Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

Zombie Companies- The Living Dead

If the last couple of years have not been bad enough, storm clouds are building. Which of us will become zombies?

The government’s support packages for industry during the Covid pandemic kept many untenable businesses afloat, while banks were understandably reluctant to foreclose. 

As the new occupant of 10 Downing Street moves in is the writing could be on the wall for thousands of uncommercial operations currently limping along in the UK. How many accountancy practices will go the same way. We saw firms go under during the financial crises 14 years ago, a time when we were expanding, and we will probably see the same again this time.

We have seen various estimates of inflation. When the forecast was under 10% we felt that it would reach at least 15%. Now there are estimates of 18%, 22% and in the near future, probably higher. This is a time to keep your nerve. If you make the wrong decisions now, you could join the ranks of zombie companies, still alive but basically dead.

It is clear that small businesses are facing hikes in energy costs that are between 300% and 500% and the market has probably not yet peaked.

What strategies should we all be adopting to weather this storm and avoid the worst effects, avoid joining the zombie class of companies. In some cases, this may consist of sharpening up credit control procedures and possibly cutting down or delaying work if we do not think we will get paid.

Some companies may need some sort of recovery package that gets them over their short term problems and leaves them in a stronger state for the future.

There is an old saying that there is opportunity in every threat, and that is invariably true but it will not seem that way to struggling small businesses. It will be a time for tough decisions about the existing business but also the opportunity for mergers and acquisitions. Could you swallow up one of your competitors at a discount.

There are undoubtedly challenging times ahead but it is an environment where many will be in their element and will prosper while others sink without trace.

If you think we can help, just get in touch. We are in our element!

Illicit Swimming Pools

In France you pay extra tax if you have a swimming pool. Under French law, pools must be declared as property taxes are calculated based on rental value, so pools can increase the value of a property – and hike the amount of tax individual homeowners pay.

Developed by Google and French consulting firm Capgemini, the machine learning application was trained to scan publicly available aerial images of properties for indications that a swimming pool was present – with the most obvious being blue rectangles in back gardens. Once identified, the pool’s address was confirmed and cross-checked against national tax and property registries.

The Guardian reported that the software had a 30% error rate in April 2022, as it would often mistake solar panels for pools or miss existing pools if they were heavily shadowed or partially covered by trees.

The tool was deployed initially across nine French regions during a trial in October 2021, helped French authorities unearth 20,356 undeclared private pools and levy additional taxes on applicable households.

The French Treasury said the tool will now be expanded across the country, where it expects to pull in around €40m (£34m) in new taxes on private pools in 2023.

The tool could eventually be used to find undeclared home extensions, patios or gazebos.

Inflation Only 14%?

The British Chambers of Commerce (BCC) has said the UK will enter recession before the end of this year with inflation spiking to 14%

The BCC is now forecasting a recession for the UK economy with three consecutive quarters of contraction between Q2 and Q4 in 2022. Annual expectations for GDP growth also continue to decline.

They say that inflationary pressure is expected to peak at 14% in the fourth quarter of this year, falling to 5% by the end of 2023.

It is apparent that inflation is running rampant, and it is not only impacting the cost of doing business, but also the ability of some businesses to keep their doors open. In January, the BCC found that 23% of businesses surveyed were looking to scale down or even consider closure in response to rising costs.

Migrating to Cloud Accounting Software

Cloud based software such as QuickBooks online and Xero are fast becoming the go to preference for many small businesses. This trend is relatively recent.

Making Tax Digital (MTD) for VAT has sent many small businesses flocking to the cloud to facilitate tax processes partially because their accountants can also log in,  and remain compliant. This trend is set to continue and will be driven forward again by MTD for income tax in 2024.

A cloud-based application enables best of breed solutions to work together seamlessly and allows fully collaborative working between different organisations and locations.

An automated tax solution, which maintains compliance while helping organisations increase efficiency and reduce operational risk, is creating dynamic industry change.

The key benefits include:

1. More efficient workflow

You and your accountant can both access the same software, even processing at the same time on different parts of the system.

2. Ready for the next MTD roll out

MTD for income tax is next but this will be followed by MTD for Corporation Tax

3. More cost-effective

5. Aids compliance

Moving to the cloud is not just implementing technology. Mindset change is critical across the entire organisation to make change successful. It is a different way of working, but a win win for you and for us.

Training on the new software is often built-in, making such programs easier to use and understand and streamlining the transition.

HMRC – R&D Tax Credit Delays

HMRC has stated that since April it had faced an increase of fraud within the R&D Tax Credit relief, mostly linked to organised criminal gangs.

It responded by pausing all R&D payments on 28 April 2022, stating that it needed to investigate irregular claims and ‘ensure they prevent abuse of the relief’.

Since 1 April, the tax authority had received over 8000 claims, which all needed to go through further scrutiny processes.

A HMRC spokesperson said: ‘We do recognise that these additional checks may cause delays to legitimate businesses and appreciate their patience as we work through these exceptional circumstances. We want to reassure legitimate claimants that we are working hard to expedite claims as soon as we can.

‘While we are pleased that we could restart paying RDTC claims from the 10 May 2022, the nature of the additional operational checks (required to protect the R&D relief) means that it is not currently feasible to offer a 28-day payment turnaround for claims and we think the standard service level will need to be 40 days.’

HMRC looks to recover from the recent pause in payments and expects to be processing 80% of claims within 40 days, by the end of August 2022.

HMRC added: ‘While we cannot go into detail of our ongoing investigations and compliance activity, we do want to explain to tax agents that we have a duty to challenge irregular claims, requesting more information if we believe it is appropriate.

Over 1,000 letters have been issued to claimants which have been identified as high-risk, challenging irregular claims.

Buy to Study Housing

For some students going to university, one option is to buy a property, usually with financial support from their families.

If they are a ‘first-time buyer’ there may be an exemption from property taxes.

Under Rent a Room, any rent received from sharing the property with fellow students will be tax-free up to £7,500. Anything in excess of that will be taxable although may be covered by the student’s personal tax allowance of £12,570.

Thus, the student is not only free of the burden of paying rent, but also has a source of funds to supplement, or even replace, whatever loans are available. Even if some or all of the price has to be borrowed, the numbers may work out favourably, especially if the course is longer than the usual three years.

In a rising market, selling the property at the end of the course should produce  a gain sufficient to cover transaction costs and to come out ahead. But short-term property investment can be uncertain.

Gift aid Carry Back

A donor can treat a gift aid donation made in the current tax year as if it had been made in the previous tax year.

The election must be made:

• on or before the tax return is delivered for the current year; and
• no later than the normal self-assessment filing deadline for the current year.

In practice, the election is made in the charitable-giving section of the self-assessment return.

But note that a claim for carry back relief cannot be made in an amendment to a return that has already been submitted.

Early RTI returns

If the full payment submission (FPS) is submitted late, HMRC may issue a penalty, subject to the three-day grace period and after first sending an education letter to the employer.

If an employer tries to get on top of their admin and file the RTI returns well ahead of the payment dates the HMRC computer may issue penalties anyway because it can’t find the return in the period it relates to.

The lesson here is don’t submit the FPS so far in advance that it falls into the wrong month, even if it is early.

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.