The Government measures to support business through the current coronavirus outbreak have recognised that the cash flow impact is of key importance and that many businesses have had to adapt their working arrangements. Partnerships and LLPs should consider the particular tax saving and cash flow options available to them to protect and manage their businesses.
31 July 2020 – tax payment deferral?
The self-assessment tax and National Insurance contributions (NICs) liability due by 31 July 2020 is often settled by the partnership but is in fact the partners’ personal liability. A firm’s decision on whether to take advantage of the Government’s decision to allow self-assessment taxpayers to defer this payment to 31 January 2021 due to financial difficulties caused by the impact of the coronavirus must consider a number of issues: can they afford to make the payment; is it morally right to defer payment; and, do the management team have the right to make this choice or do they require permission from each of the partners?
If deferral is chosen, the partners are still ultimately liable to make the July payment to HMRC by 31 January 2021 - so what happens if the partnership continues to experience financial difficulties and potentially does not have the cash to pay HMRC by the deadline? Unfortunately, HMRC will still expect payment from the partners, despite the depletion of tax reserves held by the firm. There is therefore a delicate balance to be struck between short term cash flow requirements for the business and peace of mind for the partners, knowing there is still a tax liability that must be paid by 31 January.
Change of accounting reference date?
The partnership may wish to explore changing their accounting reference date, shortening or extending their accounting period could provide the firm significant short to medium term tax reductions and cash flow benefits.
However, every firm and group of partners will have a different fact pattern and whether to shorten or lengthen an accounting period (and when) needs careful consideration, including preparation and analysis of appropriate calculations - there are many bear traps to avoid.
Partners working from home - expense claims?
Many partners may have spent a few days a month working from home before the current crisis. Now almost everybody is working from home where and when they can. For many businesses this may well become the norm going forward. There are a few small tax breaks for working from home, even for the self-employed and partners, who may claim tax relief on work related expenditure incurred on:
- variable cost items (including heat, light, power, telephone and internet connection); and
- fixed cost items (such as council tax (or domestic rates in Northern Ireland), insurance and mortgage interest).
All expenses must be claimed in the partnership tax return with appropriate adjustments to partners’ profit shares. Claims by partners in their personal tax returns will be rejected by HMRC.
It should be noted that if an expense claim is made for a room that is wholly for business use, there could be an impact on the main residence relief available for capital gains purposes when the property is sold. However, a well-designed claim should provide a successful defence against HMRC challenge when the house is sold.
For more information please get in touch with Mark Waddilove.