The more draconian government interventions introduced to control the COVID outbreak have challenged all of us, businesses and individuals, to consider the notion that we can no longer rely on our jobs or businesses to effortlessly produce the income we need.

Many businesses in the hospitality and entertainment sectors had their ability to trade quashed. Lockdown meant closedown, no income. Government did step up and provide furlough grants, to support staff retention, and various other financial funding to keep businesses afloat.

What did we learn?

That COVID had two impacts, on our health and finances, and that we needed to consider the consequences of future events, even those presently unknown.

One way that we can act is to save for these rainy days. We have experience that this disruption can extend to years rather than months. In which case, what thickness of fat do we need to build on our business bones to survive these, however unlikely, restrictions?

The part planning plays

Planning can take several forms but let us consider a basic business plan. These forecasts of profitability and solvency are fixed for the year ahead and are intended to provide a benchmark to judge future results; fine while the world at large is at peace and no external conditions develop to disrupt your plans.

Which is why, post COVID experiences, as soon as external factors change, we should revisit plans and flex them to accommodate these changing factors. This process will reveal where and when your financial challenges are likely to occur – particularly dips in cash flow, profitability and working capital – and give you time to figure out strategies to minimise any damage.

Following this process, it will then be evident how much we need in our rainy-day account to meet any shortfall.

Make hay while you can

It is beyond the context of this post to dwell on these challenges, but while you are able to resume normal business, this does open up the opportunity to transfer a calculated sum into your savings account each month and gradually build reserves.

Now may be a good time to start this process.

Would demand for the products or services you sell vary with price increases or decreases? This conundrum is considered by the term elasticity in economic circles – how demand changes when prices change.

If demand for your products is elastic, any change in price will have a corresponding impact in demand. For example, if you increase prices and consumers/buyers are able to delay buying – in the hope that prices will reduce or that a lower priced substitute can be found – then demand for your products will fall.

Alternatively, if demand for your products is inelastic, any change in price will have less effect on demand. For example, if you increase prices and consumers/buyers are unable to delay buying or find a lower priced substitute – then demand for your products will be maintained.

Inflation

In times when prices are been driven upwards, due to supply disruption, elasticity plays an important role in how your business profits will be affected. This is the situation we are presently facing in 2022.

If you sell items or services that have readily available substitutes or that consumers are happy to delay buying decisions, then increasing your prices to compensate for the increased costs you are having to bear will result in a loss of sales that may exaggerate profit reduction.

But if you sell products with few substitutes and buyers are not prepared to delay purchasing your services then it is more likely that buyers will be prepared to pay your price increases.

Elasticity and inflation

Which means that businesses selling products or services that are inelastic – price increases will not unduly affect demand – have a distinct advantage over businesses that sell products or services where demand is elastic.

Planning to include elasticity

If you presently market goods that are inelastic you may have inadvertently made life much easier for the maintenance of profitability as you should be able to increase prices without significant reductions in sales volumes.

Businesses whose products are elastic, price increases will reduce sales, may need to expand their range to include products with a less reactive change in volume when prices are increased.

Ironically, the sale of inelastic products fuels inflation, price increases. But businesses have a right to adapt in efforts to maintain solvency and profitability. The real culprit of the present rise in inflation is supply-side – a global shortage of computer chips for example – and not businesses seeking to exploit these challenges for their own benefit.

The UK tax code has numerous reliefs and allowances that reduce tax when businesses invest in qualifying assets.

Some of the reliefs allow up to 100% of the invested cost to be written off against taxable profits and companies can presently write-off 130% of qualifying expenditure.

But aside from these tax incentives to invest, it is worth considering the bottom-line effect that the investment will have on business profitability.

Cashflow considerations

Companies, who can claim a 100% write-off for an asset purchase, will presently save £190 for every £1,000 spent – this based on corporation tax rates being 19%.

Self-employed traders will save between £200 and £450 for every £1,000 spent – based on income tax rates ranging from 20% to 45%. There may also be Class 4 NIC savings.

In both cases the cash outlay (or debt acquired to fund a purchase) exceeds any overall reduction in tax payable.

Bottom-line mentality

You may be tempted to upgrade an asset out of hubris. For example, part-exchange a company car. If the vehicle offers savings in running costs or enables you to increase sales and profits, then the investment – you could say – makes commercial sense.

If the payback in additional profits is less certain, then the investment return may be less certain even when after-tax savings are considered.

Do the math…

When making decisions on major additions or replacements of plant, vehicles or other high-value equipment, be sure to consider all the effects on your business prospects. Otherwise, your tax reductions may come at the expense of hard-won cash reserves.

We can help you crunch the numbers to see if there is an overall benefit to your business. Please call before making any significant buying decisions.

The other side of the recent hikes in consumer energy costs – taking their toll on take-home pay across the UK – are the similar cost increases for industry.

Focussing on high-energy users, the government recently announced the following increased support for Energy Intensive Industries (IEE).

High energy usage businesses, such as steel and paper manufacturers, are set to receive further support for electricity costs as the government has confirmed details Friday 29 April, of the Energy Intensive Industries (EII) compensation scheme.

The scheme will also provide support for companies that manufacture batteries for electric vehicles, supporting the UK’s drive to capitalise on the global shift to greener technologies.

The scheme will be extended for a further 3 years and its budget will be more than doubled. This will help ensure the UK remains an attractive investment destination for energy intensive industries, whilst encouraging greater electrification to help cut emissions as part of the green industrial revolution across the country.

Today’s announcement will add to the more than £2 billion the government has provided since 2013 to support businesses in energy intensive sectors with the price of electricity bills.

Industry Minister Lee Rowley said:

“We want to keep the UK at the forefront of manufacturing, helping our energy intensive industries remain competitive and sustainable for the long term, and continuing to power our economy with thousands of jobs across the country.

“We are not only extending our support through the compensation scheme, by offering a greater level of compensation to eligible firms, we are delivering more relief from electricity costs for these industries.”

The scheme provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills, recognising that UK industrial electricity prices are higher than those of other countries.

It will be interesting to see if the Treasury offers more support in the coming weeks for domestic consumers.

1 May 2022 – Due date for corporation tax due for the year ended 30 July 2021.

19 May 2022 – PAYE and NIC deductions due for month ended 5 May 2022. (If you pay your tax electronically the due date is 22 May 2022).

19 May 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2022.

19 May 2022 – CIS tax deducted for the month ended 5 May 2022 is payable by today.

31 May 2022 – Ensure all employees have been given their P60s for the 2021/22 tax year.

1 June 2022 – Due date for corporation tax due for the year ended 31 August 2021.

19 June 2022 – PAYE and NIC deductions due for month ended 5 June 2022. (If you pay your tax electronically the due date is 22 June 2022)

19 June 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2022.

19 June 2022 – CIS tax deducted for the month ended 5 June 2022 is payable by today.

Dividends are a distribution of company profits to shareholders. Historically, they have been taxed as unearned income – no National Insurance deductions.

This is still the case, but the Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends.

Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, respectively.

Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.

For 2021-22, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. These rates increased by 1.25% to 8.75% 33.75% and 39.35% from April 2022.

The dividend trust rate of Income Tax was 38.1%, 2021-22. This also increased to 39.35% from April 2022 to remain in line with the additional rate.

Although the 1.25% increase sounds fairly insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.

Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial.

The Employment Allowance has risen from £4,000 to £5,000 – meaning smaller firms will be able to claim up to £5,000 off their employer National Insurance Contributions (NICs) bills.

Announced by the Chancellor at last month’s Spring Statement to reduce employment costs, the change takes an extra 50,000 firms out of paying NICs and the Health and Social Care Levy. This increases the total number of businesses not paying NICs and the Levy to 670,000.

According to the Chancellor, 94% of businesses benefitting from the £1,000 increase are small and micro businesses, and the sectors that will see the highest numbers of employers benefitting are the wholesale and retail sector (87,000); the professional, scientific and technical activities industry (63,000); and the construction sector (52,000).

Note, the Employment Allowance only covers employers’ NIC contributions.