The future of tax: Business planning for 2021
Practical CFO Director, Matt Topham, gives his summary of the future of tax for 2021, plus a few predictions that businesses should prepare for.
The global context for tax has been changing for a while. Those changes have taken a while in the past but increasing pressure on public finance will see massive and rapid future change. This changes should be on the radar of your finance team or CFO - keeping ahead will really help with smart business planning.
It’s 20 years since IR35 was first introduced. This seemed likely a niche challenge at the time but has proven to be the thin end of the wedge. A much bigger wedge was started by the Googles, Amazons & Facebooks whose wholesale change in the way we shop brought unexpected consequences in countries’ VAT & corporation tax receipts. Wholesale EU & OECD changes has managed to repatriate those axes but at the price of extra administration.
Fast forward to 2020 and governments have seen massive drops in tax receipts whilst borrowing to fund various Covid solutions and not having the wiggle room in public sector spending as we’ve only just emerged from spending constraints and further cuts would be politically unacceptable.
Since the beginning of the financial year in April, government borrowing has reached £214.9bn, £169.1bn more than a year ago (according to the Office of National Statistics). The independent Office for Budget Responsibility (OBR) has estimated it could reach £372.2bn by the end of the financial year in March.
If previous austerity measures were painful then we should expect that the pressure to repay this government debt will be even more painful.
So what’s happening now?
The latest IR35 change was initiated for public sector organisations. In 2017, the public sector was required to tax contractors (i.e. workers who were working through a limited company) as if they were employees. The practical upshot is that the public sector was confused by the bookkeeping (although one look at a similar scheme for the building industry would have offered a strong clue) and so seemed to have deemed many , many contractors as “workers” and have taxed them at source. Those workers, robbed of the tax advantages of self employment, have pressed to become employees and access benefits such as pension entitlements & holiday pay.
The word on the street is that a great deal of genuine contractors have been wrongly categorised as workers and tax advisors have been working hard to fix it. It’s not clear what success that they have had.
There are various statistics suggesting that the public sector is losing talented contractors whilst locking in the long term cost of other employees into public sector organisations. I am sure that there are a good number of those contractors who were really employees!
The big win to HMRC is lower cost operations, more taxes (extra National Insurance will be due) and faster payment. No wonder that this drive is happening.
The next change is to roll out the same changes to medium & large scale private sector organisations. For more information about effective bookkeeping, read our article here.
Making Tax Digital (MTD)
Remember when tax meant completing green paper VAT returns in your best handwriting and posting them to Customs & Excise each quarter?! We do!
The drive to acquire that information electronically has been a great convenient to both tax payer & tax authority alike; less hassle & lower processing costs. Most recent changes have included VAT & payroll submissions direct from business taxpayers accounting systems. The submission of electronic tax returns and tagged/mapped annual accounts by accountants on behalf of clients has been happening for a long time.
There's a great personal tax app is currently being trialled that will allow taxpayers to calculate their personal tax bill as the year progresses (by interrogating the tax payers bank accounts), and submit to HMRC when necessary.
The next stage of MTD will see more businesses caught but another important change is the loading of electronic copies of documents (invoices or expense claims). Whilst MTD has been badged as an initiative to help cut errors, it feels like all the pieces are there to allow all businesses to file & pay monthly tax returns in the same way that employees pay (and have filed by their employers) their PAYE monthly.
VAT Reverse Charge in Construction
Don’t switch off! There’s another interesting change afoot in construction rules.
By the way of context, the current IR35 changes (where workers are having taxes deducted as they were employees) look very similar to the Construction Industry Scheme (CIS) which was brought in the early 1970s.
The new changes to construction relate to VAT where anyone in the business to business chain (a subcontractor selling time to another contractor who sells time to the lead contractor who bundles everything up to sell to the client) will no longer charge VAT. The end of the chain (the lead contractor in my example) will invoice including VAT to the client. There’s a bit of paperwork to do but, in essence, looks very much like the EU cross border rules where B2B transactions across the EU don’t have VAT added.
Whilst it looks like a nice simplification, there’s a chunky working capital advantage to invoicing the VAT and handing it over a few months later. Follow the logic through and many businesses will find cashflow harder whilst concentrating the VAT pool in a smaller number of bigger companies; which will be easier for HMRC to actively manage. And be more likely to pay monthly VAT?
Office of Tax Simplification & Capital Gains Tax
The Office of Tax Simplification (OTS) has been working on some proposals for Capital Gains Tax; those are the ones where you might pay tax on the profit from a second home or from shares. In simple terms, OTS would like us to pay more tax by more closely aligning CGT with income tax.
Further, the OTS is worried that business owners are not incentivised to take risks or sell their businesses – except when they die. Nice. The suggestion is that help is offered for business owners who want to retire.
This runs slightly counter to the new Business Asset Disposal Relief (Entrepreneur’s relief, as was) which lowers the tax breaks.
Interim Payments on Account
Okay, so this isn’t exactly news but it fits in here nicely. Various tax payers are being prompted to pay taxes faster and at lower cost to the tax authorities.
That ranges from tax payers making payments a year and 6 months ahead of the tax filing deadline, to helpful HMRC emails suggesting that payrolling benefits makes things easier for employees…by being taxed year earlier…
Covid implications: Bounceback/CBILs loans, lower tax take, NHS budget
It's been an exceptional year all around. The macro economic summary is that the government debt guarantees will be required to reimburse banks for bad or fraudulent Covid loans, that less tax will be claims as many more businesses are struggling and that there will be increasing demands on the public purse – to defend the country or to drive down healthcare lists as the country hasn’t looked after its health during lockdown.
Remember this one? In practical terms it’s likely that businesses will be hit with extra admin in order to comply with export or import restrictions.
What to be prepared for in 2021
With reliance on systems, integration and processes, I predict that smaller companies will struggle to compete. Larger companies (even if these are larger small companies) will get into their stride. There will be an impact on company valuations with smaller businesses looking more lifestyle and unsellable with a valuation sweet spot for effective players. The days of 10x are dead.
On that basis, I can see owner-managers going increasing part-time and hanging onto their businesses to earn a dividend rather than working hard & aiming for a big exit.
This retired class of shareholders needs to think about how they offer long term incentive plans to their management teams.
Modelling, Management Information & Compliance
With slim operating margins and slimmer cash cover, the impact of mistakes or poor operations will become bigger and bigger. Businesses need better systems, better integration, better insight and better decisions.
Finance teams need to be a valued added function and not concentrate on processing. Find out more about effective management reporting.
Bootstrapping, Financing & Speed of Taxes
Start-up land will struggle even more to make progress with better funding – which the system is likely to be less inclined to give. An entrepreneur’s job just got harder!
HMRC doesn’t want any of us to be self employed. It’s inconvenient, slows tax collection, is expensive for the state to administrate, has poor benefits. So we’ll all become employees and work for someone else.
Which is a shame as the excitement, invention and creativity that will lift us out of our economic problem is less likely to happen.
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