2020-21 tax returns – a checklist for the new financial year

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What should clients and businesses be doing to get their 2020-21 accounts in shape?

The 2020-21 tax return is where pain from the pandemic is going to be felt in business accounts.

Early-April is the time to nudge clients/businesses to start providing information ready for 2020-21 (particularly concerning government grants)

“[This period] is not about reporting requirements but hand-holding clients and helping them reinvent themselves,” says Jane Norton FMAAT, Director and founder of Norton Accountancy.

1 – Craft a questionnaire

Jane Norton recommends sending out a tax questionnaire to clients, incorporating questions such as whether they took out government assistance such as bounce-back loans, CBILS, the self-employment income support scheme (SEISS), plus any funding they’ve received under the job retention scheme (furloughing).

Gary Heynes, Head of Private Client Services at accountancy network RSM UK, explains: “Accountants won’t necessarily know their clients have received these loans/grants unless you look at their bank accounts or they tell you”.

2 – Get to grips with government grants and assistance

The Government has introduced initiatives to help businesses including bounce-back loans, CBILS, furloughing, business rates holidays and grants for specific sectors.

“Exercise more diligence when checking with clients,” says Norton. “Many of them may have done their own calculations for schemes such as furloughing, but of course, these could be wrong.”

Rachel Emmerson, a senior manager at Kreston Reeves, adds: ”Government grants are not, under any circumstances, to be netted off against the cost. In your profit and loss statement, you’ll have the full staff cost you’ve paid [for furloughing], with the Government grant received shown as ‘Other Income’.”

3 – Scrutinise SEISS payments

“The most important thing that self-employed clients need to know is that [these payments] are taxable,” says Heynes.

“Also, some clients may have missed deadlines, or claimed payments but not received them. Because the claims were done by the individual, the accountant may need to double-check it’s been done correctly. It’ll all help prevent an enquiry somewhere down the line.”

4 – Exercise ethical judgment

Rishi Sunak’s £12bn scheme for the self-employed hasn’t been without its detractors. In October, a review by the Resolution Foundation think-tank found that £1.3bn may have been doled out to workers who didn’t experience any loss of income, despite HMRC specifying that only those “adversely affected by the pandemic” should apply.

It may be left to accountants to determine this. “As members of professional bodies, I think we need to question that and advise the clients on the right thing to do,” adds Emmerson.

“HMRC may look into whether people have claimed the Government schemes, as they should have done. If your client has actually smashed it during lockdown, should they be able to claim the grants, when the spirit of the scheme has been to help others? Remember the PPI scandal? This could go on for years, with lots of investigations.”

5 – Expense claims for businesses

Organisations should be able to claim for Covid-related expenses such as cleaning and sanitisation.
“If a business has needed extra plastic screen protection or sanitising hand wash in order to operate, I don’t expect they will be disallowed [for expenses],” says Heynes. “Some people may have had extra IT costs or Zoom subscriptions, which should be allowed if it was for business purposes.”

6 – Expense claims for home offices

This year, most of us have been cooped up inside, working from kitchen tables or spare rooms.

The self-employed can claim income tax relief for employment expenses such as broadband, heat and new equipment for the home office. Employees can also do the same thing. In October, HMRC launched a hassle-free online portal encouraging people to apply for tax relief that could return them up to £125, which also gives them the option to claim online without receipts.

“If they’ve paid for materials such as a new desk when working from home which haven’t been reimbursed by your employers, they can claim for them,” says Stephen Metcalf, senior manager, private client tax at Kreston Reeves. “Employers can also claim reliefs for these items used by staff too. Advise your clients.”

7 – Showing the impact of Covid-19 on company accounts

The 2020-21 accounts will reveal dramatic drops in income for many companies. Yet, how do accountants report these figures so that future readers of the statement (such as investors and bank loan lenders) can see the black holes were caused by Covid-19 and not poor financial health?

“In small company accounts, there isn’t a requirement to detail the impact of coronavirus, but large companies would disclose this in their strategic reports,” says Emerson.

Accountants may need to consider “Subsequent Events”, whereby a disclosure is required so that the financial statements aren’t misleading. This may consist of a general statement detailing the impact of Covid-19 on sales, plus any closures and supply chain disruptions. “The question you need to ask is: ‘Does over-disclosure give the accounts a true and fair view?’” says Emmerson.
However, as Norton says: “Any decent lender would understand the effects of Covid. You can just send an email alongside the accounts mentioning the shop/business was closed [due to Covid-19].”

8 – Advise companies on their stock

Remember the pubs pouring barrels of beer down the drain during the spring national lockdown? It highlights the problems many businesses have had with perishable stock during 2020.

“If the business is carrying huge amounts of stock they don’t need, such as high heels and handbags [currently difficult to sell because people are staying indoors], try talking with them about the likelihood of them selling it, as they may need to write it off,” says Norton. “If there’s expensive equipment that they may no longer need, or business premises that can’t use, they need to be thinking about this.”

9 – Deep-dive into debtors

“Don’t look at the profit and loss account and think a company had a good 2020 because they had massive sales,” says Norton.

“If those sales are tied up with debtors, such as hospitality clients who might go under, they won’t end up getting paid

“Advise them to be vigilant with these businesses, and be sure they get the money so they’re not dependent upon it.”

10 – Companies that have pivoted their business model

Whether it’s the gin distilleries making hand sanitiser instead of booze, or restaurants delivering at-home meal kits, the pivoted business model has become one of the hallmarks of 2020 business life.

“If a business incurs a loss in one trade [say gin production] they could set it off against profits in the same year for self-assessment,” says Metcalf.

Three final tips

• “If you have a company with property, getting fair values [an unbiased estimate of the market price of a product/service] is going to be tricky over the next year because people aren’t doing commercial property business at the moment,” says Emmerson.

• Norton suggests helping clients stay on top of what savings could be made, such as getting rid of a phone line.

• Keep abreast of legislation changes, urges Norton. “There have been reports recently about capital gains tax doubling. Try to make clients aware of this, so they can make decisions sooner.”

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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