2020 has been like no other. But, while COVID-19 has left an indelible mark on this year, there are certain things that remain constant in the business calendar – folded page corners that remind us of the things we need to do, and often put off until the last minute.
Wherever your year-end falls as a franchise, the end of the calendar year also invariably brings financial and, more specifically, looming tax deadlines that are unavoidable. Often falling in the aftermath of busy trading periods, or at a time when the country appears to shut down for several weeks to soak up Christmas time, their timing is always a cause for much consternation. While this year may have a slightly different tint to it, when it comes to the festive period and business opening hours, the formidable HMRC deadlines are immovable and shouldn’t be ignored.
Earlier this year, HMRC provided some respite by allowing people to defer their Self-Assessment Payment on Account – advance payments made towards a person’s tax liability for the year if they’ve completed a self-assessment tax return. While our data showed that 56% of people decided to take advantage of the Government’s move to ease financial pressure on small businesses, what it has invariably done is created additional pressure as we enter 2021.
It’s true that delaying the payment has helped many small franchises with immediate cash flow problems, but it is still owed. Self-assessment payments due on 31 January 2021 can now be spread over 12 equal instalments. So, as we enter the final three months before the deadline for self-assessment tax returns falls, what do franchisees need to consider to ensure their books are in order by 31 January?
Common mistakes
Our data shows that the most common time for people to file their tax return online is the final 72 hours before 31 January deadline. When it comes to filing tax returns, people inherently leave it until the last minute and with it come costly mistakes. The most common errors people make when rushing to file a self-assessment tax return are: forgetting to include all sources of income; claiming for the wrong expenses; putting the incorrect information down; a simple thing like ticking the wrong box: missing out vital details; assuming you don’t have to declare something, as you’ve not made a profit; and not including necessary supplementary information. It’s essential for people to get their tax affairs in order ahead of time which, in the long term, will not only help to bypass mistakes but provide them with a much clearer picture of their finances.
Invoice and expense management
There are a number of key things to remember when getting your finances in order ahead of the annual tax return deadline. It’s all too easy to lose track of invoices and expenses, unless you proactively manage your finances throughout the year and not just in the weeks leading up to 31 January.
- Organise your paper trail. If you’re a traditionalist at heart, and you process expenses manually, you need to ensure each expense is tracked and processed accurately, by keeping a rigid filing system for your forms, invoices and receipts. Ultimately, any lost paperwork could lead to a hefty penalty from HMRC.
- There may come a time when it’s right for your business to get rid of spreadsheets and manual invoicing by selecting a cloud-based invoicing system. Switching allows you to create and send bills electronically, providing you with real-time data and all the information you need for a tax return at the click of a button.
- Make sure that you keep records of the work you’re doing. For example, if you charge hourly, make sure you have time tracking that can prove what you spent. Whatever it is you’re supposed to be measuring, measure it.
Keeping on top of your finances all year round
There are some simple and easy steps you can take throughout the year, not just in the run-up to a significant tax bill, that can help you stay in control and on top of money management, particularly in the current climate. These include: always understanding your current financial position; planning for tax deadlines; implementing an effective credit control system, to ensure any outstanding debts don’t adversely impact on cash flow; monitoring your outgoings to assess where your business can become leaner; and remembering that cash is King – so, make sure you know how much your business needs to survive each month, for things like rent and salaries, and ensure your account doesn’t fall below this level.
Preparing for the next financial year and the effects of COVID-19
The Government’s unprecedented support packages have undoubtedly provided much-needed financial assistance to the self-employed and small businesses within the franchise sector. But, while loans, deferrals and payment holidays have been welcomed by franchisees, each support scheme will ultimately be due, or come to an end. Whether you’ve taken advantage of them all, or only opted for one, it’s essential to understand the implications and tax liabilities that come with accepting these emergency measures, particularly at an already complex time.
VAT is a case in point. Businesses were not required to make VAT payments during the deferral period, and were initially given until 31 March 2021 to pay any liabilities. However, this was followed by an announcement in September that, rather than paying in full at the end of March 2021, businesses will be able to choose to make 11 equal instalments across 2021 and 2022. All businesses which took advantage of the VAT deferral can use this New Payment Scheme, but will need to opt in. This opt-in process expected to be put in place in early 2021.
Effective tax planning beyond 31 January 2021
The optimum word is planning. ‘By failing to prepare, you are preparing to fail,’ as Benjamin Franklin once said. While this year has been adversely affected by COVID-19, it is next year’s tax bill that will be heavily dominated by the coronavirus.
Firstly, complete your 2019/20 tax return and submit it to HMRC as soon as possible. The 31 January may seem like a long way off, but it will soon be soaked up by the Christmas period. Getting this prepared and filed in good time will help to clarify the payments needed to be made on the 31 January 2021 and 31 July 2021. You should also start to draft your 2020/21 tax return. Being the year adversely impacted by COVID-19, this will give you a good understanding of future tax liabilities allowing the maximum amount of time to prepare for payments.
With three months to go before the self-assessment tax return deadline falls, there is still plenty of time to prepare for 31 January, while trying to implement good financial practices that will hold you in good stead as we enter a new, and hopefully more prosperous year than 2020 has served up.
