Taxing times for business owners

These are taxing times for business owners. Despite the narrative from some political parties that business has had an easy ride, for small businesses at least, this is far from being the case. Let's look at one example - the dividend tax

It was introduced in April 2016, effectively placing a double tax charge on business owners when they draw basic rate dividend income from their company. In tax year 2016/17 company profits are taxed at 20%. If the profits are then drawn as dividend by a shareholder, the first £5,000 is covered by the tax free dividend allowance, above this dividend is taxed at a variable rate depending on the taxpayer's total income. For higher rate tax payers the dividend tax rate is 32.5%. Add this to the corporation tax rate of 20% and that is a sizeable composite rate of 52.5% - ouch!

Well that's old news you may say - we are going back over 12 months to the introduction of this tax. But here's the rub, it will only start to bite over the next few months as business owners complete their personal tax returns for year ending 5th April 2017 and have to pay the tax next January. Many may have heard about the tax but the reality may not dawn until the bill from HMRC lands on their doorstep.

For business owners who have been accustomed to drawing a relatively modest income of around £40,000 and paying no personal tax (remember the company will have paid corporation tax on business profits), they will have the unpleasant task of paying around £3,000 income tax to HMRC before the end of January next year.

Fine you might say, everyone needs to pay their fair share. Agreed, but in my view this places a disproportionate burden on small, entrepreneurial business owners and will have an adverse impact on profits, growth and jobs. Where are business owners going to find the funds to pay the extra tax? For those without personal savings it will need to be drawn from their businesses, many of them hard-pressed and getting by on small margins.This will inevitably have a knock on effect to their businesses. 

It would be nice to see one of the political parties championing small business and providing genuine support. I'm afraid that in a time of austerity and uncertainty we are 'fair game' and I can only see the tax outlook becoming more challenging, whoever wins the 2017 General Election.

If you drew dividends in tax year 2016/17 my tip is to make sure that you are prepared for any additional tax bill which will be due next January. Putting a little aside every month from now might avoid a last minute rush to find the funds when they become due.

More on the dividend tax

Getting better

I've just finished reading Atul Gawande's book, 'Better - surgeon's notes on performance'. Not much there that's relevant to running an accountancy business you might think...but you'd be wrong. Gawande looks at systems and how people work in systems - his specialism is healthcare but there are lessons for any business or organisation looking to improve.

There are some great stories in the book but the most compelling one for me describes the bell curve. We are all familiar with this curve from statistics and 'normal distributions' in school maths lessons. Gawande applies this to performance in the care of cystic fibrosis and concludes that the best performers are continuously striving to improve and small margins make a surprisingly big difference. The best, keep changing to stay at the right end of the bell curve.

He ends the book with 5 tips to help you improve - become a 'positive deviant' to use his terminology:

1. Ask a question

If you are a professional - doctor, accountant, lawyer - the tendency is to focus on the task at hand with a client. Time is short, you have your list to get through. Ask an unscripted question and make more of a personal connection

2. Don't complain

When mixing with fellow professionals, don't whinge. It's draining and not productive. Lighten up and focus on the positives

3. Count something

Accountants like this one. What gets measured, gets done. Try counting some aspect of performance in your area and see what you learn.

4. Write something

I'm following this tip. The process of writing makes you think about things more deeply. Helps you to have an opinion. Blog, letter, book. Whatever, just have a go.

5. Change

Be receptive to change and become and early adopter

So if you are currently 'good', this book can inspire you to be better and I will be taking some of that inspiration to work with me this week

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