What to consider when downsizing your business

Downsizing a business is never an easy task and with many businesses not performing as well as they used to as a result of the pandemic, it has become necessary for some.

In simple terms, downsizing is reducing the size of your business in a variety of ways. It’s not just about laying off employees or reducing work hours, it could be moving to smaller premises or liquidating certain assets, for example.

If you are considering downsizing, you’re not alone. COVID-19 has brought about many challenges and downsizing may be the best viable option for many small business.

What are the benefits of downsizing?

There may be a number of advantages to downsize your business and they include:

• Allow you to free up cash from existing business assets.
• Reduces overheads, allowing time for recovery.
• Provides opportunities to restructure operations and maximise efficiency.

When downsizing leads to an absence of activity

Downsizing may lead to an absence of activity for a period of time. This would have been the likely experience of businesses subject to recent lockdown restrictions.

Unfortunately, our obligation to file returns to HMRC does not end if there are no transactions to report on these returns. Three areas where this may occur (and there may be more) are:

• Filing VAT returns.
• Filing payroll returns.
• Filing CIS returns.

This may seem to be over the top, and slightly ridiculous, but our obligation is twofold, to declare any liability and secondly, to file a return to advise HMRC of the amount due, or not due.

The fact that there may be no liability to report to does not relieve us of our responsibility to file a nil return.

Penalties will apply

The reason for flagging this issue is that if we fail to make the required nil return penalties will apply.

For example, a contractor that is registered under the CIS regulations – to report and pay over any deductions from sub-contractor payments – will be required to submit a monthly return. If a month is skipped because no payments to sub-contractors was made, then HMRC will automatically send a £100 late filing penalty.

HMRC see things differently

HMRC has legislated that the obligation to file a return is, of itself, a requirement that needs to be taken seriously, notwithstanding that there may be no liability to report, and failure to file nil returns will trigger late filing penalties.

Looking at this matter from HMRC’s point of view, you know that there is no liability but the only evidence that HMRC has is that you have failed to file (and possibly are avoiding payment of liabilities).

Nothing to declare

In which case, where it is determined that you make monthly, quarterly or annual returns to HMRC, make sure that nil returns are submitted by the due dates. As far as reporting to HMRC is concerned there is no such thing as nothing to declare.

Before you downsize

Finally, before you downsize, you should seek some advice if this is viable and the best option for you.

There are a number of negatives that come along with downsizing and they include:

• If you lay off good staff with good knowledge of your business, it may be hard to replace them when things improve.
• Day to day operational struggles – It may take some time to find your feet and if business peaks it may be a challenge to deal with.
• It can be bad for public and investor relations – You may be seen as unfair for laying off staff costs or your existing clients/investors may see this as a sign your business is in trouble.

If you need some assistance with downsizing your business, we can help. Get in touch for a no-obligation discussion.