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How elastic is demand for your products?

Many will remember the empty shelves in supermarkets when lock-down commenced March 2020. In particular, the absence of toilet rolls…

Compare this with supplies of TVs and other luxury goods where there was no noticeable absence of supply.

These examples point to a basic economic theory; that a product with few substitutes (toilet rolls) and where demand is constant, is inelastic.

Products where there is no immediate, compelling need, chocolates or a new iPad, are said to be elastic from a demand perspective.

Why does this matter?

If you sell products that are demand inelastic – toilet rolls for example – there will be less resistance to price increases if supply becomes an issue. Witness the prices we all had to pay for loo-rolls when available earlier this year.

You might like to consider the range of goods and services that your business sells from this perspective.

If most of the goods you sell are demand elastic, price increases will tend to result in a lower volume of sales: customers will simply defer buying until prices reduce.

Alternatively, if supplies of inelastic goods start to reduce, sellers will be able to pass on price increases more effectively, as demand will remain constant.

It is worth considering these basic facts of economic life when you next consider the range of goods you offer.

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Draft legislation published for Finance Bill 2020-21

The government has published the draft legislation for Finance Bill 2020-21, along with accompanying explanatory notes, tax information and impact notes. The consultation on draft clauses is intended to make sure that the legislation works as intended. The consultation will close on 15 September 2020.

The Finance Bill will contain the legislation for some of the tax measures that have been previously announced by the government many of which have since been the subject of further consultation.

The publication of the draft Finance Bill is in line with the current approach to tax and where the government committed to publishing most tax legislation in draft for technical consultation before the legislation is laid before Parliament.

This Finance Bill will see the introduction of a number of measures from April 2021 including:

Changes to the van benefit charge regarding zero emission vans.
Changes to collective money purchase pension schemes.
Changes to the treatment of termination payments and post-employment notice pay for Income Tax.
Changes to working time requirements for Enterprise Management Incentives.
New rates of Stamp Duty Land Tax for non-UK residents from 1 April 2021.

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Making Tax Digital next steps

HM Treasury has confirmed the extension of Making Tax Digital (MTD) to cover businesses with a turnover below the VAT threshold and for certain individuals who file Income Tax Self-Assessment tax returns. This announcement provides much-needed clarity of the way forward for this scheme.

MTD started in April 2019 (for VAT purposes only) when businesses with a turnover above the VAT threshold of £85,000 became mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software. Since the launch more than 1.4 million businesses have joined the programme.

The first part of the further roll-out of MTD will start April 2022, when MTD will be extended to all VAT registered businesses with turnover below the VAT threshold of £85,000. This will be followed one year later (April 2023) when MTD will be extended to taxpayers who file Income Tax Self-Assessment tax returns for business or property income over £10,000 annually.

HMRC has said that the long lead-in time will allow businesses, landlords and agents time to plan. It also gives software providers enough notice to bring a range of new products to market, including free software for businesses with the simplest tax affairs.

Financial secretary to the Treasury Jesse Norman said:

‘We are setting out our next steps on Making Tax Digital today, as we bring the UK’s tax system into the 21st century. Making Tax Digital will make it easier for businesses to keep on top of their tax affairs. But it also has huge potential to improve the productivity of our economy, and its resilience in times of crisis.’

The government has also confirmed that it remains committed to extending MTD to other taxes. The government will also consult later this year on the detail of extending MTD to incorporated businesses with Corporate Tax obligations.

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Final reminder to renew tax credit awards

Friday 31 July 2020 is the deadline day for families and individuals that receive tax credits to tell HMRC about any changes to their financial circumstances. As in previous years, there is likely to be a huge last-minute rush and it may be difficult to contact HMRC by phone. Claims can be renewed by post, phone or online.

Once the deadline has expired anyone who has not yet renewed their tax credits should still ensure they do so as soon as possible as otherwise payments may be stopped, and monies received since April 2020 may have to be repaid.

We would strongly advise readers who have not dealt with this annual chore to renew their tax credits as a matter of urgency.

All renewal packs should have been received by the end of June. A renewal is required if the pack has a red line across the first page and it says – reply now. If the pack has a black line and says – check now – recipients will need to check the details are correct. If the details are correct, the tax credit awards will be renewed automatically.

While most tax credit awards will be renewed automatically in 2020, the self-employed, those in receipt of taxable social security benefit, or those who have other income may need to review their total household income and tell HMRC if the income detail held is incorrect.

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HMRC reminder that you can defer tax

HMRC has issued a press release to remind Self-Assessment taxpayers of the opportunity to defer Income Tax payments due on 31 July 2020. This opportunity is available to taxpayers due to make their second payment on account for the 2019-20 tax year that is ordinarily due at the end of this month. Taxpayers who take up this offer will see the payment due date deferred until 31 January 2021.

This is an automatic offer with no applications required. You can opt into the deferral offer by simply not paying your tax bill due by the 31 July 2020 due date. HMRC will then (we are told) automatically update their systems to show payment has been deferred and no interest or penalties will be incurred providing it is paid in full by 31 January 2021. You should also remember to cancel your direct debit if you have one setup to ensure that HMRC do not take the payment.

Remember, this is only a deferral and any tax owing will be due on 31 January 2021. This will be in addition to the usual final payment deadline for any remaining tax due for the 2019-20 tax year. In addition, the 31 January 2021 is also the payment date for any Capital Gains Tax due in relation to the 2019-20 tax year and the due date for the first payment on account for 2020-21.

If you do not wish to take advantage of this deferral you can continue to pay your tax bill as normal.

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Who pays Inheritance Tax?

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if an individual leaves 10% or more of the ‘net value’ to charity of their estate.

There is a nil-rate band, currently £325,000 below which no Inheritance Tax is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is additional to the £325,000 Inheritance Tax nil-rate band.

Funds from the deceased estate are usually used to pay IHT. If there is a will, it is usually the executor who deals with paying any IHT due to HMRC. IHT can be paid from funds within the estate, or from money raised from the sale of the assets. Payment of any IHT due is often made using the Direct Payment Scheme (DPS) whereby some or all of the IHT is paid from the deceased person’s accounts directly to HMRC. The deceased may also have used a life insurance policy to fund the payment of some / all the IHT due.

Once the IHT and any outstanding debts are paid, the executor or administrator can distribute what remains of the estate. The beneficiaries of the will do not normally need to pay IHT on their inheritance, but there are exceptions.

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Sending forms to Companies House – coronavirus update

Companies House has developed and launched a new temporary online service to upload and send completed forms during the Coronavirus outbreak. The online service was first launched at the beginning of June. The latest release of the upload a document service was issued on 6 July and now allows users to upload more form types, including Scottish limited and qualifying partnerships, articles and resolutions. This temporary service is designed for paper forms that could previously only be sent by post or delivered in person to Companies House.

The main categories of forms that the temporary online service relate to:

Scottish limited partnership forms ;
Scottish qualifying partnership forms ;
Registrar’s powers ;
RP forms ;
Change of constitution ;
Resolutions in relation to change of constitution (CC) forms ;
Articles in relation to change of constitution (CC) forms .
Companies House is working on a new release to allow a large number of insolvency forms to be submitted via the upload service in the coming weeks.

The service is not available nor intended for the large number of Companies House documents that were already accepted online before the pandemic began. This includes documents relating to filing accounts, filing a confirmation statement, making changes to a company and closing a company.

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Tax and accounts

If you are self-employed, as a sole trader or in partnership, the profits from your business are treated as part of your income for Income Tax and self-employed National Insurance purposes. As a consequence, the amount of tax payable on your self-employment is difficult to define in isolation and is why your trading accounts do not include a calculation of Income Tax and NIC payable.

Accordingly, if you are self-employed, any balance on your capital account (the amount of money you have introduced plus profits less any drawings made) is most likely overstated as you will need to pay any taxes due as increased drawings in the following accounting period.

Contrast this with limited companies.

Companies pay Corporation Tax (CT) on company profits. Company profits are not added to shareholders’ income to determine tax due. Which is why company accounts do include a charge for CT in the year end accounts.

In most cases, this computation of CT is made annually, at the end of each trading year, but it is perfectly possible to estimate CT monthly and include those estimates in your management accounts. In this way you can keep an eye on CT liabilities and how they affect your company retained profits position.

You can also use the estimates to consider how you will pay these future CT liabilities.

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Job Retention Bonus

One of the measures announced by the Chancellor, Rishi Sunak in his recent Summer Statement was the introduction of the Job Retention Bonus. This bonus is designed to encourage employers to bring back furloughed workers as the benefits of the Coronavirus Job Retention Scheme start to taper before the scheme ends on 31 October 2020.
The new Job Retention Bonus will provide a £1,000 payment to employers that bring back an employee that was furloughed, and continuously employ them for at least 3 months after the furlough scheme ends. Employees must be seen to be gainfully employed during this period and be paid at least £520 a month, on average, from November 2020 to January 2021. The £1,000 government bonus will be payable for every employee retained under the stated terms.
There are currently estimated to be over 9 million employees who have been furloughed. If all these staff return to work and meet the conditions, then more than £9 billion in bonus payments will be due. The bonus is the same regardless of what an employee earns so the take up of the bonus is likely to be skewed more towards lower paid employees where the £1,000 makes up a larger percentage of their salary.
The government has said that the payments will be made from February 2021. Further details about the Job Retention Bonus scheme are due to be published by the end of July.

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Vehicle MOT dates

The government has announced that mandatory MOT tests for car, motorcycle and van owners in England, Scotland and Wales are to be reintroduced from 1 August 2020. This means that all drivers whose vehicle is due for an MOT test from 1 August will be required to get a test certificate to continue driving their vehicle. The government is reintroducing this requirement to keep roads safe. Testing capacity has already reached 70% of normal levels and is steadily increasing.

Vehicle owners with an MOT expiry date between 30 March 2020 and 31 July 2020 will continue to receive a 6 month extension. This includes vehicles that are due their first MOT test. The MOT expiry date will be automatically extended about 7 days before it is due to expire. For example, if your vehicle’s MOT was due to expire on 3 May 2020, this will automatically be extended to 3 November 2020. It is important to remember that vehicles must be kept roadworthy even if the MOT date has been extended.

If you are not using your car, you can register your vehicle as off the road by obtaining a statutory off road notification (SORN). This will result in any remaining full months of vehicle tax refunded. You could also take advice to see if your car insurance could be cancelled.

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