‘Tis the season for tax bills
By Kevin Flowerday – Head of Professional Lending, United Trust Bank
There have been a number of significant changes for all different types of UK tax payers announced since the summer. The Exchequer has looked to increase its tax receipts by closing tax avoidance schemes, amending the taxation rules on share dividends, introducing a new tax on the banking sector and restricting pensions tax relief for the top earners in the UK. On balance, they’ve raised the personal tax free allowance, increased the banding for 40% taxation, are going to cut the rate of corporation tax from 2017 and set the Annual Investment allowance at £200,000 for the duration of this parliament.
The 2014 Finance Act introduced significant new powers for HM Revenue and Customs that require taxpayers using avoidance schemes to pay the disputed tax upfront through the use of Accelerated Payment Notices (APN). An accelerated payment notice is designed to remove the cash advantage of sitting and waiting during an avoidance dispute. Penalties of up to 15% of the disputed tax may apply to late payment. Since the High court ruled in favour of HMRC this year, following appeals, the Exchequer has stated that they will issue 64,000 APNs by the end of 2016, bringing £5.5bn in payments by early 2020.
The Chancellor’s revised tax rules on share dividends that take effect in April 2016, appear to have generated some confusion. For the small business owner, they’re not sure what impact it will have on them from a net annual tax obligation. Also, many partnerships and LLPs in the professions sector that converted over to a limited company to benefit from being a basic rate tax payer with no tax due on their dividend income, are in the same boat. Currently, as dividends are paid out of company profits after taxation, their tax obligations were paid in corporation tax. The new rules will mean potentially higher tax bills for business owners, especially for those that are already higher rate tax payers, and it appears that many financial planning consultants are recommending business owners to draw as much as possible in dividend income before the new rules come into force next year. Will business owners look to remunerate themselves more through PAYE post April 2016 and just take dividend income up to the tax free value? Many people will need to do some serious number crunching and take advice from a qualified tax specialist. However, the upshot appears to be that taxation certainly doesn’t appear to be going down, and therefore careful planning of how businesses and individuals will settle their obligations with HMRC will need to be addressed.
With potentially higher tax bills across the board for both individuals and businesses, especially in the services sector where growth continues to outstrip every other market, we are expecting to see an even higher number of enquiries for our tax funding solutions from a broad spectrum of applicants. Over the past 12 months we have seen tax funding requirements from as little as £20,000 up to £1m, and they all share similar characteristics: increasing revenue, low debtor turnover and are highly profitable. When most business es go through this phase of growth, managing their cash flow is critical to the ongoing trading of even the most successful organisation.
Traditionally, many businesses turn to Asset Backed Lending to generate cash from their debtor book through either disclosed or undisclosed factoring. Where this can work quite well is for a business with a good spread of sub 90 day debtors, along with tangible products that have been invoiced; however those businesses that do not conform to this criteria are not as fortunate. Many professional firms have a long debtor book of billed disbursements that remain outstanding and don’t qualify as factorable. On these occasions the business needs to preserve its valuable cash to run the business as increased turnover can only contribute to the facts of diminishing cash. Corporation Tax, VAT and Partnership tax are all specific cash items that have to be paid by a specific date and debtor billing only increases their value. Overdraft facilities only provide a limited amount of flexibility, and even in today’s market of greater bank liquidity, these facilities aren’t ubiquitous to all.
Many of our broker partners understand the cash pressures faced by their customers and approach United Trust Bank to assist these types of companies with improved cash flow solutions that fit their specific requirements.
At this time of year, we see a significant increase in corporation tax funding requirements from those businesses with a March year end that potentially have a significant liability due to HMRC by the end of December. The Christmas period is always a time of tighter cash management as holiday absences means less work is completed and paid, so demand is at a high. Shortly following this, in January, partnerships need to make their payment on account for their tax liabilities to HMRC. This can be anywhere up to 70% of their annual tax liabilities and a real drain on cash.
Whether its corporation tax or partnership tax, most businesses will be feeling the cash squeeze this winter; and when you start adding in any other investment plans they have, choosing a finance partner you can trust is the first step. United Trust Bank has been assisting the UK SME market with a broad range of financing facilities for asset purchase, working capital, property, technology finance and Tax funding.