Financial Policy Changes of COVID-19
COVID-19 is the most significant event to hit the world of finance in recent years. And it is leading public authorities to enact all kinds of policies they wouldn’t ordinarily consider. By and large, their actions should help small businesses and mid-sized enterprises or investors in multiple ways, making the rules more lenient and generally giving firms time to get back on their feet. The coronavirus pandemic has been a disaster.
So how has COVID-19 changed accounting? Here are three significant alterations making their effects known.
Worldwide VAT Cuts
VAT is a sales tax – something that companies must charge all consumers when they purchase qualifying products. In the UK, VAT was 20 per cent before the coronavirus on most products. Now some sectors most affected by the crisis may only have to apply a 5 per cent tax. Other countries like Germany, Norway, Greece and France, are offering discounts or extensions to the VAT filing deadline to help businesses in their jurisdictions. And in the United States, many states are offering sales tax relief (or have done at some point during the crisis).
Worldwide VAT cuts are an attempt by authorities to restore the circular flow of income and get households spending again in restaurants, shops and other venues most affected by social distancing policies. When the rate of VAT falls, the upfront prices that customers pay goes down too, creating a sort of economy-wide sale. The lower the price, the higher the demand, and the greater the upward pressure on prices.
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For companies, all of this represents good news. Customers are much more likely to spend when taxes are lower, especially if they know that the benefits will expire soon. And so tax relief could kickstart the economy and get things moving again.
Extensions To File Accounts
In the UK, the government announced on 25 March that companies would be able to apply for a three-month extension to file their accounts. The idea is to give firms some extra breathing space to deal with the fallout of coronavirus, instead of having to focus on their taxes.
In total, around 4.3 million companies on the Companies House register stand to benefit from the scheme. They will be allowed to submit their accounts to the agency at any time in the three months following their regular accounting date.
The hope is that by giving firms more time, the UK’s tax authority – HMRC – won’t have to issue so many fines.
Companies House says that these are the most uncertain times for business in modern history and that it is only right for the agency to help out. The goal is to help reduce business burdens right now so that they will be able to better thrive in the future. HMRC and the government need to keep companies as productive as possible so that tax receipts in the future do not fall.
The UK is currently working closely with a range of stakeholders, including legal practitioners, and representative bodies to mitigate the overall impact of COVID-19 and help make accounting rules more accommodating. Thus, we can expect updated guidance moving forward, especially if the situation changes.
IR35 Reform Delay
IR35 legislation has been on the books since 2000 and, since then, has proven very unpopular among workers and small businesses for unfairly penalising specific individuals registered as a limited company. The government announced on 17 March that it would be updating the existing laws, starting April 2020, to include a new off-payroll tax – already running in the public sector since 2017.
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COVID-19, however, has changed their timetable, and now tax authorities say that they won’t implement the changes until April 2021.
People who are genuine contractors, consultants or freelancers shouldn’t have anything to fear from changes to the IR35 policy. However, in some cases where a contractor is an employee in all but name, firms will have to register for the new off-payroll tax.
Even though the new legislation isn’t going into effect until April 2021, the old laws will continue to apply, and HMRC will continue investigating them in the same way. If, however, you’ve been issued with an SDS, then you can likely ignore it. It won’t have a substantial effect on your employment or tax status.
In the public sector, the IR35 rules still apply. Agencies must deduct taxes at their source, instead of relying on workers to do it after the fact. The government intends to delay this policy for companies in the private sector, giving them more time to sort out this years’ accounting in the context of COVID-19.