The Budget for recovery: what does it mean for your hotel?

The announcement of the most recent Budget was eagerly anticipated by the hotel sector. After a year of original and significant fiscal policies to support the economy through COVID-19, there was immense pressure to see how the Government would repay the large debts incurred during the pandemic and help hospitality businesses during the post-Brexit transition, whilst still maintaining economic growth. In addition, there remains the need to help hospitality businesses through the post-Brexit transition period.

The Chancellor announced his ‘Budget for recovery’ with a clear focus on continuing and enhancing the economic support for COVID-19 and the rebuilding of public finances to ensure a post-COVID-19 financial recovery and a stable economic future. However, as always the devil is in the detail and it may not be as simple as it sounds. So we’ve taken a closer look at what the Budget means for your hotel business, what to look out for and how to prepare.

The CJRS continues but with far more scrutiny of claims past and present

Although the Government has announced that the Coronavirus Job Retention Scheme (CJRS) will be extended until 30 September 2021, the claim calculations are not getting any easier and the level of support is to be phased down. From July 2021, the level of grant available to employers will be deceasing to 70% of wages up to £2,500 per month, with further reductions to 60% in August and September.

When the scheme was initially launched, the focus of HMRC and the Government was to deliver financial support and get money to struggling employers quickly. However, since the November 2020 evolution of the CJRS scheme, HMRC have made it apparent that they will focus on inquiries into high-risk claims being made by employers and they estimated that the error and fraud rate in the furlough scheme could have been between five and ten per cent for all claims.

For claims relating to periods on or after 1 December 2020, HMRC have begun publishing details of employers’ claims on the Government website: employees are also able to see whether they are included in furlough claims since December via their personal tax accounts. Both of these measures have been introduced to deter fraud through greater transparency with the furlough claims and to ensure employers are using them correctly.

How can errors occur?

Given the short time frame of introduction and the complex nature of the CJRS claim calculations, it is unsurprising that errors leading to over and underpayments have occurred. However, a year on, and given HMRC’s increasing enforcement activity, businesses should be taking the time to review previously submitted claims, to ensure that these were correct and identify any potential errors and to take the correct remedial actions, as well as making good these amounts with HMRC.

The main area likely to result in errors is the reference pay used to calculate the CJRS claim. While regular salary forms part of the reference pay, discretionary pay such as tips or commission do not. Whether pay was discretionary or not could be a matter of interpretation leading to some employers taking a position which may conflict with HMRC’s interpretation of the rules. Furthermore, for those whose pay varies by the number of hours worked (eg zero hours contracts), the calculation of reference pay was even more complex as it required a comparison with equivalent pay before furlough or the average pay since April 2020.

The number of hours worked for the purpose of calculating the claim also presented an issue and whether the employee worked during the furlough period added further complexity. In the first stage of the CJRS, furloughed employees were not able to ‘work’ although there were some exemptions, for example in relation to training and directors performing statutory duties. A potential error could have resulted around misinterpretation of the guidance so that furloughed employees worked in addition to training or employers did not properly track which employees returned to work.

Following the introduction of flexi-furlough, changes were also made to the level of wage claim that could be made as the initial 80% (capped at £2,500 per month) decreased to 70% in September 2020, before rising again to 80% in November 2020. There were also further changes as the Government no longer covered the cost of employer NIC and pension contributions from August 2020, which has continued to be the case in 2021. Errors may have arisen in terms of claiming the incorrect rate of employer’s NIC or by mistakenly claiming employer’s pension contributions when in fact the employee had opted out.

What if my claim is incorrect?

Early on, HMRC recognised that it was inevitable that mistakes would occur and implemented a correction process. Even companies with large HR departments are expected to have made errors, due in no small part to the often complex calculations and definitions of what constitutes ‘wages’.

HMRC has already begun trying to tackle incorrect and potentially fraudulent CJRS claims and, given the potential amounts involved, a significant number of HMRC’s resources are expected to focus on this area. Where it identifies errors that have not been reported within the statutory 90 day period, HMRC will be seeking to charge tax penalties as well as recoup any overpaid CJRS payments.

What steps to take next?

It is important to look back at previous CJRS claims submitted during the last 12 months, particularly at the pay elements being used to calculate reference pay.

We at BDO have been helping many clients across a variety of sectors to review their CJRS claims, including those where HMRC have opened active enquiries into claims. It is therefore important to take proactive steps to review your own calculations, so that if an error is identified, any amounts can be made good with HMRC on a voluntary basis, to avoid any potential penalty or interest issues. The new CJRS legislation also includes powers to publicise defaulters online and to pursue company office holders where businesses become insolvent, with joint and several liability.

Restart Grants

Local Authorities in England will provide new ‘Restart Grants’ to businesses required to close because of the latest national lockdown. The grants of up to £6,000 per premises will be based on the rateable value of their business premises and be available to ‘non-essential retail businesses’. Hospitality, accommodation, leisure, personal care and gym businesses will be able to get more generous grants of up to £18,000 as they will reopen later with more restrictions. Businesses that continued to trade, those that chose to close and those that are in administration or insolvent will not qualify.

Recovery loans

A new scheme, available from 6 April 2021, will help businesses of all sizes fund the resumption of business after lockdown ends. Businesses can borrow between £25,000 and £10m. Any business (apart from banks and insurers) can apply before 31 December 2021, including those already borrowing under existing COVID-19 loan schemes. The Government will underwrite the new loans with an 80% guarantee.

The scheme will offer both overdrafts and invoice finance over a maximum of three years and term loans and asset finance over a maximum of six years. Personal guarantees will be required for loans over £250,000 and the business must be able to show it has been affected by the pandemic but remains viable and not insolvent.

Three-year loss carry back

Unincorporated businesses and companies will welcome the increased flexibility to carry back losses arising during the period of the pandemic an extra two years. The extended relief will allow for a three year carry back of losses arising in 2020-21 and 2021-22 as follows:

Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2m of losses in each of 2020-21 and 2021-22
Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations
Companies that are members of a corporate group will be able to obtain relief for up to £2m of losses in each of 2020-21 and 2021-22, but subject to a £2m cap across the group as a whole.

This will provide some additional cash flow by accessing a repayment of previous tax payments.

R&D consultation

Research and development tax reliefs and cash credits are used to stimulate investment in innovation and technology across all sectors. The hotel sector as a whole has traditionally been slow to adopt new technologies, but we have seen an acceleration of spend in this area following COVID-19, meaning we expect more businesses to consider and use R&D reliefs.

The Government has now announced a review of R&D tax relief, which gives an opportunity for the sector to set out what would facilitate further investment in technology and innovation. The review covers:

How the existing R&D relief schemes support R&D in the UK
Whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation
Whether the definition of R&D and the scope of what qualifies for relief remain fit for purpose
Whether current rates of relief, and the difference in rates between the two available R&D schemes, remain appropriate.

However R&D tax relief changes in the future, it is worth reviewing your spend on technology and innovation to see whether R&D tax reliefs could provide cash back into the business.

CONTACTS:

Jacqui Roberts
Associate Director
Global Employer Services – Employment Tax
Tel: +44 (0)203 219 4062
Email: Jacqui.roberts@bdo.co.uk

Katy Rabindran
Director / Innovation & Technology
Tel: +44 (0) 207 893 3193 (DDI)
Email: katy.rabindran@bdo.co.uk