There is a plethora of things to think about – tax issues may not appear to be among the priorities. But for business-owners tax complications could include:
• Payments of tax
• Loss of business records
• Cash flow pressure when funding expenditure on remedial works
• Insurance recovery
Payment of tax
While the deductibility of expenses is crucial, a more immediate concern for self-employed business-owners will be cash flow. Expenses still need paid even though income has significantly reduced or stopped altogether.
One expense which will be looming large will be the tax payments due on 31 January 2020. HMRC do offer payment plans to those in financial difficulty; early dialogue with them will be essential in advance of this deadline. Companies should also consider approaching HMRC if the ability to meet tax payments has been affected by disruption to trading caused by the flooding.
Loss of business records
31 January is also the deadline for filing 2018/19 Self-Assessment tax returns. Early discussions with HMRC will be advisable if the records have been damaged or destroyed in the floods. Those affected should not wait until the deadline has passed. Similarly, loss of books and records needed for accounting and VAT purposes should be notified.
Tax relief for expenditure on remedial works
The availability of tax relief for expenditure on remedial works will be an important consideration for business-owners. This is particularly the case where there is no valid insurance policy in place.
Expenditure can be broadly split into two categories:
‘Repair and refurbish’: this expenditure properly referred to as revenue expenses and thus qualifies for a deduction against taxable profits.
‘Improvements’: these are regarded as investments and treated as capital expenses - and not qualifying for a deduction against taxable profits.
While there are expenses which will clearly fall into one or other of these categories, there are expenses where the position is not as clear. An expense that would fall into the ‘repair and refurb’ category is the replacement of an old electrical system with a modern equivalent. However, if the electrics were replaced with a system which included state-of-the art solar power system this would be an improvement.
Replacing carpets with linoleum or blinds for ruined curtains may be grey areas that would be subject to discussion with the taxman in due course.
Because not all expenditure on remedial works will necessarily qualify for a business deduction, it is important that the expenditure incurred is analysed carefully. This analysis should include any ancillary or preparatory expenditure - such as hiring of dehumidifiers to dry out the property before work can commence.
Hopefully, most businesses will be able to claim on their insurance. In situation where there is an insurance recovery, but not for the full amount of the remedial expenditure, it will still be necessary to consider the maximum claim for deductible expenditure. While insurance recovery is a capital rather than a taxable trading receipt, it will be brought in as a trading receipt up to the amount of the deductible expenditure.
A full insurance recovery will result in a tax neutral position. However, full recovery is unlikely if there is a policy excess.
It would be obviously helpful if HMRC takes a proactive approach and communicates potential support available to affected business-owners. In particular, for those struggling to meet the 31 January deadline for payment of tax and submission of returns, and other upcoming deadlines. Business owners may wish to enter into an early dialogue with HMRC to reduce, mitigate or avoid penalties.
While securing tax relief for expenditure is important, the reality for many will be that tax relief for expenditure not covered by an insurance recovery will result in a net cash outflow. One lesson that business-owners can learn from these tragic events is to regularly review insurance cover.
Reconstructing records and bringing paperwork up to date as quickly as possible will be essential. But immediate priorities will be to concentrate on the human impact of this tragedy - a sympathetic approach from HMRC will go a long way in aiding recovery.
Lynne Rowland is a Tax Partner with Moore Kingston Smith