This is particularly important in sectors where expenditure has continued but revenues have dropped or ceased.
Where the business includes breeding of horses, the costs for the care and feeding of the horses will continue at a similar level. However, there is a fear that either autumn sales will not take place or, more likely, prices across the board will be lower. One small consolation is that coverings have continued. With nomination fees looming on the horizon in October, this article aims to cover some of pertinent points that businesses may wish to consider in order to weather the storm.
Careful monitoring of cash will be imperative to a business’s success in these difficult times. Businesses should prepare detailed cashflow projections to ascertain the cashflow requirements of the business and to highlight any areas where there may be savings, and to gain an understanding of its ‘pinch points’. Evidence of cash flow projections are also likely to be required should any external funding be sought. Knowledge is power and the best place to start is to really ‘know’ your cash position.
Bounce Back loans
The scheme is designed to help small and medium sized businesses borrow between £2,000 and up to 25% of turnover, to a maximum of £50,000. The government will guarantee 100% of the loan and there are no set up fees and no interest to pay for the first 12 months. After the first 12 months the interest rate will be 2.5% a year and the loan term is up to 6 years.
In order to qualify for the loan, the business needs to be:
- Based in the UK
- Have been established before 1 March 2020
- Been adversely affected by the coronavirus.
This bounce back loan cannot be claimed if the business is already claiming under the Coronavirus Business Interruption Loan Scheme, The Coronavirus Large Business Interruption Loan Scheme or the COVID-19 Corporate Financing Facility.
There are 11 lenders participating in the scheme including many main retail banks. You should approach a suitable lender yourself via their website where you will be required to fill in a short online application form to self-declare you are eligible.
A shorter-term solution may be to approach a business bank for a larger bank overdraft. This however will not have the advantage of no interest for the first year. However, it may offer increased flexibility where there a short period where additional cash is required.
Interest on loans
Where interest in paid on business loans it will be deductible in calculating the taxable profits of the business. It should be noted that restrictions may apply where this creates losses (detailed below). In cases where the business is not undertaken through a company and includes residential lettings it is likely an element of the interest paid will only receive a basic rate tax credit.
Utilisation of tax losses
Subject to the restrictions on ‘hobby farming losses’, which state that sideways loss relief can only be available for up to 11 years after commencement, providing that the business has the potential to be profit making in the future, business losses should be available to set against other income. This is subject to a cap for individuals of the higher of £50,000 and 25% of individuals adjusted total income. There is a further cap for non-active traders (being those engaged for less than 10 hours a week). It may also be possible to carry back losses in order to obtain a tax refund for the prior year.
It is always important to keep in mind the fact that loss relief is only available where you can demonstrate that you are trading in a business-like fashion and the business is capable of making a profit at some time in the future. For example, is it time to sell any mares who don’t pay for themselves by only having a foal every third year or regularly producing foals with confirmation problems? A bad mare costs as much to keep as a good mare.
When submitting 2019/20 tax returns it is unlikely the full effect of COVID-19 will be reflected in the taxable income. Where payments on account are required by January 2021, consideration should be given to reducing the payments if it is anticipated the taxable income for 2020/21 will be lower.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
The tax treatment depends on the individual circumstances of each client and may be subject to change in future.
Smith & Williamson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.