The unpredictable world: The impact on business

What an interesting 12m we have been through. 

We started it by moving out of one ‘Black Swan event’ – the impact of the Covid pandemic; quickly found ourselves in a second –  war in Europe, which in turn gave rise to a third – energy prices rising at an unimagined rate.

And now, it feels like we might be having another with the Bank of England increasing base rates to 4% after some 13 years of rates hovering at just above zero.

If ever we needed a masterclass in the unpredictability of the world, the last year feels like it has been it.

But, back to the base rate.  The Bank is, for understandable reasons, somewhat opaque in its pronouncements around the potential future path for base rates.

But some commentators have a sense that the rate rises are now easing off; there might be another at the next MPC but could that be a plateau?  A big driver behind this idea is the fact that wholesale energy prices for gas have fallen significantly from the early winter peaks –  not all of this reduction has necessarily flowed downstream to consumers…unsurprisingly. Interestingly, the Bank itself is predicting that inflation rates will fall below 2% from early-mid  2024 and be below 1% by the end of 2024. 

The Bank makes a point of saying that it has some concerns that wage inflation might become sticky through 2023 and 2024 and that could fuel inflation as energy prices fall.   But some aren’t convinced.  They would point out that what we have seen, and are seeing, is that employees are unable to secure wage rises which currently match inflation – so why would they be able to do so , or possibly outstrip inflation, as it continues to reduce through 2023?

Might it actually be the case that the Bank regards the events of the last 12m as giving it the chance to ‘resume normal service’ with regard to base rates and get them back up to the historical norms of c 4% or so?   

But what does this macro-economic unpredictability mean for businesses? Well, very simply for very many, it means some degree of discomfort at best and potentially fatal pain at worst.

However, and at the risk of sounding like Voltaire’s somewhat delusional Dr Pangloss,  is it wholly unrealistic to think that this volatility or entropy across the macro economy might ‘stirs things up’ in a potentially positive way and might also create opportunities for some businesses?  Could that be a useful message from business leaders to their staff?

I am just reading a short biography of the 18th century German writer (and polymath) Goethe and was struck by a passage last night where Goethe amused some soldiers around a damp, muddy campfire with a sleight of hand and several bottles of ‘confiscated’ French wine. The lesson drawn from this was that the wise person doesn’t seek to remind her or his audience of how bad things are –  the audience knows that only too well –  the wise person’s role is to make lives more bearable. 

Shouldn’t that be one of the key aspects of the leader’s role in her or his organisation; particularly when that organisation is facing some very challenging circumstances such as many of us are now?

Many people are worried, with good reason, about the cost of living crisis creating a perfect storm with increasing mortgage payments.  For the most part, they will be employees somewhere. The best businesses will do what they can, of course, to improve the financial position of their employees. But where that support can’t address all of their financial worries what else can leaders do to make employees lives more bearable? Even though there will be a large degree of overlap from one business to the next, each set of circumstances will be unique and so there is unlikely to be a one size fits all answer to this question.

What could you do in your business?

Tax-Free Benefits for Employees

There is no doubt that this year has turned into a difficult year for ordinary workers, and one of the most common questions we see from caring employers has been “How can I help employees with the cost of living”. 

Regarding benefits in kind and expense reimbursements, we have put together our top 5 suggestions.

Maximising your tax-free expenses payments

Reimbursement of business travel expenses incurred in a privately owned car can be at a maximum of £0.45p per mile for the first 10,000 miles, after that £0.25p per mile, tax and NIC free. 

For company car drivers, the rates are published quarterly, known as the advisory fuel rates.  Maximising these rates will not incur any PAYE/NIC for the employee, and the employer will not have a NIC liability.

Christmas parties

The annual party exemption allows the employer to pay for a morale-boosting annual party without the employee picking up an unexpected tax bill. 

The employer should ensure that there is an annual party and that the costs of the party, including transport and accommodation, are within the £150 per attendee limit. 

Be careful though as breaching the limit will incur a taxable benefit in kind on the whole amount, therefore precise records need to be kept.  The party must be available for all employees to be able to attend, even those with a Bah humbug attitude!

Electric Company Car

The average car owner spends around £3,500 a year on owning and maintaining a car. 

Employers can offer an electric company car via a salary sacrifice scheme. 

The employee can then benefit from the tax and NIC reductions and take advantage of the continued ultra-low taxable benefit in kind on an electric car.  The scheme can even be operated in such a way as to avoid a cost to the company.

Business Mobile Phone

Employers can provide a company-contracted mobile phone for business and not incur a benefit in kind on the employee, even if used privately by the employee.

Trivial Benefits in kind

There is no tax and NIC liability on the provision of a trivial benefit in kind.  This will cover high street vouchers for instance.  There are a few conditions to consider such as:

  • It cannot be cash or a cheque
  • The cost to the employer must not exceed £50 (VAT inclusive)
  • It is not part of a salary sacrifice scheme
  • The benefit is not provided in recognition of particular services performed by the employee. (e.g a Christmas/birthday/birth of a child would be OK.  An employee of the month/performance target rewards would fail)
  • For close companies (those with 5 or fewer participators (i.e. shareholders), or a company of which all the participators are also directors) there is an annual limit of £300 per director.

How can MHA help?

If you would be interested in any of the above options, please contact the employment taxes team at MHA to find out more.

Corporate governance reforms on the near horizon

Audit and corporate governance reforms were confirmed earlier this year by the Government.

The Financial Reporting Council (FRC) will move towards becoming the new Audit, Reporting and Governance Authority (ARGA), expected to take place in April 2024.

This strategy follows the Government’s proposal to restore trust within corporate governance and audit and will include granting ARGA the ability to raise funding for their regulatory activities through a statutory levy.

Current funding proposals being consulted on include:

  • Accountancy professional bodies should meet the costs of overseeing the performance of ARGA’s regulatory role through an annual levy;
  • Public Interest Entities (PIEs) should finance the cost of ARGA regulative reporting against directors and other areas;
  • Auditors of PIEs should fund regulation by paying an annual levy based on their fee income from PIE audits.

Changes to Public Interest Entities (PIEs)

The threshold to be considered a “Public Interest Entity” (PIE) is also changing which may impact on reporting requirements for companies that will be captured in the new thresholds. The definition will be widened to include large entities of public importance irrespective of if they are trading on a regulated market. The definition of PIE will change from the 500 employees/£500 million thresholds to having both 750 employees and £750 million annual turnover (referred to as ‘750/750 PIEs’).

To minimise the potential strain for entities now appraised as a PIE, the Government intends to institute a tiered approach to reporting. PIEs meeting the 750:750 threshold will not become subject to all existing PIE requirements, but rather new reporting conditions will be introduced that will be applicable primarily to these 750/750 PIEs.

The expanded criteria will include AIM-listed, LLPs and third-sector entities but companies are encouraged to check the new requirements for themselves to check whether they will be caught.

Further Changes to Reporting and Governance

Alongside the move to ARGA, there are many other proposals relating to this area. For the new 750/750 PIEs, a ‘Resilience Statement’ will need to be included in the strategic report and they will need to publish an ‘Audit and Assurance Policy’ (AAP) every three years.

The resilience statement will incorporate existing going concerns and viability provisions in the financial statements and will require companies to discuss how certain risks have been dealt with. The ARGA is to provide supporting guidance on the resilience statement and detail what will be required.

The AAP will describe the company’s approach to obtaining assurance over its reported information. They will also need to publish an annual implementation report regarding how effective their assurance mechanisms have been.

Both the new policy and report will be issued in the same segment as the audit committee report within the financial statements and again, further guidance will follow in due course.

Mini-Budget 2022: Changes to Income Tax Rates

Following pressure from members of his own party, the Chancellor has made a dramatic U-turn on the abolition of the additional rate band for income tax purposes, which he had previously announced a week ago.

The additional rate of income tax, being 45% for savings or non-savings income and 38.1% for dividend income, will remain in place from 6 April 2023.

We still expect that the 1% decrease in basic rate income tax will come into effect on 6 April 2023; in addition, the reduction of 1.25% on the rates of dividend income will also still come into effect on 6 April 2023.

The National Insurance increase of 1.25% which was brought in by Rishi Sunak on 6 April 2022, will be reversed effective from 6 November 2022.

With all this uncertainty around the economy and tax rates, it is more important than ever for owner-managed business owners to review their strategy for drawing income from their business to ensure that they are in the best possible position.

Get in touch

For further guidance on any of the tax measures discussed in this article, please contact your usual MHA Moore & Smalley advisor or Contact Us.

Read the latest tax commentary – visit our dedicated hub where we will be providing resources, advice and practical guidance on what these emergency tax measures mean for you and your business, to help you prepare and manage their impact.

R&D Tax Relief Scheme – Upcoming Changes for April 2023

The Research and Development Communication Forum (RDCF) met in July 2022 to discuss the various announced changes which are to be made to the R&D Tax Relief scheme from 1 April 2023.

But what are the upcoming changes? Our latest blog explores what businesses should expect when the new R&D tax relief scheme changes are rolled out from 1 April 2023.

What are the upcoming changes in the R&D tax relief scheme?

These changes include, but are not limited to:

  • Cloud and data costs are allowed as qualifying R&D expenditures
  • R&D to be expanded to include pure mathematics research
  • Restrictions on overseas sub-contractor costs (albeit exemptions if “it is unavoidable for the R&D activity to be undertaken overseas.”)
  • A standardised format of information to be provided
  • Senior Company Officer sign off the R&D claim 

The most significant discussion point of change from The Research and Development Communication Forum (RDCF) meeting was the new requirement for claimant companies to inform HMRC of their intention to make an R&D claim in advance. As of writing, the specific timescale of the ‘advanced notification‘ had not been provided by HMRC.

What is the ‘advanced notification’ I have to give HMRC about my R&D claim?

For R&D claims with accounting periods commencing 1 April 2023 and onwards, companies or their agents will need to indicate to HMRC of their intention to make a claim. 

Currently, an organisation can make a claim up to 2 years after the accounting year-end date, to which the claim relates, without any prior indication to HMRC that it intends to do this.

How much notice to HMRC do I have to give about my R&D claim?

The new changes implemented from 1 April 2023 mean that businesses are being advised to notify HMRC that they will be making a claim within 6 months of the accounting year-end.

The advanced notification will be made digitally.

The requirement to notify HMRC of an intention to make an R&D claim will only apply to new claims or organisations that have not yet made an R&D during the three previous years.

If the organisation is a regular claimer of R&D Tax Relief, there is an expectation from HMRC that they will make a claim year on year or every two years and so there is no need to advance-notify. 

Is there any flexibility with the 6-month ‘advanced notification’ deadline?

When analysing recent guidance, there does not appear to be any flexibility or leeway in the 6-month notification period. HMRC has taken the opinion that if you miss the 6-month advance notification deadline that you simply can’t make the claim for that year. 

Organisations will need to be proactive in identifying R&D projects in year and as they arise and not as part of their post-year Corporation Tax Return preparation, which can be up to 12 months following the accounting year-end.

There does not appear to be any restriction to a business making an advanced notification and subsequently not submitting a claim. If this is the case, the company will then may be required to make a further advanced notification, if it does wish to make an R&D claim for the following year.

The time to act is now

If you are an organisation which undertakes research and development or creates novel solutions using science and technology and have not made an R&D Tax Relief claim before, you should contact your accountant to agree on a process of ongoing in-year project review.

‘Advanced notification’ may also have the effect of removing some less scrupulous firms which set out to somewhat inflate R&D claims, as they will need to be proactive in the year to identify qualifying projects and not just step in 18- 24 months after the year end and try to pull together a claim from the accounting records. 

The six-month advanced notification may rule out many eligible organisations from making an R&D claim, especially those who engage accountants who are not fully versed in this specialist area of taxation and so do not have the experience to identify R&D activities in the year.

How can MHA Moore & Smalley help?

We have R&D specialists who advise our clients on this specialist area of taxation. For a free consultation on how we can help you and your business, please fill in the form below:

Digitalising expenses for your employees

In recent years, more businesses are migrating their expense claim system to be fully digital, regardless of organisation size. Traditionally, businesses would rely on employees to manually submit their expenses, or for the employee to pay for the expenses personally out-of-pocket and then claim it back via payroll or a separate payment.

What are the benefits of digitalising my expenses system for employees?

Eliminating paper forms and physical handing in

In the age of hybrid working, it’s likely that you have employees who are not always in the office. Digital expenses can cut down on paperwork and digitising the information stream means having data readily accessible.

Fewer errors and regular compliance checks

Most digital expenses software will have compliance and duplicate checks built-in. Data validation will also be available which will cut down on the number of errors on expenses forms.

Time-saving features

Most expense solution software providers include a mileage tracker as part of their mobile app. This is just one of the features included within software solutions which reduce the time an employee would need to dedicate to filling an expenses claim.

What expenses software is available to my organisation? And how do they work?

There are quite a few systems out there, including Pleo & Expensify.

MHA Moore and Smalley have started to see several clients move to digital expense systems and the feedback has been positive both in terms of control and time-saving. The systems work by issuing cards with pre-set limits to employees/directors.

These are then used to purchase items and as soon as something is purchased the mobile app sends a notification reminding you to take a picture of the invoice. This all then goes into the system and the employer is alerted to the spending.

The software links into QuickBooks, Xero, and Sage Business Cloud, so you can then seamlessly update your bookkeeping software for invoices and expense information.

Pleo is also capable of working as an accounts payable solution if needed. Invoices can be uploaded into Pleo, authorised, and then paid via the cards. Pleo effectively works as an extra bank account. You transfer funds across as needed and you can use these funds to pay for invoices as well as out-of-pocket expenses.

Pleo isn’t just for businesses; Charities find the level of control and approval as a really good all-around solution to reimbursing expenses.

For more information please get in touch with the digital solutions team by filling in the form below:

Reforms to the period of taxation for sole traders, partnerships & LLPs

The way in which the tax basis period is calculated for the self-employed and partnerships is set to be reformed ahead of the implementation of Making Tax Digital in April 2024.

What are the current rules?

At present unincorporated businesses are free to choose whatever accounting year-end they wish. These profits are then taxed according to the tax year in which the accounting year-end falls. For example, a business with a year-end of 30 September 2021 would be taxed on those profits in the tax year running from 6 April 2021 to 5 April 2022 (2021/22), with the tax payable on 31 January 2023.

HMRC believes that the current rules have created a complex system that is difficult to understand. When a business starts or a partner joins a partnership, the ‘opening year rules’ must be applied, this can create double taxation of some profits, called overlap profits.

Any profits which have been taxed twice on the commencement of trade can then be relieved in the year of cessation of the business or upon the partner leaving the partnership. HMRC has identified that these rules are often not correctly applied and records of any overlapped profits can often be lost as the period between commencement and cessation of a business can be many years.

HMRC also believes that these rules can give an unfair advantage to larger businesses which often have accounting years that are non-coterminous with the tax year. Smaller businesses will commonly have a 31 March year-end for simplification purposes. If a business has an accounting period ending near the start of the tax year this can give up to 21 months before tax is paid on those profits.

What are the changes?

HMRC will tax all unincorporated businesses and LLPs on a tax year basis regardless of the accounting year-end. There is no requirement to change the accounting year end of the business, just the way profits are taxed.

For example, if a business has a 30 September 2023 year-end the taxable profits would be calculated for the 2023/24 tax year by taking six months of profits from the 30/9/23 year-end and six months of profits from the 30/9/24 year-end. If the 30/9/24 accounts have not been prepared prior to the submission date of the 23/24 tax return provisional figures should be used, and the tax return amended once the final figures are known.

That, however, would just seem to confuse matters, so we envisage that accounting year ends will change to 31 March, unless there is a strong commercial reason for a different year-end.

Will there be a transitional period?

HMRC recognised that during the 2023/24 tax year when the new rules are implemented this could see taxpayers paying a significantly increased amount of tax as more than 12 months of profits may be brought into account. It will be possible to offset any overlap profits but, in many cases, these may be considerably lower than current year profits as they were created when the trade was commencing.

Where taxable profits exceed the current year’s profits excess profits can be spread over five years.

This is demonstrated in the following example:

A sole trader has a year-end of 30 June. The profits to 30 June 2023 are £30,000 and for 30 June 2024 are £60,000. They have overlap profits brought forward of £5,000.

Taxable profits for 2023/24 are:

1 July 2022 – 30 June 2023 30,000

1 July 2023 – 31 March 2024 60,000 x 9/12 45,000

Less: overlap profits (5,000)

Taxable profits 2023/24: 70,000

As these profits exceed the current year profits of £30,000 the excess of £40,000 can be spread over five years. The minimum amount per year to be added is £8,000 (40,000/5). An election to spread the profits would therefore see 2023/24 taxable profits of £30,000 + £8,000 = £38,000.

£8,000 would then need adding to the taxable profits for the subsequent four tax years.

It is possible to accelerate the taxation of the spread profits however, they can not be deferred.

Making Tax Digital for Income Tax

These proposals are seen as a forerunner to future reform and Making Tax Digital (MTD) for income tax which is due to be introduced from 1 April 2024 for sole traders and landlords and 1 April 2025 for partnerships. MTD sees all sole traders, partnerships, and landlords with turnover greater than £10,000 required to keep records digitally and submit quarterly updates to HMRC.

HMRC consider that moving to a tax year basis for taxing profits will reduce the number of submissions taxpayers may need to do. For example, a sole trader who is also a landlord may need to make quarterly submissions for both their business and rental profits. Rental income is currently taxed on a tax year basis, if the business was not taxed on a tax year basis they may not be able to combine the two quarterly submissions, greatly increasing the admin burden for the taxpayer.

What is next?

If you think that you will be affected by these proposals, please speak with us as soon as possible. We can then discuss the pros and cons of changing your year-end and the best time to do this.

How to secure early-stage funding for your start-up

Fundraising, whether debt or equity, is rarely a straightforward process for most businesses – and that is particularly so with start-up and early-stage fledgling businesses for the simple reason that they are at what is perceived as the riskiest stage of development. 

Often the business concept is new and, at best, only partially tested by the market; and the early-stage businesses rarely have much financial wool on their back. What might knock a more established business off its stride could be fatal for an early-stage business. 

Although there are multiple sources of finance for start-ups, the funding landscape is complex and there is no easy ‘single’ point of entry for a business to begin to access funding. 

Once an idea has been developed further, with proof of concept established with some initial paying customers, the next stage is loosely termed ‘Series A’ and is designed to scale the business. Getting to this stage of development will typically involve ‘bootstrapping’ the business and often require equity investment from High Net Worth Individual (“HNWI”) Angel investors – usually via tax-efficient Enterprise Investment Scheme (EIS) structures. 

The funding landscape up to Series A is less structured and often related to HNWI and their own contacts and Angel network.  From Series A and beyond, a relatively wide market of Venture Capital Trust (“VCT”) funds are potentially accessible and forms the subject of this insight. 

VCT funding 

Let us take a look at the VCT funding landscape and how this works. 

Before considering VCT funding, there are two fundamental questions the business owner has to ask – and crucially, answer honestly – these are: 

  1. Is he/she personally ready to bring in an external investor?
  2. Is the business ready for institutional investment? 

The first question can be the most difficult one as an investment will result in changes to the corporate governance structure and the owner’s ability to make independent decisions. 

There is a degree of relinquishing an element of control and being fundamentally answerable to another party.

That can be quite a culture shock for an owner. If a founder has already received angel money from HNWI’s or EIS investors, this may not be a new experience and merely another individual’s view to take into account; but for those founders not used to being answerable to a third party, this change may take some time to bed in and feel ‘normal.’ 

If you believe that you are personally ready, how do you ensure the business is ready for VCT investment? VCT funding often has a ‘tech’ aspect to it, but the following are some headline considerations for any business to honestly reflect upon at the outset before it embarks on a VCT fundraise: 

  • Do you have a proven concept that works and has (at least some) paying customers?  
  • Have you assessed your addressable market, and confirmed it is ‘large’ and un-cluttered, but most importantly, do you understand where the opportunity lies for you to grow rapidly?  
  • Can you articulate how will the cash investment ‘now’ generate significant returns in the medium term (c3 years) for an investor? 
  • Related to this, you must have a compelling growth story and a clear long-term vision for the future. 
  • Ideally, you will also have a capable senior leadership team (or the beginnings of one) who are all aligned and incentivised to work alongside you and deliver the growth potential. 

Current issues  

In the ‘new’ world of rising inflation, supply chain issues and skilled labour shortages, the UK economy is considered to be primed to seek out automation solutions to overcome some supply-side pressures.  VCT funding is primarily focused on tech-based businesses, and whilst ‘tech’ is a broad church, what we are seeing is that funds are particularly excited by the potential of software solutions businesses across the wider, medium-term, economy.   

The funding world, aware of this emergent trend, is seeing a number of new early-stage funds being established to support and drive the ‘next big thing.’ 

How can we help?

The VCT funding landscape is well set up to support aspiring unicorns of the future, however, navigating this landscape is complex. One size will definitely not fit all and getting the ‘wrong’ investor on board can be, at best, painful and, at worst, potentially fatal for a fledgling business.

At MHA Corporate Finance we are both highly experienced in advising early-stage businesses and extremely well networked with funders. Our database tools enable us to segregate UK and European VCT funds by sector and investment size, ensuring that we are connecting our clients with the ‘right’ VCT funds that fit the owners’ culture and the business’ requirements.

This is only a very quick overview of the early-stage funding landscape, but if it resonates with you, contact us to see how we can help.