Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company’s financial position may have deteriorated significantly from that shown in its last annual accounts.

The Companies Act 2006 requires that a dividend be paid only if there are sufficient distributable profits. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.

If a dividend is paid that proves to be more than this amount, is made out of capital or even made when there are losses that exceed the accumulated profits then this is termed ‘ultra vires’ and is, in effect, ‘illegal.’

For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend but they will be needed for the declaration of a final dividend. HMRC’s Corporation Tax Manual states that the accounts need to be detailed enough to enable ‘a reasonable judgement to be made as to the amount of the distributable profits’ as at the payment date.

Therefore, the financial status of the company needs to be considered each time a dividend payment is made which can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. The test must be satisfied “immediately before the dividend is declared” and this is generally interpreted to mean that the ‘net assets’ test must be satisfied immediately before the company’s directors decide to pay the dividend. If the directors correctly prepare basic interim accounts and a dividend is paid based on those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that there was an insufficient amount for distributable profits.

If regular amounts have been withdrawn then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts show a trading loss or the profit cannot support the payment. HMRC will argue that ‘in the majority of such cases’ the director/shareholder of a close company will be aware (or had reasonable grounds to believe) that such a payment as dividend was ‘illegal’.

A significant consequence of paying an ‘illegal’ dividend could arise if the company goes into liquidation when the liquidator or administrator routinely reviews the director’s conduct over the three years before insolvency. If it is found that a dividend has been paid ‘illegally’ then under the Companies Act 2006 rules the shareholders will be expected to repay the amount withdrawn (or the ‘unlawful part’). HMRC will actively pursue this route being as they are often the largest unsecured creditor. Furthermore, under the Insolvency Act a director can be held personally liable for any breach of his or her fiduciary duty to the company.

However, it is not only in liquidation that HMRC could open an enquiry into the treatment of a dividend. HMRC treats a dividend that it perceives to be illegal as being equivalent to a loan and, for a ‘close’ company, this means being a loan to a participator and as such it must be declared on the company tax return. If such a ‘loan’ is not so declared and the financial statements filed online show that the company’s reserves are in deficit at the end of the relevant period then HMRC may raise enquiries. Likewise where the opening balance next year is in deficit but dividends are still paid.

HMRC have also been known to argue that the repayable amount is an interest-free loan and for a director employee could result in a taxable benefit-in-kind should the loan be less than £10,000.

The self-assessment tax return for 2019/20 must be filed by midnight on 31 January 2021. If you miss this deadline, you will automatically receive a late filing penalty of £100, regardless of whether you owe any tax, unless you are able to convince HMRC that you have a reasonable excuse for filing your tax return after the deadline.

You must also pay any outstanding tax that you owe for 2019/20 by 31 January 2021, unless you have agreed a Time to Pay agreement with HMRC. The amount of tax that is outstanding for 2019/20 will depend on whether you opted to defer payment of the second payment on account for 2019/20, which would ordinarily have been due by 31 July 2020.

To help taxpayers who were struggling financially as a result of the Covid-19 pandemic, self-assessment taxpayers could opt to delay payment of the second payment on account for 2019/20, paying it instead by 31 January 2021. Where this option was taken, the balance owing for 2019/20 will be the total liability for the year (tax plus, where relevant, Class 2 and Class 4 National Insurance), less any amount paid on account by 31 January 2020.

If you decided instead to pay your July payment on account as normal (or if you paid it later than normal but have now paid it in full), you will only owe tax for 2019/20 if the total liability is more than what has already been paid on account.

Payments on account

If your total tax and Class 4 National Insurance liability was at least £1,000 for 2019/20 and less than 80% of your total liability is collected at source, for example, under PAYE, you will need to make payments on account for 2020/21. Each payment is 50% of the 2019/20 tax and Class 4 National Insurance liability. The first payment is due by 31 January 2021, along with any tax owing for 2019/20. The second payment should be paid by 31 July 2021.

Struggling to pay

For many, 2020 has been a difficult year financially. Where the option to delay the July 2020 payment on account has been taken, taxpayers may struggle to pay the higher than normal January tax bill in full by 31 January 2021. Where this is the case, they can agree with HMRC to pay the tax that they owe in instalments over the year to 31 January 2021.

If the amount that is owed is £30,000 or less, an agreement can be set up online. Where the amount outstanding is more than £30,000 or the taxpayer needs more than 12 months to pay, contact HMRC to discuss setting up an arrangement to suit.

As payments on account for 2020/21 are based on pre-pandemic profits, consider reducing the payments if profits for 2020/21 are likely to be lower.

Many businesses have been forced to close as a result of the national and local restrictions introduced to slow the spread of Coronavirus. Where this is the case, the business may be eligible for a grant from their local authority.

The following grant support is available to businesses in England during the second national lockdown. Grants to businesses in Wales, Scotland and Northern Ireland are subject to devolved rules.

Businesses closed due to national retractions

Business that were previously open as usual, but which were required to close between 5 November 2020 and 2 December 2020 as a result of the second national lockdown in England may be eligible for a grant from their local council for the 28-day period for which the national lockdown applies.

A business may qualify for a grant if it meets the following conditions:

• it is based in England;
• it occupies premises in respect of which it pays business rates;
• it has been required to close between 5 November 2020 and 2 December 2020 as a result of the national lockdown; and
• it has been unable to provide its usual in-person service from those premises as a result.

Businesses that qualify may include non-essential shops, leisure and hospitality venues and sports centres.

Business that normally operate as an in-person venue but which have had to modify their services as a result of the lockdown also qualify. An example here would be a restaurant that is not allowed to provide eat-in dining but which stays open for takeaways.

Businesses are only entitled to claim one grant for each non-domestic property.

Amount of the grant

The amount of the grant is based on the rateable value of the business premises on the first day of the second national lockdown.

Where the rateable value of the business premises is £15,000 or less, the business will receive a grant of £1,334 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is between £15,000 and £51,000, the business will receive a grant of £2,000 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is £51,000 or above, the business will receive a grant for each 28-day period for which the restrictions apply.

Applications should be made to the local council following the application procedure on the relevant council’s website.

Excluded businesses

A business is not eligible for a grant if it can continue to operate during the restrictions because the business does not depend on providing in-person services from their premises. Businesses that would fall into this category would include accountants and solicitors.

Businesses that are not required to close, but which choose to, are also ineligible for a grant.

A business which has exceeded the permitted state aid limit – set at €200,000 over a three-year period – is not eligible for further funding but may qualify for help under temporary Covid-19 measures.

Local restrictions

Where local restrictions are in force, businesses may qualify for separate grants if they are either forced to close or, where they can remain open, their business is severely impacted as a result of those restrictions. Details of the grants available where local restrictions apply can be found on the Gov.uk website.

The Covid-19 pandemic has placed the office Christmas party firmly off the menu this year. Regardless of what restrictions are in place over the Christmas season, many employers will want to take the opportunity to spread some seasonal cheer amongst workers, who may have been furloughed or working from home for much of 2020.

The impact of any goodwill gesture is somewhat diminished if it comes with an associated tax bill. This is where the trivial benefits exemption can come into its own, enabling employers to provide employees with tax-exempt Christmas gifts, while keeping the costs low at a time when many businesses are struggling financially. Personal and family companies can similarly make use of the exemption.

Nature of the exemption

Under the trivial benefits exemption, a benefit is exempt from income tax and National Insurance if all of the following conditions are met.

• The cost of providing the benefit does not exceed £50.
• The benefit is not in the form of cash or a non-cash voucher.
• The employee is not contractually entitled to the benefit.
• The benefit is not provided in recognition of, or in anticipation of, services performed   as part of the employee’s employment duties.

Where a benefit is provided to a group of people and it is impracticable to work out the exact cost of providing it to each recipient, the average cost is used to determine whether the benefit is trivial.

Directors of close companies (together with members of their family or household) can only receive tax-free trivial benefits to a maximum value of £300 in a tax year. For other recipients, there is no annual limit (but each individual trivial benefit must cost £50 or less).

Seasonal gifts

The following example illustrates how the trivial benefits exemption can be utilised to provide tax-free Christmas gifts to employees.

Example 1

An employer purchases 100 turkeys to be given to employees at Christmas. The total bill is £4,800. The turkeys vary slightly in weight but are not priced individually.

As it would be impracticable to work out the exact cost of the turkey provided to each individual employee, the average cost of £48 is taken as the cost of the benefit. Assuming all the other conditions are met, the gift of the turkey falls within the trivial benefit exemption and is free from tax.

Gift card trap

Care should be taken using gift cards which are topped up on several occasions. Rather than evaluating each use of the card separately for the purposes of the trivial benefits exemption, HMRC look at the total cost of providing benefits via the card in the tax year in question. The following example illustrates the trap.

Example 2

An employee is given a gift card at Christmas which can be exchanged in a particular store for a gift. The card costs the employee £30 to provide. The card is topped up by a further £30 on the employee’s birthday. Although each top-up costs the employer less than £50, the total cost of providing the employee with a gift card is £60 for the tax year. As this exceeds the £50 trivial benefit limit, the exemption does not apply.

Instead, the employer should give the employee separate gifts costing £30 each, both of which would be exempt.

At the start of lockdown, the Government announced a number of measures to help businesses weather the pandemic. One of those measures was the option for VAT-registered businesses to defer VAT payments that fell due between 20 March 2020 and 30 June 2020. This window meant payment of VAT for the following quarters could be deferred:

• quarter to 29 February 2020 – due by 7 April 2020;
• quarter to 31 March 2020 – due by 7 May 2020; and
• quarter 30 April 2020 – due by 7 June 2020.

However, businesses opting to defer payments were still required to file their VAT returns on time.

VAT due after 30 June 2020

Normal service is resumed in respect of VAT which falls due after 30 June 2020. This must be paid on full and on time. Consequently, VAT for the quarter to 31 May 2020 must be paid by 7 July 2020, even if the trader has yet to pay their VAT for the quarter to 29 February 2020. This applies for successive VAT quarters too.

Set up cancelled direct debits

Where VAT is normally paid by direct debit but the direct debit was cancelled to enable the trader to take advantage of the deferral option, the direct debit needs to be set up again so that payments can be taken automatically. If this has not yet been done, payments will need to be triggered manually to ensure that VAT reaches HMRC on time until the direct debit is back up and running.

Paying VAT that has been deferred

Deferred VAT remains due – the measure simply provides a longer payment window; it does not cancel the liability. VAT that fell due in the period from 20 March 2020 to 30 June 2020 was originally due to be paid in full by 31 March 2021.

However, in delivering his Winter Economy Plan on 24 September 2020, the Chancellor, Rishi Sunak, announced that instead, he will allow businesses to spread the repayment of deferred VAT over 11 smaller repayments during 2020/21, with no interest to pay.

Struggling to pay?

Businesses in certain sectors, such as hospitality and leisure, are still not able to operate normally. Where, despite the longer repayment period, a business thinks that it may struggle to repay its deferred VAT, it should contact HMRC to set up a time to pay agreement, which can spread the repayments over a longer period.  This should be done before the first payment becomes due.

The hospitality and leisure industries have been severely affected by the Coronavirus pandemic. To help businesses in these sectors to get back on their feet, a reduced rate of VAT of 5% rather than the standard rate of 20% will apply to certain supplies for a limited period, from 15 July 2020 to 12 January 2021.

Hospitality

Food and drink supplied for consumption in the premises, for example by a restaurant or a bar, and hot takeaway food and beverages are normally liable for VAT at the standard rate of 20%. During the support period, the 5% rate will apply instead to:

• hot and cold food for consumption on the premises on which they are supplied;
• hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied;
• hot takeaway food for consumption off the premises on which it is supplied;
• hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied.

Hotel and holiday accommodation

For businesses supplying hotel and holiday accommodation, the 5% rate VAT applies during the support period to:

• supplies of sleeping accommodation in a hotel or similar establishment;
• certain supplies of holiday accommodation;
• charge fees for caravan pitches and associated facilities;
• charge fees for tent pitches and camping facilities.

Meals provided to guests in long-term holiday accommodation (more than 28 days) will also benefit from the reduced rate, but the hire of motor caravans will not.

Admission to attractions

The reduced rate of 5% also applies during the support period in respect of admission to certain attractions which would normally be liable for VAT at the standard rate. However, if the admission fee is exempt from VAT, this will take precedence over the 5% charge and the admission charge will remain exempt.

The temporary reduction will apply to admissions to shows, theatre, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events where these are not included in the existing cultural exemption.

Impact on flat rate scheme

VAT registered businesses using the flat rate scheme should note that some of the flat rate percentages have been reduced to take account of the temporary reduction in the rate of VAT.

The Coronavirus Job Retention Scheme (CJRS) has provided a lifeline to millions of employees and their employers during the Covid-19 pandemic. As at 19 July 2020, 9.5 million employees had been furloughed by 1.2 million employers, benefitting from support totalling £29.5 billion.

As with all good things, the CJRS must come to an end. The scheme is now is its second and final phase, which runs from 1 July 2020 to 31 October 2020. This phase provides a transition from Government support to employers once again meeting the costs of employing their employers. From 1 July 2020, furloughed employees can return to work on reduced hours under the flexible furlough rules, with employers paying the employees as usual for the hours that they work and claiming a grant under the CJRS for the remainder of their normal hours. Employees who were not furloughed for at least three consecutive weeks prior to 1 July 2020 are not eligible for a grant under the scheme from July onwards (unless the employee returns from statutory leave).

During the final phase of the scheme, employees will continue to receive 80% of their pay up to the equivalent of £2,500 a month – this is known as minimum furlough pay.

From 1 August 2020, the financial support provided under the scheme starts to reduce. For claim periods on or after 1 August 2020, employers cannot claim back the employer’s National Insurance and minimum pension contributions on grant payments but must instead meet these costs themselves. For September, employers can only claim 70/80^th of the employee’s minimum furlough pay; this reduces to 60/80^th for October. However, furloughed employees will continue to receive their minimum furlough pay, with the employer making up the shortfall.

Job Retention Bonus

When the scheme comes to an end, employers will need to assess their staffing requirements and decide whether they can bring furloughed employees back to work. The Government are keen that they do. To encourage employers to retain furloughed employees, they will pay a Job Retention Bonus of £1,000 for each furloughed employee who is employed continuously from the end of the CJRS until 31 January 2021. To qualify for the bonus, the employee’s earnings during this period must, on average, be at least equal to the lower earnings limit for Class 1 National Insurance purposes, set at £120 per week (£520 per month) for 2020/21. The Government will pay the bonuses from February 2021.

As far as the Coronavirus Job Retention Scheme is concerned, it is all change from 1 July 2020. From that date, employees can be flexibly furloughed allowing furloughed employees to return to work part time and be furloughed for their usual hours that they do not work. The employer pays the employee for the hours that they work and claims a furlough grant for the furloughed hours. The employee continues to receive ‘minimum furlough pay’ for the furloughed hours, equal to 80% of their pay up to the maximum amount equivalent to £2,500 a month.

Conditions

There are, however, conditions. From 1 July, a grant claim can only be made if the employee was previously furloughed for at least three consecutive weeks before 1 March 2020 and 30 June 2020. This means that a grant cannot be claimed for an employee who has been working reduced hours throughout (although a furloughed employee can be brought back on the same reduced hours and a grant claimed).

Employers to start meeting costs

Although employees will continue to receive 80% of their wages based for their furlough hours up to the maximum amount (equivalent to £2,500 per month), the employer will start to meet some of the costs from 1 August. Prior to that date, employers can claim the employer’s National Insurance due on the grant amount and also the associated minimum pension contributions due under auto-enrolment. However, for pay periods starting on or after 1 August 2020, employers must meet this cost.

The amount that the employer can claim for furloughed hours is reduced to 70% of the employee’s pay (up to maximum equivalent to £2,187.50 per month). For October, this reduces to 60% of the employee’s pay (up to a maximum equivalent to £1,875 per month). The employer must top up the grant so that the employee receives 80% of their wages up to the maximum amount.

The scheme comes to an end on 31 October 2020.

Doing the sums

Flexible furloughing introduces some more complex calculations; although help is available on how to do the sums on the Gov.uk website.

The starting point is to work out the employee’s usual hours, furloughed hours and minimum furlough pay. Guidance on the Gov.uk website explains how to do this. From 1 July onwards, claims must start and end in the same calendar month. If the pay period spans two months, it must be split into two separate claims. This is because the amount that can be claimed is different each month from July onwards.

The furlough hours are the usual hours less the hours that the employee has worked in the month.

The minimum furlough pay is the lesser of 80% of the pay for the pay period and the maximum amount, divided by the employee’s usual hours and multiplied by the furlough hours.

Employers who provided taxable expenses and benefits to employees in 2019/20 need to tell HMRC about them by 6 July 2020, if they have not opted to tax them via the payroll.

Non-payrolled taxable expenses and benefits are reported to HMRC on form P11D. Employers must also file a P11D(b) by the same date. This is the employer’s declaration that all required P11Ds have been submitted, and also the statutory Class 1A return.

Taxable value

The taxable value of the benefit is normally the cash equivalent value. However, where the benefit has been provided under an optional remuneration arrangement, such as a salary sacrifice scheme, and is one to which the alternative valuation rules apply, the taxable amount is the relevant amount. Broadly, this is the salary foregone where this is higher than the cash equivalent value calculated under normal rules.

Exempt benefits

Benefits and expenses that are exempt from tax do not need to be included on the P11D. However, remember to check that all associated conditions have been met.

The exemption for paid and reimbursed expenses means that no tax liability arises where the employer meets or reimburses expenditure which would have qualified for tax relief if met by the employee. Paid and reimbursed expenses falling within the scope of the exemption do not need to be reported on the P11D.

PAYE Settlement Agreements

An employer can use a PAYE Settlement Agreement (PSA) to meet the tax liability on certain benefits and expenses on the employee’s behalf. Items included in a PSA do not need to be returned on the P11D. A PSA is a continuing agreement and remains in place until revoked. Review PSAs before 6 July 2020 to ensure they remain valid and to add any new items that you wish to include.

Payrolled benefits

Employers can opt to tax benefits through the payroll (‘payrolling’) instead of reporting them to HMRC on the P11D. This option is available for all benefits excluding low-interest and interest-free loans and living accommodation. However, the employer must register before the start of the tax year to payroll.

Payrolled benefits do not need to be included on the P11D; however if other benefits are also provided, these must be included.

Remember to include payrolled benefits in the calculation of the Class 1A liability on the P11D(b).

Online or paper forms

Expenses and benefits returns can be filed online using HMRC’s Expenses and Benefits Online Service, PAYE for Employers or commercial software.

However, there is no requirement to file online and paper returns can be filed if this is preferred.

The deadline is 6 July 2020. Employees should be given a copy of their P11D by the same date.

A nil return is required where HMRC have sent a P11D(b) or a P11D(b) reminder letter. It can be made online at www.gov.uk/government/publications/paye-no-return-of-class-1a-national-insurance-contributions.

Pay Class 1A National Insurance

Class 1A National Insurance contributions for 2019/20 should be paid by 22 July 2020 if payment is made electronically. If payment is made by cheque, as 19 July falls on a Sunday, the cheque should reach HMRC by Friday 17 July.

The self-employment income support scheme (SEISS) provides financial help to self-employed traders and partners in partnerships who have lost income as a result of the COVID-19 pandemic. Not all self-employed traders can benefit – it is only open to those with profits from self-employment of £50,000 or less who have filed a 2018/19 tax return. The scheme will provide eligible traders with a grant equal to 80% of average profits for three months, capped at £2,500 a month. The grants should be paid in early June 2020.

Who is eligible?

To qualify, the individual must:

• have submitted their self-assessment tax return for 2018/19 by 23 April 2020;

• traded in 2019/20;

• be continuing to trade when they claim the grant, or would be except for the Coronavirus pandemic;

• intend to continue to trade in 2020/21; and

• they have lost profits due to the Coronavirus.

Traders who had not submitted their 2018/19 tax return by 23 April 2020 are not able to claim a grant under the SEIS.

£50,000 profit limit

The grant is limited to traders whose trading profits are not more than £50,000 either for 2018/19 or on average for the three years 2016/17 to 2018/19 inclusive. This if a trader has profits in excess of £50,000 for 2018/19 they can still qualify if their average profits over 2016/17, 2017/18 and 2018/19 are less than £50,000. Profits from self-employment must comprise at least 50% of the individual’s income.

Amount of the grant

The grant is based on average trading profits over the following three tax years:

• 2016/17;

• 2017/18; and

• 2018/19.

The grant is worth 80% of the average trading profits (capped at £2,500 per month) for three months. Where self-assessment returns have not been submitted for 2016/17, 2017/18 and 2018/19, the grant will be calculated by reference to average profits for continuous periods of self-employment, either 2017/18 and 2018/19 or only 2018/19 where the trader was not trading in 2017/18, even if they traded in 2016/17. This will apply, for example, to those who only started trading in 2017/18 or 2018/19.

Making a claim

It is not yet possible to claim. HMRC are to write to those who (based on 2018/19 filed returns) they think are eligible for a grant in mid-May. Claims must be made via the online portal once this is open and grants should be paid in early June.

Help for those outside the scheme

The SEISS will not help all self-employed traders who lose income as a result of the pandemic. Those whose profits exceed £50,000 either in 2018/19 or an average over the three-year period from 2016/17 fall outside its scope, as do those who did not submit a 2018/19 tax return by 23 April 20202 or who did not start to trade until 2019/20. Individuals outside the scheme can, if eligible, make a claim for universal credit if they need financial help during the pandemic.

Deferring VAT and self-assessment

The self-employed can also take the opportunity to defer the self-assessment second payment on account for 2019/20, due by 31 July. Where this option is taken, the payment must be made by 31 January 2020. VAT registered businesses can also take advantage of the VAT deferral option.