Dividend income subject to tax increases from 6 April 2016

It was bound to happen some time...

At present there are considerable savings in National Insurance contributions to be made if a minimal amount is paid as salary and any balance of a remuneration package is paid as dividends (particularly for shareholder directors of private limited companies).

From April 2016, the NIC status of dividends is not changing and therefore this strategy is still valid. Unfortunately, the income tax position of dividend income is changing and this may have a direct impact on the overall savings in NIC and income tax that can be achieved.

What’s changing?

From 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:

• 7.5% if your dividend income is within the standard rate (20%) band
• 32.5% if your dividend income is within the higher rate (40%) band, and
• 38.1% if your dividend income is within the additional rate (45%) band

Without the tax credit, a dividend income of £30,000 received in 2016-17 would create the following, additional income tax liabilities.

Comparison of tax payable on dividend income of £30,000:

Income tax due if dividend received  is £30,000	2015-16	2016-17
Dividend is within the standard rate band	Nil	£1,875
Dividend is within the higher rate band	£7,500	£8,125
Dividend is within the additional rate band	£9,167	£9,525

Based on these figures:

• if your dividend income is within the standard rate band you would have extra tax to pay for 2016-17 of £1,875;
• if your dividend income is within the higher rate band you would have extra tax to pay for 2016-17 of £625, and
• if your dividend income is within the additional rate band you would have extra tax to pay for 2016-17 of £358.

As you can see, this new tax on dividends will impact standard rate tax payers the most. In all cases any tax liabilities for 2016-17 will be collected 31 January 2018. At the same time, HMRC will also add 50% of the tax liability to your first self assessment payment on account for 2017-18, also due 31 January 2018 with a further 50% due at the end of July 2018.

We advise all readers to take professional advice to see how these changes will affect their personal tax for 2016-17. You will not need to pay addition tax due until 31 January 2018, but there may be planning options that could be employed to lessen the blow.

Don’t let doubts cloud your judgement

Cloud accounting makes sense at a number of levels, so why are some businesses still so reluctant to embrace it?

Although the benefits of storing accounting data in the cloud are now quite well established, we still see a nervousness among some clients to make the leap. It’s strange in many ways that we embrace the online world in so many aspects of our lives, but are wary of embracing it in the work environment. 

The concerns can be summarised as falling into three distinct categories.

The first objection is often around security. People imagine their data is suddenly going to be ‘out there’ for everyone to see and that their business has become more vulnerable. Stopping to think about this for a second though, many small businesses don’t have particularly elaborate security systems in place on their premises. It’s therefore quite possible the data is at greater risk in the real world than it is in the cloud. 

Before you reject the cloud, ask yourself what disaster recovery measures you have in place in the event of your data getting stolen or corrupted. Storing another copy of your accounting information gives you greater resilience if any back-up fails. What’s more, many cloud-based systems advertise ‘bank-level’ security and most of us are quite happy to check our current account or savings online.

The second line of resistance to the new technology is the concern that your accounting will now rely on 24-hour access to the internet. Can we be sure that our broadband connection is always 100% efficient? 

Clearly the reliability of web connectivity may vary by region and supplier, but we now live in a world of instant access to the web via 3G and 4G mobile technology. This means that if, for some reason, your broadband is down, you can still access the data on a smartphone or tablet rather than a desktop. Or, of course, head to another location where it’s possible to access the web. 

The third objection – and perhaps the most difficult to overcome – is simply fear of the unknown. Some people might take the view that if their accounting regime ‘ain’t broke’, as the saying goes, there’s no need to fix it. In our experience, though, many businesses have too little sense of cash flow, who exactly owes them money and when the next invoices are due. When data is collected and processed in the cloud, they can often realise how inadequate their previous systems have actually been.

If you’re able to get past your concerns, there are so many potential advantages. The user-friendly nature of the cloud packages means that you often end up saving valuable time. Free support is available and software updates are processed by the software company without any disruption.

And, of course, your accountant is able to work with you collaboratively – sharing the same screen. 

With monthly subscriptions and the ability to avoid long-term financial commitment, a move to the cloud is unlikely to prove costly and, in most cases, is less expensive than desktop accounting packages. 

Your accountant can help you make the transition fairly seamlessly, as importing data from your current systems is usually straightforward too. So there really isn’t much need for caution. It’s honestly a change that you will be delighted you’ve made. 

Why back-ups should be front of mind

It may be the end of a long day, but the inconvenience of backing up your files is nothing compared to the problems that can result from lost or corrupted data.

How often do you back up your Sage data? What if I said you really ought to be doing it every time you use the package? 

It may sound like overkill but, in the business world, your accounts information is just too important for you to sit back and cross your fingers. Once you get into a routine, you’ll probably find that the back-up process isn’t really that arduous at all.

A common issue is that data can become corrupted over time. Errors creep in. At some point, you’re likely to recognise the problem, but you then need to be able to return to the last ‘clean’ files. Although Sage has a special department which can try to resolve corrupted data, there are no guarantees and the process could cost you significant sums of money.

If you’ve been backing data up, you just need to keep reverting until you reach the point where the files are without errors. At least you then have a starting point for reconstructing your figures and don’t need to begin again from scratch.

Another thing worth bearing in mind is that Sage will prompt you to conduct a data check when you back up. We strongly recommend that you do this, as you get a snapshot of the data integrity and the system will highlight any potential problems. There’s not much point, after all, in backing up data which is already problematic.

So what role should accountants play in all this? It’s certainly true that when there’s a crisis, clients will often go to their professional advisers and ask whether they have kept their own back-up. You may be lucky, but the reality is there’s no obligation for the firm you retain to be doing this kind of work on your behalf. 

Our advice is therefore to back up to a memory stick, external hard drive or to a server. And once you’ve completed your back up, it’s always worth browsing to the destination and checking the files really are there! You can even try restoring them if you want absolute peace of mind, just to make sure that nothing would go wrong in the event that you needed to re-import them in an emergency. 

Increasingly, of course, there are more options to back up in the cloud, via services such as Google Drive and Dropbox. While this is undoubtedly useful, it may be that you’ll feel most comfortable having the data copied locally too. In the world of IT, a belt and braces approach is almost certainly best.

Pensions come into their own

If you’re a business owner who’s ignored pension provision until now, the new regime should make you sit up and take notice.

In the past, it’s been hard to persuade some small business owners to take pensions particularly seriously. Many may have had other investments and will have been relying on them to produce a suitable income in retirement. The restrictions in the pension rules and what you were able to draw down was certainly a psychological obstacle for a number of people.

Since the change in the regulations earlier in 2015, clients have definitely been taking more notice and have been actively reviewing their options. Some have decided to increase their company pension contributions, restrict their personal income and take tax-free cash straight away. As it’s possible to go back three years in your calculations, contributions per individual can be maximised.

When you put in additional pension contributions and draw tax-free cash, it may be possible to preserve your personal allowance for the current year. What’s more, by reducing your income, you may find yourself going down the marginal tax bands.

The company gets relief on the contributions and individuals are entitled to draw up to 25% of the fund as a tax-free lump sum. (If you draw any income, you restrict the amount you can pay into pensions in the future.)

Another point worth making is that the pension fund can be quite a useful and low-cost life assurance vehicle. That’s because if you die under the age of 75, the proposals are that the full fund will go tax free to any nominated beneficiary. 

In some instances, it may be possible for a pension scheme to purchase a commercial property from the individuals that currently own it, effectively releasing equity into their own names. As well as helping with cash planning, this strategy can also reduce exposure to inheritance tax.

So now, with the new regime in place, there are plenty of interesting talking points. Pensions are a more important part of the equation than ever because of the increased freedoms. 

With changes to dividend rules coming into effect in April 2016, we expect to be having even more conversations with clients who are looking at this issue in a new light.

How mums can give birth to new businesses

It’s definitely possible to achieve business success while raising a family.

It’s easy to think that being a mother and owning a start-up business are incompatible. Anecdotal evidence, however, suggests that the phenomenon is becoming more and more common.

Our advice is that if you have a good idea and the confidence to pursue it, you should follow your instinct. Don’t automatically assume that having a young family is going to stop you.

Of course, there’s a need for discipline if you’re going to balance work with family life. If you’re not organised and efficient in the way you work, then you won’t be able to achieve a sense of equilibrium. But it’s usually a matter of working smarter rather than working longer.

Are you generally flexible and adaptable? If so, you’ll be able to deal with the unexpected, which is an inevitable part of running a successful business. Looking after kids may demand many of the same skills, in fact! 

It’s important that you set the terms. You need to work in a way that suits you and shouldn’t think that what someone else has done is necessarily a good model. This is a personal balancing act.

Finding a good accountant and taking their advice is a critical first step. They will advise you on how to get started, the different structures you might consider and the way in which you’re going to remunerate yourself. They’ll also have plenty of advice on potential pitfalls. 

At a practical level, your professional adviser can take charge of admin such as book keeping, payroll, VAT and tax. All responsibilities which can often become a troublesome burden for a fledgling entrepreneur.

So don’t let being a mum stifle your business ambitions or creativity. There’s plenty of help out there and you can make it work.

Changes from the Chancellor

After the July Budget we sift through some of the headline announcements. 

It is, of course, human nature.

Every time the Budget ticks around, we try to work out whether we are better off as a result, or whether we feel as if we’ve been kicked to the curb once again. 

The recent ‘Stability Budget’, delivered on 8th July, was no different, with some potentially major changes being introduced. Post-election, it wasn’t the time for the crowd-pleasing penny-off-the- price-of-a-pint to appease the red-tops. Instead, the Chancellor has given businesses right around the UK something to think about.

The biggest headline grabber was the future cuts in the rate of Corporation Tax. A limited company’s taxable profit will be taxed at 19% for the financial years beginning 1st April 2017, 1st April 2018 and 1st April 2019, and then at 18% for the year beginning 1st April 2020. The 2% reduction is, in real terms, a £1,000 reduction in the tax liability per £50,000 of taxable profit.

Although the figures may not seem ground breaking, they need to be viewed in conjunction with further changes that were announced. The success of Annual Investment Allowance since its introduction back in 2008, has led to its further extension. With the limit having been due to drop to £25,000 from the current £500,000 at which it is set, many welcomed the news that the figure will now, in fact, be £200,000 with effect from 1st January 2016. This means that the first £200,000 (barring transition rules) that a company spends on capital items can be deducted in full against their taxable profits.

One final piece of good news for companies, and employers in general, was the extension of the Employment Allowance, which is now in its second year. The Chancellor announced that from April 2016, it will be increased to £3,000 from the current £2,000 level. This means that an employer can save £3,000 from their National Insurance bill in a tax year. The criteria have been tightened to allow for the increase though, with schemes where a company director is the sole employee no longer being eligible.

More than ever, it’s now a time for business owners to be looking into the changes that are afoot, deciding on the possible ramifications and trying to take full advantage of any opportunities arising as a result. If you are unsure of how the changes might impact your business, take the time to give your accountant a call. They would love to discuss possible growth opportunities with you.

The transfer window is now open

Tax year 2015-16 has seen a change which could save some basic-rate taxpayers more than £200. JODIE STREET explains how the Married Couples Transferable Allowance works.

The essential idea behind the Married Couples Transferable Allowance (Marriage Allowance), introduced in the 2014 Budget, is pretty straightforward. Where one spouse is a basic-rate taxpayer and the other is not using their personal allowance in full, up to £1,060 of their personal allowance can be transferred between the two. This can result in a potential tax saving of about £210.

When we look at the detail, it’s a little more complex, of course.

First of all, as you would expect, people applying for the transfer must be married couples or civil partners, who are basic-rate taxpayers or not using their personal allowance. They must be born after 1935. If not, the Married Couples Allowance would apply. Normally, they must be UK residents too. 

There are, however, groups of transferors who are entitled to a personal allowance for a reason other than being a UK resident. (These include being a national of an EEA state, a resident of the Isle of Man or the Channel Islands, someone who has been employed in the service of the Crown and various other categories.) In such cases, their income must be taxed at the basic rate using the hypothetical net income calculation.

How is this calculated? We assume they were UK resident for the full tax year concerned and were domiciled here in that period (worldwide income and gains included). We also assume that they weren’t deemed non-resident by a double tax treaty and that they have made any available claim for double tax relief on income and gains. If their income isn’t in sterling, it’s calculated using the average exchange rate for the year.

Getting the timing right

The couple involved in the transfer must be married for the full year or part of the tax year, as well as at the time of election. The transferor must elect for the transfer within four years of the end of the tax year concerned. 

If the election is made in the tax year to which it relates, it continues for as long as the qualifying conditions are met, unless it is withdrawn or the couple divorce. If the election occurs out of the relevant tax year, on the other hand, it only affects that year and the individual must apply separately for other years.

Remember, you are only entitled to one allowance per year, even if you are married twice to separate spouses in that period! If you do have more than one spouse, you can only give the allowance to one of them.

You can register your interest by visiting https://www.gov.uk/marriage-allowance and HMRC will then invite you to apply via an email link. It’s the person who is transferring their personal allowance who must apply. You will need your NI number, as well as that of your partner, and must be able to prove your identity online. Even if you make the application during the course of the year, it will apply to the whole of 2015-16.

A faster, better DNG App is born

Download the DNG App (or update your existing one) today and discover significant improvements throughout the App. Hundreds of amendments and improvements have been made – here are just a few of the more obvious ones you can enjoy: New platform means the DNG App is much, much faster

• Increased ease of navigation 

• Calculators updated and layouts improved

• GPS mileage tracker quicker with improved reliability 

• Improved photo receipt manager to log your expenses ‘on the go’ faster than ever with auto-populating VAT, receipt date and a ‘My Settings’ feature added

• Income tracker added 

Download it today here:

For Iphones/Ipads via the App Store on Itunes

For Android devices via Google Play

We hope you enjoy the improvements – feel free to pass the App around your friends and colleagues with our compliments.

Free up your time with professional, strategic support.

Many professional services firms – including accountants – employ a ‘practice manager’ to oversee and co-ordinate their work. Plenty of companies in other sectors could benefit from exactly the same kind of approach.

An increasing number of accountancy and legal firms now employ a Practice Manager to look after the day-to-day running of their business. It’s a recognition that it’s very difficult to focus on the priorities of clients and to deliver a seamless service, unless you have someone working behind the scenes to make sure that everything is running efficiently. 

In simple terms, the Practice or Operations Manager makes sure that whatever the business and its clients need, the structures and processes are in place to make it happen. This could involve anything from recruitment of staff through to creation of a robust IT infrastructure, management of front-of-house reception and the preparation of disaster recovery plans.

The sheer importance and variety of the role makes it highly strategic. How do we respond to regulatory requirements, for instance? What is our tolerance level for risk? And how can we make sure we manage our finance, insurance and facilities in the most effective way possible?

If you’re choosing a manager to oversee operations in your own business, my recommendation would be that they are an inquisitive person. Someone who looks at numbers and is able to see the underlying trends behind them. The chances are that they may come from an accountancy background and will have real attention to detail, along with an almost instinctive ability to spot opportunities to reduce costs.

Remember, if you’re working too much in the business, you’re not working enough on the business. It’s a scenario which is repeated across many growing firms. Eventually, this is likely to translate into poor profitability and low cashflow. That’s why an investment in an operations manager can make sense for any expanding company.

Is there a magic threshold or size at which you decide to act? Not necessarily. One company with a £2m turnover might be very different from another. I would make your judgement on the basis of the complexity of your business. Once the demands of running the firm efficiently are starting to undermine your ability to focus on your core role, then it might be the ideal moment to find someone who can take a lot of the burden off your hands.

Start planning for the future with your accountant

Accountants do a lot more than simply crunch numbers. They can be trusted partners who’ll help you draw up a compelling business plan.

In the past, business planning was not an essential part of life. The small businesses we dealt with didn’t recognise the importance of looking forward and planning for the development of their company. 

Times have changed and, today, business planning is very much an essential part of corporate life. Why the transition? Well, the most common reason to prepare a plan is to explain your business priorities, capabilities and ambitions to an external lender, such as a bank. In an era of reduced access to finance and the application of rigorous lending criteria, a professional approach is absolutely essential. 

A business plan is, however, important at other levels too. It is an essential business management tool which provides a structure and guidelines for the running of your business.

From our point of view as professional advisors, assisting clients with the preparation of their plans is an ideal way of developing a close relationship with them and their staff.

The preparation of a business plan naturally involves financial information, but it also enables us as accountants to show that we are business advisors with commercial awareness, rather than simply number crunchers. A well-written plan will get behind the numbers. It will include comments on the aims and objectives of the business, as well as the personal ambitions of the owners. We will make reference to the key people in the organisation, the state of the company’s assets and planned capital expenditure.

A good plan will include observations on marketing strategies and risk management – the latter being an essential part of today’s business life. Working with clients to produce a business plan is therefore a highly rewarding and fulfilling exercise. It is also an excellent way to demonstrate how chartered accountants are trusted business partners for their clients.

Why trusts are giving way to Family Investment Companies

For people with significant wealth, Family Investment Companies are now a more fashionable way of planning for the future.

Trusts have for many years been an option when looking at tax-efficient ways of planning for the future and helping children and grandchildren. Recent changes, however, have limited what you’re able to put into trust – in most cases to £325,000 in a seven-year period. This is one of the reasons we’re seeing more and more interest in Family Investment Companies (FICs) today, despite the fact that the concept has actually been around for many years.

To start with, just think of a FIC as a company, into which you can build different shares, rights and restrictions. It doesn’t have to trade. It can just hold different assets as an investment and it might be possible to transfer an existing portfolio of investments into your FIC, depending on whether this creates any tax charges.

So why bother? Well, assets can grow and income then becomes taxable within the company at 20% rather than at the higher rate of income tax. With certain investments – dividends from most other companies, for instance – no tax is payable at all within the FIC. You can choose then whether you want to take some income from the FIC, which shares dividends are declared upon, or perhaps you simply “draw down” some of the loan you used to set it up.

There are, of course, some downsides. You have the costs and administration associated with setting up a limited company and, in theory, your accounts are a matter of public record, which anyone is free to inspect. It could be that in the longer term, if the company pays tax on gains and you then take that out as a dividend, that you could pay more tax overall, and obviously tax rules can change in future.

So setting up a FIC isn’t necessarily an obvious and straightforward decision. I recommend doing the due diligence beforehand, and sitting down not only with your accountant, but also a financial adviser and a lawyer. There may, for instance, be implications for your will and you do need to decide when setting the FIC up who you want to be shareholders, and what benefits you want each person to get in future. By and large, however, savings in income tax will often outweigh the potential risks, and there can be longer-term inheritance tax savings too.

Here are some frequently asked questions:

How do I fund an FIC?

If you create a large director’s loan account, the company founder should be able to withdraw funds in later years with no tax implications. You may want to partly fund by loan and partly fund by share capital.

How does the tax position compare between assets I hold myself and in an FIC?

Corporation tax is currently 20% (income tax up to 45%) and there’s no tax on UK dividends received in a FIC. There are some other benefits that companies can take advantage of, as well as the differing tax rates.

How is an FIC structured?

A lot depends on what you want to achieve – one of the great aspects of FICs is they are so flexible. You may have a founder shareholder, for example, who keeps tight control over the FIC, and then different classes of shares for each family member, allowing flexibility over dividends and future asset growth. 

You could also still use a family trust – many FICs have trusts as shareholders. As noted earlier, there is a great deal of choice when setting a FIC up.

Prepare to share

Before May’s election, many businesses were uncertain about whether they would pursue shareholder status for key employees. Since then, there has been a definite flurry of interest.

One initiative of the Coalition government back in 2013 was the introduction of ‘employee shareholder status’ or ESS. With Labour signalling that it was likely to scrap the provision – which allows staff to trade employment rights for equity – there was relatively little take-up. But with the election of a majority Conservative government in May 2015, companies now have a reasonable degree of certainty that the policy is here to stay.

The essential idea is that a business owner may want to tie in employees by giving them shares. The new regime allows employers to do this in a tax advantageous manner.

For example, you might want to reward a particularly impressive Finance Director and ensure that she stays for the long term. You issue new shares to her and she pays nothing for them, as the ‘consideration’ in legal terms is created by giving up certain employment rights (see below).

These shares must be worth a minimum of £2,000. If that’s all you choose to offer, no income tax is payable by the recipient, although if you offer more, tax is due straight away on the amount above the £2,000 threshold. (While this charge obviously belongs to the individual, it’s perfectly legitimate to offer a bonus that would help to compensate the employee for the upfront bill.)

If the amount you offer is worth more than £50,000, there are restrictions on the tax advantages. There is no tax on sale at exit up to this cap, but if the shares were worth, say, £100k when they were first offered, only half would be tax free on disposal.

Although valuation is obviously a very difficult issue in many businesses, it is possible to agree figures with HMRC up front to avoid any potential dispute. It’s important to work closely with your accountants, who will be able to make the calculations – there is a prescriptive process to go through with HMRC in order to get this agreed. 

A tax-free exit can seem very appealing and the owner may be looking to part with fewer shares than they would otherwise have to. It’s worth bearing in mind that entrepreneurs’ relief only applies if someone has 5% of the company, whereas under ESS they can have a smaller % and pay 0% on an exit, not 10% under entrepreneurs’ relief.

What rights does an employee give up as ‘consideration’ for shares?

• Unfair dismissal rights (unless the dismissal is related to discrimination or health and safety)
• Statutory redundancy pay
• The statutory right to request flexible working (with the exception of the two weeks after return from parental leave)
• Certain statutory rights to request time off to train

Other rights, including statutory sick pay, paid annual leave and maternity/paternity leave, remain in place.

So it’s not for everyone, and clearly as an employer you are giving away equity if you do this, but one advantage of ESS is that it is very flexible and there are not the restrictions over which type of company can do this, which there are with a number of other tax favoured schemes such as the enterprise management incentive scheme.

A holding company? There may be no reason to hold back.

If you thought the formation of a corporate group structure was just for big multinationals, it’s time to think again. It’s a serious option for much smaller businesses too. 

When a limited company has built up a significant amount of wealth on its balance sheet – perhaps three quarters of a million pounds or more – and it has a large value of fixed assets, the option of creating a holding company becomes something worth exploring.

Although the formation of a ‘group’ is something you’d more normally associate with large, blue-chip corporations, there’s certainly no reason in principle why smaller companies can’t take advantage of the structure too.

When you create a holding company, you can move spare cash and fixed assets into it from your trading company. The holding business can then rent the fixed assets back to the original company, buying any new assets itself. 

Each year, dividends can be paid to the holding company, which is allowed to set up its own directors’ payroll scheme and pay your executives, while charging the trading company for its services. 

There are a number of potential benefits to this approach. 

First of all, the business owner’s wealth, which has been built up over the years, is protected from a potential disaster such as losses from under-insurance. Creditors can generally only come after the trading company. You may also be able to maintain greater privacy over directors’ remuneration and possibly qualify for a less arduous audit regime. 

It’s worth noting too that the creation of the new holding company gives you an opportunity to bring in new shareholders and buy existing ones out. 

But do watch out. The new company structure will involve an increased admin burden in relation to year-end accounts, VAT, insurance and so on. And if you end up reducing your trading company’s balance sheet, there may be a short to medium-term hit on your credit rating. But, if you do have spare cash and are paying your creditors on time, this might not be such a big deal.

As you can see, there are likely to be pros and cons of the new arrangement, so the best thing is to talk the options through with your professional advisers. They will be able to look at your specific circumstances and give you appropriate guidance.

Banking on the right decision

You need heavy-hitters on your side when you approach a bank with a view to getting finance for investment.

When a client needs to persuade a bank to make a substantial investment in their business, we always recommend that they get their professional advisers involved at the earliest possible stage. Unless you have your accountant on board and get some support in presenting your case, there’s a danger you may end up shooting yourself in the foot.

Banks can be notoriously difficult to impress and can fall back on a tick-box mentality when it comes to deciding on finance. They’ll look at the recent figures and overheads, but can fail to take into account the bigger picture and the great opportunities that can come with investment.

Even with our involvement, the process of convincing the bank isn’t always easy. Different potential funders often ask for information in varying formats. Sometimes banks – despite the preparation of a detailed business case – seem as if they don’t quite ‘get’ it. 

As well as a paper analysis of where the business is heading, you may need to support your pitch in other ways – video that demonstrates the advantages of technology, for instance, and tours of the current facilities. 

It’s also important to set out your stall right at the beginning. Ask the bank’s local representatives whether they are actually able to make a decision. If you know the green light will have to come from someone further up the hierarchy, politely request that they come down to your client’s site and have a face-to-face meeting. 

At the end of the day, a successful request for funding is going to come from a partnership. On the one hand, there’s your expertise and knowledge about your business and market place. On the other, there’s the guidance and advice of your accountants and other advisers, who know from experience the best strategies to employ during the negotiations.

Five ways to measure business health

Keep on top of how well your business is performing by monitoring five key indicators.

There’s an old adage in accountancy: turnover is vanity, profit is sanity and cash-flow is reality. It’s a way of saying that there are numerous measures you can apply when measuring the financial health of your business, but it’s often good to have a rounded picture.

Too often, in a lot of smaller businesses, owners see the annual accounts process as a necessity to satisfy HMRC and possibly their bank. For that reason, it can be left to the last minute. In effect, this can often be nine months after the end of a particular accounting period. So by the time they get an insight into how well their company is doing, the information is no longer up to date.

My advice is to talk to your accountant about receiving management accounts on a monthly or quarterly basis. Then, you need to start looking at the following key indicators:

CASH-FLOW

Everyone talks about it, but how many people really understand its importance? The balance of the money flowing in and out of the business needs to be positive and you can only achieve this with accurate, up-to-date forecasting. You can then start to analyse the reasons for any discrepancies between the projections and your real figures. 

TURNOVER 

Again, here you should be interested in any differences between your projected turnover and the actual figures. If there are variances, it’s worth having a discussion with your accountant and talking through the implications.

GROSS PROFIT

In a nutshell, your gross profit margin is your income, less cost of goods sold. If this figure isn’t high enough, you won’t be able to cover your overheads and make yourself a profit.

OPERATING PROFIT 

Your operating profit figure is your gross profit less your overheads, but will exclude tax and interest. If this figure is too low and you haven’t yet taken money out of the business, you may have nothing to show for your endeavours.

NET PROFIT

This is your total income, less all expenses including interest and tax.

With cloud accounting now becoming increasingly common, it’s actually possible to monitor all these critical indicators in real time. This means you can make comparisons to the same period last year and see whether any improvements you’ve made to your business practices have achieved results. Contact us now to find out of a switch to the cloud would benefit your business.

Forget the Lamborghini. Park yourself in front of an IFA

New pension rules aren’t just about people acquiring fancy sports cars, they also have big implications for financial planning. 

Much of the coverage in the press about the new pension reforms has been a little bit caricatured. There has been a lot of focus on the ability of savers to cash in and buy a Lamborghini, which probably won’t be top on the list for most people approaching retirement. Considerably less has been said, however, about how the new rules affect financial planning.

In the past, when advising clients on retirement and how to structure income, we have been confronted with a restrictive set of rules. The key factors were the tax implications – both during the retirement period and at death. We didn’t have a great deal of flexibility. There might have been situations where it would have been appropriate to strip out the pension to reduce the pot before the client died, but this action had serious income tax implications.

Things have now moved on, as a worst-case scenario at death is now perhaps a 45% charge, where the figure might once have been as high as 82% or lost entirely with annuity purchase. So leaving your money in your pension pot is not necessarily such a bad thing anymore. Pensions should be considered as part of mainstream unencumbered assets, which you can use as an income source and valuable tax planning ‘wrapper’.

Using your pension fund alongside other investment wrappers such as ISAs, you’re able to maximise net spendable income for the smallest amount of capital spend. Since the advent of the new rules, we may choose to take less out of a fund in many circumstances and make use of other assets for income, protecting the pension fund to pass it on to the next generation.

In short, we’re being presented with a great opportunity to maximise client assets. We can now plan more efficiently in relation to tax, capital preservation, succession planning and income. So if you’re keen to live a better lifestyle and pass on more to beneficiaries, then it’s definitely important to start a conversation with one of our independent financial advisers.

Back to the future

The best way to avoid end-of-year panic is to think about reverse planning.

Planning your tax year in reverse sounds like a strange idea, but that’s exactly what I advise my clients to do if they want to avoid unnecessary stress. Very often, they’re trying to do things at the last minute, when they really should have thought about them a lot earlier e.g. making best use of tax allowances, reliefs and exemptions. 

Take married couples, for example. On 6th April, new rules came into force that allow one spouse or civil partner to transfer 10% of their personal allowance to their other half, providing that neither of them pays tax above the basic rate. It’s a good opportunity in a situation where one partner has a low income and would otherwise have wasted their allowances. It does involve contacting HMRC immediately though and asking for the allowance to be transferred and tax codes to be updated.

And what about the child benefit charge? When one member of the family has an ‘adjusted net income’ of £50,000 or more, the benefit starts to reduce. And once the income exceeds £60,000, you lose it altogether. That could mean a gap of up to £1,800 a year if you have two kids. But if you think ahead and plan, the limits can be extended – through personal pension contributions, for instance, or gift-aid donations.

There’s another planning opportunity worth mentioning too. In April, the starting-rate tax band increased to £5,000 and the rate went down to zero. If you are a married couple or civil partners and you have relatively low pensions or earnings, but a higher amount of investment income, you need to consider your options. You could for example receive pensions to the value of around £10,600 and another £5,000 in gross interest without paying tax.

If you talk to your accountant at the earliest possible stage, you’re always better prepared to take advantage of opportunities. So don’t end up with a last-minute scramble. 

When you're saving, look for extra savings

Whether we’re young or old, the government is keen to encourage us to save. Interest rates, however, are at a record low, so it’s important to look for every possible advantage or tax break you can find. We explore the potential of the new savings allowance.

Many people know about the NISAs or new ‘super’ ISAs that have been introduced, which should allow people to save up to £15,240 a year tax free in 2015-16. Savings allowances tend to receive rather less coverage in the press and on the TV and radio, however. While it’s true to say that the amounts involved are relatively small, they’re certainly not insignificant. Particularly if you’re someone who is on a modest income.

Up until the end of the 2014-15 tax year, some people with savings income of up to £2,790 would have it taxed at 10% rather than 20%. In a bid to boost savings, the government has pledged a £5,000 gross savings allowance for people with an income of up to £15,600 (the combined total coming from the savings and the personal allowance of £10,600).

To put this in tangible terms, this takes you from a maximum saving of £279 in the last tax year, to a £1,000 in the year head. Certainly not be sniffed at.

If you’re someone with earnings of, say, £12k, all your savings could be taxed at zero per cent, provided the combination of your salary and/or pension and your savings is under the £15,600 limit. On the other hand, someone who earns more than £15,600 can’t benefit at all.

In a scenario in which you have a £14k income, but your savings take you above the threshold to perhaps £18k, it’s possible to claim a tax rebate on the sum between £14,000 and £15,600, but this has to wait until your self-assessment tax return, or form R40. If you fall neatly under the cap, however, you can register to receive interest paid gross.

All in all, it’s important to make the most of the allowances that are available and maximise the amount that’s due to you. If you’re trying to make a retirement income stretch further, for instance, it’s vital to keep up to date with the changes that are taking place. They’re definitely to your advantage.

Don’t let customer debt get you down

You've identified a potential bad debt. You've sent the friendly reminder, the follow up letter seven days later. You've then phoned two or three times and sent a final notice. Still no joy. Where does it go from here?

It’s a familiar scenario for lots of business people. What seems like a slightly overdue payment is starting to turn into a troublesome debt. You don't particularly want to start formal legal proceedings, as they've been a customer for some years but you're getting increasingly frustrated. 

The phone rings. It’s the customer telling you about their cash flow problems. Things will apparently be resolved next week, so you agree to give them more time. But next week rolls around… nothing. The following week... still nothing.

You are now getting increasingly worried. You might be a key supplier and of course you could place their account on hold, but that could make the situation worse and actually reduce the prospect of payment. What you need is for the customer to engage with you. 

A good first step in this scenario is to speak to your accountant. If they are not themselves an insolvency practitioner, the chances are they will have a good working relationship with one. When they are instructed by a creditor, they will write to the debtor to advise that they have been consulted. The message is usually that failure to either make payment, or provide an acceptable and deliverable payment plan, may result in the creditor taking matters to the next stage, which could ultimately be an insolvency event.

By issuing an unambiguous statement of intent, you make your position clear to the debtor and in doing so you'll invariably find they'll try to prioritise payments to you.

The involvement of a third party in these circumstances will often produce the desired result. If not, then an assessment would have to be made to ascertain whether it's financially viable to pursue matters further.

If you find yourself in this situation and would like to discuss your options, the best thing is to contact your accountant initially. Appropriate action can then be advised on a case-by-case basis.

Invest now and reap the reward

With the general election just around the corner, there’s an element of uncertainty over how the tax regime will change. Now may be an excellent time for businesses to make investments in fixed assets.

 

In their Green Budget published earlier in 2015, the Institute for Fiscal Studies analysed the growth in overall tax take following general elections. Perhaps unsurprisingly, the think-tank found that there was a strong tendency for taxes to be hiked in the period following the poll.

 

One area which may come under scrutiny when a new government is formed in May is the Annual Investment Allowance (AIA), which gives qualifying businesses 100% tax relief on the purchase of qualifying fixed assets. The allowance covers most items of capital expenditure although two notable exceptions are building structures and cars. 

 

The AIA is an allowance which has never been so good, as the cap is currently at £500,000 – a figure many small businesses are unlikely ever to approach and which offers a lot of scope for larger enterprises too. 

 

The policy is understandable in the aftermath of the recession, as it’s an excellent way of stimulating investment and boosting the wider economy. But the increase is only temporary and is due to expire in December 2015. The Chancellor announced in his Budget speech, delivered on 18 March 2015, that it “would not be remotely acceptable” for the AIA to reduce to the previous limit of £25,000 and that a new limit will be set at “a much more generous rate”. 

 

This leaves business owners with uncertainty as to the level of revised AIA commencing January 2016. The Chancellor indicated a better time to address this relief will be in the Autumn Statement. So we are all left waiting…

 

The UK economy is generally a lot stronger now than two or three years ago. It’s a time when investment is on a lot of people’s agendas. Our strong suggestion is that if you are considering making capital investments in the near future, it might be best to move ahead now, while you can maximise your tax advantage within the published regime. 

 

You may be one of the many business people who is familiar with the idea of the AIA, but not necessarily keeping a close track of the changes in the cap rate. If so, it’s time to talk to your professional adviser about getting the most out of your allowances while the rules are stacked in your favour.

Self Assessment: don’t leave it all to the wire

If you’re relying on your accountant to help you with your self-assessment tax returns, the earlier you’re able to get organised the better.

As accountants, we always like to be proactive and remind clients of the need to get their records, receipts and other relevant information ready as far as possible in advance of their filing deadlines. Inevitably though, pressures of business and life can get in the way and the records only arrive as January 31st looms.

 

Of course, any professional accountancy firm will do their best to turn things around speedily, but it’s not an ideal scenario from anyone’s point of view for things to be done last minute. At that point, for some clients, will come the realisation that cashflow isn’t good enough to cope with the imminent tax demand and there is no time left to budget for the liability. 

 

If you’re able to get ahead of the game, you’ll not only avoid last-minute panics and the danger of possible surcharges and interest for late payment of tax, but you may well have the opportunity to spend some time discussing tax planning options with your accountant too.

 

Another issue is that a last-minute rush may mean your accountant can’t always plan resources effectively. If your tax affairs aren’t that complex, it might be that a relatively junior member of staff can happily take on the work but if they’re already allocated to other projects, a more senior accountant may be needed. Many firms like DNG will do their best to avoid penalising clients financially and even discount senior rates but you want to be certain about the fee level you’re going to pay and help yourself avoid any nasty surprises.

 

So the message is to think ahead and give your accountant a call. See if you can get your adviser the information they need early enough to recalculate any payment on account you have to make in the summer. It may well be that reducing your July payment is worth considering, especially if your income is down on the previous year and accounts have been prepared early which confirm this. For employees who file self-assessment returns, your reminder to take action could be as soon as you have received your P60. 

 

We can then consider the tax that will be due the following January and you can start to budget based on your cash-flow projections. It’s a common sense approach, which will allow both you and your accountant to sleep that little bit easier each New Year. 

A new start with the one-stop shop

VAT rules changed on 1st January this year and there are important implications for businesses supplying digital services to consumers outside the UK. DNG Dove Naish’s Business Edge Manager, ROB BURNELL, brings us up to date.

 

As part of a strategy to create a level playing field across Europe, rules about VAT on digital services have recently changed. 

 

Instead of accounting for VAT in this country when selling to consumers, you need to account for it in the country the customer is based. And while in the UK there’s generally no obligation to register for VAT unless your turnover is £81k or above, there is no lower threshold when you’re supplying services to consumers in another EU member state.

 

The change has led to a considerable amount of commentary on social media, particularly as many people thought that they might need to account for VAT on everything they sold, just because of one or two incidental sales of digital services supplied overseas. This isn’t, in fact, the case. 

 

It’s true that a UK VAT registration number will be needed, as this allows you to sign up for the new VAT Mini One Stop Shop (VAT MOSS) platform. But once you’re on the VAT MOSS system, you can account for the tax in any European country via one return and you don’t need to pay VAT on sales within the UK unless you go over the £81k turnover figure.

 

A statement was issued by HMRC in December 2014, attempting to make the situation crystal clear:

 

“If you make taxable supplies of digital services to customers in other EU member states, and your UK taxable turnover is below the UK VAT registration threshold, you may use the VAT MOSS to account for the VAT due in other EU member states but you do not need to account for and pay VAT on sales to your UK customers.”

 

It’s important to remember that the new rules only apply if your services are being bought by consumers. There are different regulations in place to account for VAT in business-to-business transactions.

 

The term ‘digital services’ is obviously fairly broad and covers everything from telecommunications and broadcasting and e-services. It’s the latter category that is perhaps most likely to affect smaller businesses, which may be involved in selling apps, music downloads, e-books and games. (The definition of an e-service is one which is fully automated and requires little or no human intervention.)

 

If you’re supplying a service of this type, there’s an onus on you to identify the country in which your customer is based, so if your website currently doesn’t gather this information, it’s something you need to address. 

 

You then have to account for VAT at the rate applicable in the customer’s location. That’s where the VAT MOSS system is going to prove useful, as it simplifies the process and means that you don’t have to register numerous times in different jurisdictions. 

 

Although your accountant can’t take responsibility for the actual registration on VAT MOSS, they’ll be able to guide you through the process and can file returns for you once you’re set up.

How to boost businesses tax efficiently

Investing in smaller, start-up businesses can be more risky, which is why the government offers tax incentives through specialist schemes. 

When you’re selling a business or shares in a qualifying company, it’s fairly well known that it’s possible to claim entrepreneurs’ relief, which will help limit your capital gains tax liability to just 10%. What’s more, if assets are being sold because you need to replace them, you may be able to avoid CGT liability with an application for ‘rollover’ relief.

As the economy picks up, it may be that you’re looking to dispose of investments or non-business assets which are increasing in value. The problem is that, if you’re a higher earner, your gains will be taxed at 28%. Unsurprisingly, many clients ask whether there might be a way of lessening the blow. 

One tax-planning option is simply to use your spouse or civil partner’s annual exemptions, as well as your own. It’s usually a sensible approach, but the savings are never going to be huge. The joint maximum figure will be £22,000, so the most you can save is approx. £6,000. Also, if your spouse or civil partner does not already use the whole of their basic rate tax band then it might be possible to reduce tax on part of the gain to 18%.

Another possibility is that you take advice from an IFA and consider options such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which are designed to encourage support for small, unquoted companies.

The government recognises that if you invest in up-and-coming businesses, there’s a greater degree of risk attached, which is one reason why they offer relief on both income and capital gains tax, provided certain conditions are met.

With EIS, where the maximum investment is £1m, you can obtain 30% income tax relief on the total amount invested in the tax year (which can also be carried back to the previous year, if preferred). Remember, you can’t have been an employee or director of the business and your interest in the company must be less than 30%. The relief is deducted from your income tax liability, which can be reduced to zero, but no further.

On the capital gains tax front, you can defer payment by reinvesting in EIS shares up to one year before – or three years after – your liability arises. In fact, the tax can be deferred until the point you dispose of the EIS shares and can be deferred again if you make a new EIS investment. If the gain is still deferred at the time of your death, then it won’t come back into charge. What’s more, EIS shares are themselves exempt from CGT on their disposal, provided income tax relief was obtained on the investment and you have held them for a minimum of three years.

SEIS was introduced in 2012 and is designed to support companies that are perceived as slightly riskier investments. If shares are acquired within two years of the business starting to trade, 50% income tax relief is available on the total amount invested in the tax year (or, again, a previous tax year if that’s more desirable). In this case, the maximum investment is £100,000, providing relief of up to £50,000, which is deducted from your income tax liability. As with EIS, it can only be used to reduce your tax liability to zero.

SEIS shares can be exempt from capital gains tax, but the gain and the SEIS investment must be made in the same year, subject to limited carry-back rules. A difference with EIS is that up to 50% of the gains reinvested in the SEIS are exempt from CGT rather than simply being deferred.

The investments mentioned above can in some circumstances have Inheritance Tax advantages but that should be considered as part of a larger IHT planning exercise.

You can, when you plan…

Time is ticking away if you want to do some serious tax planning in this financial year.

 

With a general election on the horizon, taxation – and each party’s various policies regarding wealth – will be high on the agenda in the coming weeks and months. You may therefore be forgiven for thinking that the money that remains in your pocket is entirely decided by those in power. In reality, you might be more in control than you imagine. 

 

At this stage, we can only guess what changes to legislation will be introduced in the future. As such, planning can only be based on the here and now, starting with the approach of the end of the tax year. 

 

It’s hard to believe, so soon after the 31st January self-assessment bombardment, that there are only two months remaining of the 2015 tax year to plan and adapt.

 

Tax planning itself will vary in complexity between individuals, but there are a number of things that we all should look at before 5th April 2015 in order to ensure we don’t miss out:

 

 

Individual Savings Accounts (ISAs) 

 

Have you taken advantage of your full annual entitlement to these tax-free accounts? The regulations for 2014/15 were relaxed last summer, meaning that you have an annual allowance of £15,000 which can be invested however you choose. The ability to select between cash and/or stocks and shares gives you much greater flexibility than ever before.

 

 

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) 

 

Investments in these schemes may bring an increased risk, but the tax breaks are attractive. Is now the time to consider whether the relief offered is worth the additional risk?

 

 

Pension Contributions 

 

Have you used your full annual allowance of £40,000? Is there any unused allowance from the previous three tax years that you could take advantage of too? Remember, relief from 2011/12 tax year must be used by 5th April 2015.

 

 

Personal Allowance 

 

With a tax free earnings allowance of £10,000 per person, it may well be that planning between spouses is necessary in order to obtain maximum advantage. At the other end of the scale, the personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000, giving nil allowances to an individual earning £120,000 or above. Could your adjusted net income perhaps be reduced via pension contributions and gift aid?

 

 

Capital Gains 

 

Remember to make use of your Annual Exemption of £11,000 before the end of the tax year. This exemption is per individual, so think carefully about the ownership of any assets that you intend to sell.

 

 

Capital Allowances 

 

Consider the timing of asset purchases. Would it be beneficial to buy earlier, in order to take advantage of the allowances at the earliest possible point in time?

 

 

It’s easy to see that it’s a really great time to take careful stock of your finances, but the suggestions above are only a starting point. Are you doing everything that you can to help yourself? Why not sit down with your accountant and draw up a plan for maximum tax efficiency?