Tax tips for the 'Comfortable poor'

The brilliant author and publisher, Felix Dennis, who sadly died this year, created various categories to compare relative wealth of individuals. These range from the 'Comfortable poor' who have quickly realisable assets of £50,000 to £200,000 to the 'Filthy Rich' with quickly realisable assets of over £100m. Mr Dennis himself was amongst the select group of 'Filthy rich', his fortune built on his entrepreneurial endeavours.

We don't have any clients in the 'Filthy rich' category but we do have some who are 'Comfortable poor' or aspiring to be so. These will often be higher rate or additional rate taxpayers, still working hard in employment or in their own business, often with young children still living at home. These tax tips are aimed at this group and could help them to keep more of their hard earned income.

1 Use your annual ISA allowance

Anyone over 18 can now invest up to £15,000 in a tax year and receive all their interest or returns tax free. The investment can be split between cash and stocks and shares.

2 Make pension contributions to keep child benefits

Over 1m people have been adversely affected by the child benefit changes which were introduced in 2013. The benefit starts to withdrawn when one earner in the family has income of more than £50,000 and is taken away completely if earnings are £60,000.

If you are earning a little over £50,000 you could invest some of your income into an Additional Voluntary Contribution into your corporate pension scheme or into a personal pension scheme. As well as being a tax effective method of saving for retirement this could enable you to retain your entitlement to child benefit by reducing your qualifying earnings to below the £50,000 threshold. An extremely attractive double benefit.

3 Keep your personal allowance and save 60% tax with pension contributions

Following a similar approach to that described above can enable you to retain your personal allowance and save 60% tax.

For earnings between £100,000 and £120,000 the £10,000 personal allowance is gradually withdrawn. The effect is that the rate of tax on these extra earning is a painful 60%!

Making pension contributions to reduce your earnings below £100,000 can avoid this punitive tax rate.

4 Share your personal allowance

From April next year basic rate taxpayers will be able to transfer up to £1,000 of their personal allowance to their spouse or civil partner. 

So just a few tips here to help the 'Comfortable poor' keep a little more of their income. These are all reasonable planning steps introduced by the government to encourage saving, investment in pensions and recognise the value of marriage and civil partnership. If these leave you feeling slightly guilty for keeping this money out of the chancellor's coffers you could always donate more to charity. That could potentially save you more tax but I will save that for another blog.

www.base52.co.uk

The tax man cometh

We have had some recent successes with dealing with HMRC enquiries on behalf of our clients. These have included enquiries relating to tax returns, an IR35 review, a special relief claim and others. Although we have achieved good outcomes, the enquiries have been stressful for our clients and the Revenue have taken quite a tough line in some instances.

So it is good to be prepared if HMRC knocks on your door (metaphorically speaking, normally they would send a letter) to limit the risk of any nasty surprises.

The first and most obvious thing you can do to reduce the risk of an enquiry (or HMRC finding something wrong in an enquiry) is keep good records and take care to work within HMRC guidelines. Another sensible precaution is to take out tax investigation insurance. This will cover the professional costs associated with dealing with an enquiry. Enquiries can often be protracted and knowing that most of your accountancy fees are covered can at least reduce some of the stress and worry. Most accountants offer this insurance as part of their service and for a few pounds a week I think it is a sensible thing to have.

If you are unlucky enough to be singled out for an enquiry, in most cases it would be advisable to work with your accountant to respond to HMRC and follow the enquiry through to a conclusion. Our approach as a practice is to be transparent and open and deal promptly with any requests for information from HMRC. Of course, if we disagree with decisions made by HMRC we will challenge these and follow the appeals process until the best outcome is achieved.

A recent report in the Daily Telegraph disclosed that thousands of people successfully fought the tax office last year after beings chased for money. The disputes were settled by the Tax Adjuducator, a little-known body that arbitrates between HMRC and individuals. In a staggering 9 out of 10 cases, the adjudicator found in favour of the individuals.

Most of the cases related to surprise tax bills, often due to incorrect PAYE codes. In these circumstances the Revenue needs to act fairly and is permitted to write off the debts under 'extra statutory concessions' if 3 conditions are met:

- Did HMRC make 'proper and timely' use of information provided to it?

- Could the taxpayer 'reasonably have believed their affairs were in order'?

- Was notification sent with 12 months of the end of the tax year in question?

So the first step if you believe you are being asked to pay unexpected arrears of tax unfairly maybe to ask your local tax office to apply the Extra Statutory Concession (ESC A19). If it refuses you can then file a complaint and ultimately after exhausting all other avenues, the next step would be to refer the case to the adjudicator.

If the tax man selects you for enquiry it is undoubtedly a cause of anxiety and stress. With help from your accountant and a dogged approach you can come out the other side with a good result. Remember to reduce your risks in the first place with accurate and timely record keeping and taking out insurance to cover your professional fees.

www.base52.co.uk

Is anyone else missing their business bank manager?

I am an owner/part owner in three businesses and I use the same bank for each of them for business banking. Earlier this year my bank decided to do away with 'relationship managers' for smaller businesses. There was no consultation about this (at least not with me!). I received a letter announcing the change and within a couple of months my relationship manager had moved on.

Progress? A logical step due to increased automation? I think not. I really valued my relationship with my relationship manager. (No pun intended). He had been my contact at the bank for many years. He knew me and my business. We met a couple of times a year for a catch up and he was supportive of my goals and offered good advice when it was needed.

Of course not all relationship managers have been removed. I think there is a turnover threshold of about £1m. If you are in this exclusive group you are allowed to keep your relationship manager. For me and thousands of other business owners we are now left to fend for ourselves. The 'personal' contact with the bank has been removed with the swish of an accountant's pen, or maybe spreadsheet.

So why do I feel that's a backward step? Sure the bank will save millions of pounds in the short term by removing a layer of relatively highly paid managers. But what will they lose? Well here are just a few thoughts:

• Customer retention - my relationship manager was the single biggest factor why I stay with my bank. We are loyal to people, not institutions. No personal contact, less loyalty.
• Less business - my relationship manager was always the first port of call if I wanted to open a new business account, take out a loan or overdraft, extend the scope of my services etc. If I need to do this through the internet or a telephone helpline I am much more likely to shop around
• Referrals - professionals like me refer our clients to our own bank if we like the service. If we don't we are far less likely to refer
• Competition - there is surely an opportunity here for one or more of the other banks to make a big splash about how they are continuing to provide relationship managers. 

I have had my first direct experience of missing my relationship manager this week. My business has been growing well in the last 2 years and I would now like to accelerate things a bit. I have healthy reserves and cash balances but I would like a little contingency to cover some of the expansion costs.

So I am thinking of taking out a relatively small loan just to have in reserve in case the plan goes a bit slower than anticipated. Normally this is something my relationship manager would have dealt with for me. Instead I have had to call a telephone help line. They don't know me or my business and they are just ticking boxes. I'm pretty sure the loan will be approved but there is more form filling, more time invested and, well, it's just a little less customer friendly. 

I think there is a lesson here. Banks need to manage their costs and increasing automation will inevitably reduce some of the 'human' element and personal touch. I believe that the personal element is still very important, particularly in a 'business to business' context. If the banks remove this, without listening to their customers, they should not be surprised if their customers become less loyal.

Why bother with the balance sheet?

I'm going to make a confession. For most of my career as a management accountant I didn't pay much attention to company balance sheets. As a management accountant at Boots the Chemists and Tesco my focus was mainly on gross and net profits. Tracking these by week, month, product, department etc was the priority and other accountants worried about the balance sheet. Of course I understood the make up of balance sheets and the importance of archieving a good return on capital employed. But monitoring assets and liabilities, looking at trends, making improvements, was not part of my remit.

This has all changed in the time we have been helping our clients with financial management at Base52. Sure, profits are important and a business that is not making profits will not last long but the balance sheet shows how tangible those profits are and what is left after distributions to the shareholders.

So our management accounts for clients show the profit & loss and the balance sheet too. We take time to review and prove every asset and liability total on the balance sheet. Are the fixed assets all still held by the company and are the values realistic? Are stock and work in progress valuations accurate? Are there any bad debts? Is the company collecting receipts from customers fast enough? Are liabilities affordable when coming due for payment and does the company have enough cash? Are dividends set at an appropriate level and affordable? These are all key questions which can only be answered by a thorough review of the balance sheet.

The best businesses have strong balance sheets. In other words, there are no hidden nasties, like bad debts or inflated stock valuations waiting to pop out and there is a healthy surplus of net assets. Perhaps 10% of sales is a desirable minimum level for net assets but 25% or more would be preferable and provide a contingency in the event of a downturn in business. Too many small businesses have negligible net assets and this exposes them to significant risks if trading is worse than anticipated. A weak balance sheet will also affect a company's ability to gain credit or loan finance. 

If your business is profitable that is great news. If after tax and dividends there is still a good surplus on the balance sheet that is even better and essential if your business is to thrive. So take the time to understand your balance sheet. If it is not part of your regular monthly routine, I would argue it should be if you are serious about building a solid business. 

www.base52.co.uk

Breaking up is hard to do?

Changing accountants is a difficult decision. You may have had a relationship for several years and have shared highs and lows on your business journey. There can come a time however when it is in the interests of both parties for there to be a change. Usually this comes down to capability. Is your current accountant capable of meeting the needs of your business as it develops over the next few years? If, after a careful and considered assessment, the answer is no, it is time to move on.

In my experience, many business owners put this decision into the 'too difficult' pile and things trundle along in an unsatisfactory manner, often for several years. 

As Neil Sedaka says, 'Breaking up is hard to do', but it may not be as difficult as you think.

Here are the usual steps:

Step one

Find your new accountant. A good starting point is talking to your business colleagues and asking who they work with and how the relationship works. Build up a short list of 2 or 3 candidates and meet and talk to them. Ask to speak to their clients to try and get a real understanding of how they work. You need to find someone who can support your business over the next few years. Take your time and broaden your search if you need to. It's a big decision and you want to get it right.

Step two

Let your current accountants know of your decision to change and let them know the name of your proposed new accountants. The 'ideal' time to change is after any major 'work in progress' is completed. So for example, changing whilst your accountant is in the middle of preparing your annual accounts is probably not a good idea.

Step 3

Your proposed new accountants will then contact your outgoing accountants and ask if there are any professional reasons why they should not accept the appointment and also to request the formal handover of records and working papers. The records requested enable the continuity of accounts and tax work.

Step 4

The handover of reponsibilities and records takes place

Step 5 

Your new accountants will prepare formal terms of engagement and when these are in place they can commence work

The handover process normally takes 2 to 3 weeks and usually works smoothly and effectively. There can occasionally be delays if outstanding work is to be completed by the outgoing accountant or a final invoice to be settled, but complications are rare.

Breaking up is undoubtedly hard to do. It is sometimes necessary however and choosing the right advisor can have a very significant impact on your business. So don't put this decision off because it is 'too difficult'. Grasp the nettle and you and your business could reap the benefits.

www.base52.co.uk

5 tips for simple financial management.

These tips will help you stay on top of your business finances. When your finances are managed well you feel in control and are able to make good, timely decisions to advance your business. Many businesses do the basics - the essential administration, but don't go that bit further to 'manage' their finances proactively.

1 Set a long term goal

There is a quote attributed to Lewis Carol and George Harrison, 'If you don't know where you're going, any road will take you there'. Having a long term goal gives a clear direction to your financial plan. It's a good idea to link your long term goal to exiting from your business some time in the future. So it could be, 'in 10 years I need £1m in a pension pot so that I can be financially secure in retirement'. Your plans and actions in your business then work towards this long term goal.

2 Set short term targets

Once you have your long term goal you can work back from this to set shorter term targets. If you need your business to be worth £1m in 10 years you can look at the value now and work out the annual growth rate required to achieve your goal. It's sensible for a small business to have a detailed financial target for at least 12 months ahead, broken down into revenues and costs.

3 Measure

So you have your detailed 12 month target. Now you need to measure how you are performing against this on a monthly basis. Idealy you should have a set routine of preparing your monthly accounts say by the second Friday of the following month and sticking to this. Your accounts should include an accurate profit & loss, balance sheet and debtor and creditor reports. As far as possible your monthly accounts should be prepared on a similar basis to your annual accounts so that there are no nasty surprises which pop out of the woodwork at the year end.

4 Take action

The most important bit. If your monthly figures are falling short of your plan you need to take action! Modify your products, change your pricing, listen more to your customers, cut those unnecessary costs. Whatever it takes, but you need to get your financial performance back on track. This is where the 'management' part of financial management comes in. If you just look at the figures and carry on as you were, there's no point.

5 Forecast

To complement your target and your measurement you need to forecast regularly. A rolling 12 month forecast for most small business should be a minimum. This should be a detailed forecast of revenues and costs - for businesses with tight cash balances a short term cashflow forecast is also recommended. Armed with your forecast, you can anticipate problems and opportunities in advance. 'If we carry on as we are now, in 12 months we are going to be £30k below our target. ' Ok, so what are you going to do about it? Having a forecast gives you the information to address a potential issue before it's too late. It is an essential tool.

So that's it. Good financial management in a nutshell. If you do all these things it will not guarantee you business success. It will mean that you are in the driving seat and can take control. The decisions you make, based on your financial reporting will determine how you get on. 

www.base52.co.uk

A little light reading

January is great time for browsing any books you might have received in your Christmas stocking. I love picking them up, reading the reviews, the forwards, dipping in a bit and then choosing which one to look at first. I always put a few business books on my Christmas list. That is very sad I know but I genuinely enjoy reading them so it works for me. Over the last few years I must have read at least 100 business books. Most are on my shelves in my office. A few duds do not make the shelves and have been recycled at the nearest charity shop. My wife can't understand how, if I have read all these books and accumulated  all this knowledge, why I am not a multi-millionaire by now. I tell her I am working on it and she needs to be patient.

The kind of books I like are by people who have 'been there and done it' and are writing based on their own experience. The books I like least are the ones where the writer's main purpose seems to be to write books to sell to gullible people (like me) about getting rich by the power of thought or by doing things that the author has never put into practice themselves. In my personal opinion (and I think I'm in a minority here), one of the worst business books I (almost) read (and I say 'almost' because I packed it in about half way through) is 'Think and grow rich' by Napoleon Hill. It is apparently one of the best selling business books of all time. It has the advantage of having been written a very long time ago (allowing for more time for more people to buy it) but it has been relegated to my bottom shelf. This shelf contains books which I may just want to look at again to check something over but I would be very unlikely to re-read from cover to cover again.

Some books I do read again and these are destined for my top shelf where they have pride of place. These are the ones I recommend to my business clients and I refer to often as being useful, practical guides. My 'Top 3' in descending order are:

1, How to get rich by Felix Dennis

A bit of a naff title but a truly fantastic book. Brilliantly written and full of frank, honest view about how to set up and run successful businesses and create wealth. 

2. The eMyth revisited by Michael Gerber

All about setting up the structures and processes necessary to develop and grow a small business. Easy to read and great, practical advice

3. The Richer Way by Julian Richer

Once you have created your small business Julian Richer has some great ideas for recruiting, rewarding and retaining the best employees. It is based on his experience running Hi-Fi chain, 'Richer Sounds'.

Even if a book is not one of the best, almost every one I read is stimulating in some way or other. Reading regularly helps me to challenge my thinking and approach and keep things fresh. So I'll be ploughing into this little lot in the photo over the next few weeks. You never know, maybe one of them will make it onto my top shelf?

www.base52.co.uk