COVID-19 – Income Tax for sole traders and partnerships

With the current COVID-19 situation, many partnerships and sole traders will be badly affected in terms of cash flows and causing a profitable business to tip over into losses. What can be done to help ease the situation in terms of your Income Tax position?

1. Utilise Loss Relief

Typically, a sole trade business or partnership can utilise any trading losses within the tax year and/or carry them back one tax year. If you have excess losses and had a successful previous year, then you may be in a refund position. This will help your cash flow situation.

If a business ceases, then losses can be carried back three full tax years that you can carry back.

2. Making provisions in your accounts

In preparing the accounts which could show the loss position, we can be prudent in considering the recoverability of work in progress and debtors. If you are doubtful that you are going to be paid for a piece of work or a service, then you could be able to make a specific provision for that amount in your accounts.

The provision would deductible from your profits which will certainly reduce profit and could in fact turn a profit into a loss. We can then use the above reliefs

A general provision cannot be made, for example a business cannot say “I won’t receive 50% of all of my invoices”. The provisions need to be specific against each invoice.

If income is received from a bad debt then this becomes taxable, but not until the period in which you receive it.

3. Change of accounting date

It may be useful for some sole traders to change their accounting date to make sure you can utilise any losses you have made earlier than would otherwise have been the case.

For example, if your year end is 31 March, you will be mainly affected by any COVID-19 effects within your 2020 accounts. This will mean any losses will be available for offset in 2019/20, but can also be carried back to 2018/19.

For those with a 30 April year end the losses will be in the accounts for the year ended 30 April 2020, and so, will not be utilised until 2020/21 and carried back to 2019/20.

Changing the accounting date to 31 March could advance the time at which you get relief for any losses due to COVID-19. However, this has other Income Tax implications, and so if such a change is to be contemplated, we would have to carry out comparative calculations to determine if such a course of action is advisable.

4. Capital Allowances

In some instances where a sole trade has large losses it may not be beneficial to make a capital allowance claim within the tax year. This is because you may not have any profits against which to set off this loss.

Disclaiming the capital allowances could then allow you to carry forward a higher figure for future years, when you will hopefully be back into profit.

5. July 2020 Payment on Account deferred

All interim payments on account due in July 2020 are deferred until January 2021. You do not have to do anything – the deferment will be automatic, but you can still make the payment if you want to

Note that the payment is still due, but since the payment date has been deferred, late payment interest will not be charged as long as the tax is paid by 31 January 2021

Tip: Try to have your 2020 tax return prepared as soon as possible so that you will know exactly how much tax you owe for 2019/20 and have time to plan for the January 2021 tax payment

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