in the tax year – here the grants are not assessed in the tax year in which received.
SEISS grants that have been included in a set of annual accounts, they will generally have to be added back in the tax computation and declared separately on the tax return except in a partnership where the partner has transferred their SEISS grant to the partnership.
National Living Wage – Changes
The Government announced on 25 November 2020 that the National Living Wage (NLW) would not only be increasing in 2021 but that the age threshold would be lowered also.
Below is a table which highlights the current rate of NLW and the ages entitled to it, as well as the new structure from 1 April 2021.
As seen below, the current age threshold for NLW is 25 years and above, which sits at £8.72 an hour. However, from 1 April 2021, you must be careful not to include 23- and 24-year-olds to your list of those entitled only to the National Minimum Wage (NMW) as the NLW threshold has been lowered to cover those aged 23 years and over. Therefore, from 1 April 2021 onwards, NMW will only apply to those aged between the compulsory school age and 21.
|Age||Current rates||Rates from 1 April 2021|
|Workers aged 25 and over (NLW)||£8.72 an hour||–|
|Workers aged 23 and over (NLW)||–||£8.91 an hour|
|Workers aged 21-24||£8.20 an hour||–|
|Workers aged 21-22||–||£8.36 an hour|
In light of the introduction of the new NLW threshold,
- Ensure that staff who are 23 and 24 years of age are not excluded from receiving the NLW if organisations have a pay reference period that begins on or after 1 April 2021
- Keep track of staff birthdays so that they always receive the correct national wage rates for their age groups – whether NLW for people aged 23 and over or the NMW for people aged between the compulsory school age and 22, as well as apprentices.
You may also need to think about how the cost of this change will impact your business and how you can manage this, especially as coronavirus may have affected their business financially. Some viable solutions may be to:
- Keep staff on furlough until the Job Retention Scheme ends at the end of September 2021, if they are eligible to use it
- Reduce staff hours if possible and consider whether an agreement needs to be had with staff before this is done by looking through the terms of their employment contracts
- As a last resort, consider redundancy – remember to follow the full procedure in this case.
As a priority, you should review your current policies to identify which need to be updated to reflect this new threshold change and ensure the purpose of these policies are still relevant; for example:
- Recruitment policies – how pay within the organisation is advertised
- Equality and diversity policies
- Pay policies
- Pay review arrangements
- Pay progression arrangements.
It is important that you communicates with staff along the way.
If you need help with your contracts we have people we can put you in touch with who will keep you right.
Correcting VAT Errors
You can make adjustments to correct errors that are:
- below the reporting threshold – You can adjust your next VAT Return if the net value of the errors is £10,000 or less. You can also adjust your next VAT Return if your error amount is up to 1% of your box 6 figure (up to a maximum of £50,000).
You must report the error to HMRC if it’s above the reporting threshold.
- not deliberate
- for an accounting period that ended less than 4 years ago
You must report any errors that do not meet these conditions to HM Revenue and Customs (HMRC).
How to make the adjustment – When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you.