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Spring Statement March 2025

Thursday, February 13th, 2025

The upcoming Spring Statement, scheduled for March 26, 2025, is shaping up to be a pivotal moment for Chancellor Rachel Reeves and the UK economy. Based on recent reports from the accounting press and national newspapers, here’s what we might anticipate:

 

Economic Context and Fiscal Challenges

The UK is currently grappling with sluggish economic growth, elevated borrowing costs, and persistent inflationary pressures. These factors have significantly eroded the government’s fiscal headroom, which was previously estimated at £9.9 billion. Economists now warn of a substantial “fiscal hole,” suggesting that the Chancellor may need to consider spending cuts or tax increases to adhere to her fiscal rules.

 

Potential Policy Announcements

  1. Spending Cuts and Tax Adjustments: Given the constrained fiscal environment, there’s speculation that the Chancellor might announce broad spending cuts. This could include measures such as extending the freeze on income tax bands, effectively increasing the tax burn as inflation pushes incomes into higher brackets. 
  2. Welfare Reforms: Reports indicate that Labour is considering significant cuts to welfare benefits. This may involve abolishing certain categories under Universal Credit, potentially affecting individuals with severe disabilities or illnesses. Additionally, changes to Personal Independence Payments (PIP), including the possibility of one-off payments or means testing, are being discussed.
  3. Infrastructure and Growth Initiatives: In an effort to stimulate economic growth, the Chancellor has unveiled plans to create “Europe’s Silicon Valley” between Oxford and Cambridge. This ambitious project aims to boost the economy by £78 billion over the next decade through infrastructure improvements and streamlined planning regulations.

 

Challenges Ahead

The Office for Budget Responsibility (OBR) is expected to release updated economic forecasts that may present further challenges for the Chancellor. Downgrades in growth projections could complicate efforts to manage the economy without resorting to immediate extensive tax hikes or spending cuts.

 

Additionally, the recent cancellation AstraZeneca’s £450 million vaccine manufacturing project in Liverpool has been a setback for the government’s pro-growth ambitions, highlighting the challenges in securing critical investments.

 

Conclusion

As the Spring Statement approaches, the Chancellor faces the delicate task of balancing fiscal responsibility with the need to foster economic growth. Stakeholders should prepare for potential policy shifts, including spending cuts, tax adjustments, and initiatives aimed at stimulating investment and development.

20 Cash Flow Warning Signs Small Business Owners Cannot Ignore

Tuesday, February 11th, 2025

Cash flow is the lifeblood of any small business, and keeping an eye on certain indicators can help business owners spot potential trouble before it becomes a major issue. Here are the key cash flow warning signs that should raise concern:

Declining Cash Reserves

  • If your cash reserves are consistently shrinking, it’s a sign that your business is spending more than it’s bringing in.
  • Regularly review your cash balance to ensure it’s not dipping dangerously low.

Increasing Overheads Without Revenue Growth

  • Rising fixed costs (rent, utilities, wages) without a corresponding increase in revenue can create a cash flow squeeze.
  • Conduct periodic reviews to identify unnecessary expenses.

Late Customer Payments (Accounts Receivable Issues)

  • If customers are taking longer to pay, it can disrupt cash flow and make it difficult to cover short-term obligations.
  • Watch out for a rising average debtor days figure (the time customers take to pay invoices).

Struggles to Pay Suppliers on Time

  • If you’re delaying supplier payments because of cash shortages, it could indicate deeper cash flow problems.
  • Late payments might harm supplier relationships and affect future credit terms.

Relying Heavily on Overdrafts or Short-Term Borrowing

  • Frequent use of an overdraft or business credit cards to cover day-to-day expenses suggests a liquidity issue.
  • It’s fine to use credit strategically, but constant reliance can lead to higher debt costs.

High Proportion of Sales on Credit

  • If most of your sales are made on credit (rather than immediate cash or card payments), you may struggle with cash shortages.
  • Consider offering discounts for early payments or requiring upfront deposits.

A Declining Gross Profit Margin

  • If your costs are rising but prices remain the same (or are falling), your profit margin will shrink, reducing available cash.
  • Regularly review pricing strategies and cost control measures.

Seasonal Cash Flow Gaps

  • If your business experiences significant seasonal fluctuations, ensure you have enough cash reserves to cover lean periods.
  • Budget and plan ahead for these fluctuations.

High Inventory Levels (Cash Tied Up in Stock)

  • Holding excessive stock means cash is locked up and unavailable for other business needs.
  • Improve stock management by reducing slow-moving items and optimising reordering processes.

Rising Tax Liabilities Without Adequate Provision

  • Failing to set aside enough cash for VAT, PAYE, or corporation tax can lead to late payments and penalties.
  • Keep a separate tax savings account to avoid last-minute cash shortages.

Frequent Loan Repayments Draining Cash

  • If loan repayments are consuming too much of your revenue, it might be time to restructure or consolidate debt.
  • Consider renegotiating repayment terms with lenders to ease cash flow strain.

Increasing Late Payment Fees or Interest Charges

  • If you’re regularly incurring penalties for late payments to suppliers, lenders, or HMRC, it’s a sign of poor cash flow management.
  • Prioritise timely payments to avoid unnecessary extra costs.

Poor Cash Flow Forecasting

  • Not having a clear picture of upcoming cash inflows and outflows can lead to surprises.
  • Maintain a rolling cash flow forecast to anticipate potential issues and plan accordingly.

Difficulty Paying Wages

  • Struggling to pay staff on time is a red flag that your cash flow is under pressure.
  • If this issue persists, consider reviewing your pricing, expenses, or business model.

Over-Reliance on a Few Key Customers

  • If most of your revenue comes from a small number of clients, losing one or two could be disastrous.
  • Diversify your customer base to reduce risk.

Unexplained Cash Flow Gaps

  • If you frequently find yourself wondering where the cash has gone, it may indicate financial mismanagement or inefficiencies.
  • Review financial records regularly to track spending and income properly.

Declining Sales While Fixed Costs Remain High

  • If revenue is dropping but overheads remain constant, cash flow problems will soon follow.
  • Look for ways to increase revenue or reduce non-essential costs.

Repeated Requests for Extended Payment Terms

  • If suppliers or landlords frequently grant you more time to pay, it might signal that your cash flow is under stress.
  • Consider adjusting your payment collection process to improve incoming cash flow.

High Customer Return or Refund Rates

  • Frequent refunds or returns can negatively impact your cash flow, especially if they aren’t accounted for in projections.
  • Improve product/service quality and customer satisfaction to reduce refund rates.

Personal Funds Regularly Covering Business Expenses

  • If you find yourself dipping into personal savings to cover business costs, your cash flow might be unsustainable.
  • Consider reviewing your business model or exploring financing options.

How to Improve Cash Flow

If you recognise these warning signs, take proactive steps to improve your business’s cash flow:

  • Invoice promptly and set clear payment terms.
  • Chase late payments and use automated reminders.
  • Negotiate better supplier terms for extended payment periods.
  • Review costs regularly and cut unnecessary expenses.
  • Diversify revenue streams to reduce reliance on a few customers.
  • Build a cash reserve to cover unexpected downturns.

By keeping an eye on these indicators and acting early, small business owners can prevent cash flow issues from escalating into serious financial trouble.

 

 

Understanding the Profit Breakeven Point

Thursday, February 6th, 2025

For any business, knowing when it will start making a profit is crucial. The profit breakeven point is the moment where revenue covers all costs-meaning you’re no longer losing money, but you’re not making a profit yet either. Understanding this point helps business owners make informed decisions about pricing, sales targets, and cost management.

Why Is the Breakeven Point Important?

  1. Risk Management – It helps business owners understand the minimum performance needed to avoid losses.
  2. Pricing Strategy – Knowing your costs ensures you set prices high enough to cover expenses and eventually generate profit.
  3. Financial Planning – It helps in budgeting, forecasting, and determining when additional funding may be required.

 

How to Calculate the Breakeven Point

The breakeven point (BEP) can be calculated using a simple formula:

Breakeven Point (units) equals: 

Fixed Costs divided by (Selling Price per Unit – Variable Cost per Unit)

 Where:

  • Fixed Costs – Costs that don’t change with production (e.g., rent, salaries, insurance).
  • Variable Costs – Costs that vary with sales volume (e.g., materials, commissions, packaging).
  • Selling Price per Unit – The price at which you sell each product or service.

 

Example Calculation

Imagine a small business selling handmade furniture.

 

  • Fixed Costs: £10,000 per month (rent, staff salaries, etc.)
  • Variable Cost per Table: £50 (wood, paint, labour per unit)
  • Selling Price per Table: £150

Using the formula:

£10,000 divided by (£150-£50) =100 tables

This means the business must sell 100 tables per month to cover costs. Any sales beyond this will generate a profit.

 

Using Breakeven Analysis for Growth

Once you know your breakeven point, you can:

  • Adjust pricing to become profitable faster.
  • Identify cost-cutting opportunities to lower the breakeven point.
  • Set realistic sales targets based on market demand.

 

By regularly reviewing your breakeven analysis, you ensure that your business remains financially stable and on track for long-term success.

What expenses can be claimed against rental income?

Wednesday, February 5th, 2025

Are you a landlord? Maximise your rental income by knowing which expenses you can claim to reduce your tax bill. From maintenance costs to Replacement of Domestic Item Relief, understanding allowable deductions is key to smart property management.

If you are a landlord, it is important to be aware of the expenses that can and cannot be claimed from rental income. As a general rule, allowable expenses must be wholly and exclusively for the purpose of renting out the property. In some cases, a proportion of expenses can be claimed if part of the expense relates to the property business.

Common types of deductible revenue expenditure include:

  • General maintenance and repairs to the property (but not improvements)
  • Water rates, council tax, gas, and electricity
  • Insurance costs
  • Letting agent and management fees
  • Qualifying legal and accountancy fees
  • Direct costs such as phone calls, stationery, and advertising for new tenants
  • Vehicle running costs (only the proportion used for the rental business), including mileage rate deductions for business-related motoring costs

Additionally, the Replacement of Domestic Item Relief allows landlords to claim tax relief when replacing furniture, furnishings, appliances, and kitchenware in a rented property, provided certain conditions are met.

Landlords should also keep a record of any capital expenditure incurred on investment properties. These expenses cannot be claimed as revenue expenditure against rental income but can usually be offset against Capital Gains Tax when selling a property.

Selling online and paying tax

Wednesday, February 5th, 2025

Selling online? Whether it’s a hobby or a business, you may need to pay tax if your earnings exceed £1,000. From services to content creation, it’s vital to understand self-assessment rules and new reporting obligations for online platforms starting in 2024.

If you are selling anything through an online marketplace, it is important to know that you might be liable to pay tax, whether it is your main source of income or just something a part-time hobby. This applies to a range of activities, so it is worth understanding when you need to register for self-assessment and pay tax.

You may need to report your earnings and pay tax if you are doing any of the following:

  • Buying goods to resell, or making things to sell (even if it’s just a hobby that you sell items from);
  • Offering services online, such as dog walking, gardening, repairs, tutoring, food delivery, babysitting, or hiring out equipment;
  • Creating online content, whether that’s videos, podcasts, or even social media influencing; or
  • Earning income by renting out property or land, like letting a holiday home, running a bed and breakfast, or renting out a parking space on your driveway.

There is a Trading Allowance you can claim that allows you to earn up to £1,000 a year from self-employment without having to pay tax or register as self-employed. But if you go over that £1,000 threshold, you will need to register with HMRC as self-employed and submit a self-assessment tax return.

If you are just selling personal items, such as second-hand clothes or unwanted electrical goods, you typically do not need to worry about registering for tax. This is not considered a business activity, so it does not count as trading in the eyes of HMRC.

For those using online platforms to sell goods or services, there are new reporting obligations. Any relevant information about your sales may be reported to HMRC by the platform you use. There is a new requirement for online platforms to report pertinent information collected about online sellers between 1 January 2024 to 31 December 2024 to HMRC by 31 January 2025. This will only happen if you have sold 30 or more items or earned £1,700 (or EURO2,000) in the calendar year. The platform will also provide you with a copy of the information they send to HMRC, which can be helpful when you need to submit your own tax return.

Rolling over capital gains

Wednesday, February 5th, 2025

Business Asset Rollover Relief allows you to defer Capital Gains Tax (CGT) when reinvesting proceeds from selling business assets. By rolling gains into the cost of new assets, tax is postponed until the new asset is sold. Learn how this relief can optimise your business investments.

Rolling over capital gains is a useful way to defer CGT when you sell or dispose of business assets.

Essentially, if you use the proceeds from selling an old asset to buy a new one, the gain is “rolled over” into the cost of the new asset. This means you do not have to pay CGT on the gain immediately; instead, the tax is deferred until you sell the new asset. This relief is known as Business Asset Rollover Relief. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

If you do not use all the proceeds from the sale to buy a new asset, you can still make a partial rollover claim. Additionally, you can apply for provisional rollover relief if you plan to buy new assets but have not yet done so.

Rollover relief also applies if you use the sale proceeds to improve assets you already own.

The total amount of relief depends on how much you reinvest in new assets. There are a few conditions to keep in mind.

  • the new asset must be purchased within 3 years of selling the old one (or up to a year before), though HMRC can sometimes extend this period;
  • both the old and new assets must be used for your business, and your business needs to be trading when you sell the old asset and buy the new one; and
  • claims for relief must be made within 4 years of the end of the tax year when the new asset was bought (or the old one was sold, if that happened later).

Claiming VAT on pre-registration purchases

Wednesday, February 5th, 2025

Businesses can reclaim VAT on pre-registration expenses if they relate to taxable supplies made after VAT registration. The rules differ for goods and services, with time limits of 4 years for goods and 6 months for services. Proper understanding ensures you don’t miss out.

VAT can only be reclaimed if the pre-registration costs relate to taxable goods or services that will be supplied by the business after it becomes VAT registered.

Different rules apply depending on whether the costs are for goods or services:

Goods: VAT can be reclaimed for goods still held by the business or for goods used to produce other goods still in possession of the business.

  •  Time limit for reclaiming: 4 years from the date of registration.

  Services: VAT can be reclaimed for services related to the business.

  •  Time limit for reclaiming: 6 months from the date of registration.

Pre-registration VAT should be reclaimed on the business’s first VAT return. In certain cases, it may be possible to backdate the VAT registration. This should be considered if there is additional Input Tax that can be recovered.

There are specific provisions for partially exempt businesses, businesses with non-business income, and the purchase of capital items under the Capital Goods Scheme (CGS). These rules may affect the recoverability of VAT and should be reviewed in detail based on the circumstances of the business.

Self-employed must report profits on tax year basis

Wednesday, February 5th, 2025

Big changes are here for the self-employed! From 2024-25, profits must align with the tax year, replacing the old “current year basis.” Overlap relief is ending, and transition profits will be spread over five years. Here’s how the new system affects your tax bill.

The reform to the self-employed tax basis period has introduced significant changes in how trading income is allocated to tax years. Previously, the tax basis period operated on a “current year basis,” but the reform has now shifted to a “tax year basis.” As a result, all sole traders and partnership businesses are required to report their profits based on the tax year, commencing with the self-assessment return that was due by 31 January 2025. This return covered the tax year 2023-24.

Under the previous system, overlapping basis periods could occur, which resulted in certain profits being taxed twice. To counter this, businesses could claim ‘overlap relief,’ typically at the time of business cessation. The introduction of the “tax year basis” eliminates the possibility of overlapping basis periods, thereby preventing the generation of further overlap relief.

It is important to note that businesses which already prepare annual accounts to a date between 31 March and 5 April are not affected by these changes. These businesses continue to file their tax returns as they did under the old system, without any alteration.

The full implementation of the new rules takes effect in the current 2024-25 tax year, which ends on 5 April 2025. The 2023-24 tax year is considered a “transition year.” During this transitional period, the basis periods for all businesses will be aligned with the tax year, and any outstanding overlap relief can be utilised against profits for that period.

In cases where profits exceed the period covered by the overlap relief-specifically profits that span more than 12 months-these are referred to as “transition profit.” This transition profit will, by default, be spread across five tax years, from 2023-24 to 2027-28, to help ensure a smooth adjustment to the new rules.

Tax Diary February/March 2025

Wednesday, February 5th, 2025

1 February 2025 – Due date for Corporation Tax payable for the year ended 30 April 2024.

19 February 2025 – PAYE and NIC deductions due for month ended 5 February 2025. (If you pay your tax electronically the due date is 22 February 2025)

19 February 2025 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2025.

19 February 2025 – CIS tax deducted for the month ended 5 February 2025 is payable by today.

1 March 2025 – Due date for Corporation Tax due for the year ended 31 May 2024.

2 March 2025 – Self-Assessment tax for 2023-24 paid after this date will incur a 5% surcharge unless liabilities are cleared by 1 April 2025, or an agreement has been reached with HMRC under their time to pay facility by the same date.

19 March 2025 – PAYE and NIC deductions due for month ended 5 March 2025 (If you pay your tax electronically the due date is 22 March 2025).

19 March 2025 – Filing deadline for the CIS300 monthly return for the month ended 5 March 2025.

19 March 2025 – CIS tax deducted for the month ended 5 March 2025 is payable by today.

Pension reforms announced

Tuesday, February 4th, 2025

The UK government is shaking things up with some significant pension reforms aimed at boosting economic growth and enhancing pension pots for working folks. Let’s dive into what’s happening.

Unlocking Pension Surpluses

Traditionally, occupational defined benefit (DB) pension schemes have been somewhat restricted in how they can use surplus funds. These surpluses often sit idle, benefiting neither the businesses that contribute to them nor the broader economy. The latest reforms aim to change this by allowing well-funded DB schemes to more flexibility invest their surplus funds into the wider economy. This move is expected to unlock billions of pounds, providing businesses with additional capital to invest in growth initiatives, which, in turn, could lead to higher wages and improved pension benefits for employees. 

Reducing the Pension Protection Fund Levy

In tandem with these changes, the government is considering proposals to grant the Pension Protection Fund (PPF) greater flexibility in reducing the levy it collects from pension schemes. Given the PPF’s strong financial position, relaxing these restrictions could free up millions of pounds for pension schemes. Employers could then redirect these funds into their businesses, fostering further economic growth. 

Creating Pension Megafunds

Another bold step involves consolidating various pension schemes into larger “megafunds.” By merging assets from multiple Local Government Pension Scheme authorities and defined contribution schemes, these megafunds can leverage economies of scale to invest in high-growth areas like infrastructure and innovative businesses. This approach draws inspiration from successful models in countries like Canada and Australia, where larger pension funds have achieved higher returns through diversified investments. 

Balancing Growth with Member Protection

While these reforms are geared towards stimulating economic growth, the government emphasizes that the security of pension scheme members remains a top priority. Any changes will be implemented with safeguards to ensure that members’ benefits are protected. The goal is to create a more dynamic pension system that not only secures retirement incomes but also contributes actively to the nation’s economic prosperity.

Looking Ahead

These reforms represent a significant shift in the UK’s approach to pensions, aiming to transform dormant funds into active investments that benefit both individuals and the broader economy. As these changes roll out, it will be crucial to monitor their impact on economic growth and the financial well-being of pension scheme members.