New dividend tax will hit small business owners hardest

In the summer budget this year, George Osborne quietly announced the introduction of a new dividend tax. I say 'quietly' because there seems to have been very little fuss about this, very little in the way of challenge from business groups and it now seems to have slipped away under the radar. Compared to the current rumpus about tax credits it seems like the government has been able to make this change very easily.

The impact on many small business owners however will be very significant indeed. For an owner/director of their own limited company drawing say £40,000 net income per annum they will be over £1,500 per annum worse off from April 2016 as a result of this dividend tax. That is nearly 4% of their net income which the chancellor will be taking from them, every year.

Let's not forget too that this is double tax hit for these small business owners. The company will also pay corporation tax on the profits before they are distributed as dividends. I can't help thinking that this is a way of raising revenue from a group who as a rule tend not to protest but roll their sleeves up and get on with it. A classic 'stealth tax' where a small group will be seriously affected but unlike with tax credits, the people affected are, wrongly in my view, perceived to be wealthy, and will draw little public sympathy.

Drawing £40,000 net per annum is not untypical for many business owners. Personal drawings above this level are taxed at higher rate so are less attractive and in any event, many entrepreneurs want to retain any surpluses in their business, as contingency or to fund growth. In leaner times, many of those affected by this tax will have forgone any income at all in an attempt to sustain their businesses. The chancellor has now seen fit to impose a new tax on income from their 'risk' capital which will hit small business owners very hard.

This is one of those taxes where the effect is not immediate but I believe will have a material impact on the household incomes of small business owners and on their businesses, when it starts to bite. The tax starts in the next tax year 2016/17. It will be collected via personal tax returns and will not be payable until January 2018. As well as the dividend tax due, taxpayers will need to pay a further 50% 'on account' for tax year 2017/18. So it will perhaps be from Autumn 2017 to January 2018, as tax returns are finalised for the previous tax year, when some business owners will realise how much they are going to have to stump up.

If they have not already made provision for the tax or have savings to draw on, they will have a choice of tightening their household budgets or drawing more from their businesses to pay the tax. Either way, I believe a small, hard working, enterprising group, exactly the people the chancellor supposedly wants to help, have been targeted unfairly by this tax. The government will point to positive measures like the planned reduction in corporation tax rates and the increase in the employment allowance which underline there 'business friendly' credentials. For owners of smaller limited companies, with modest profits and no other employees, where these changes deliver less benefit or do not apply, they will not compensate for the adverse impact of the new dividend tax.

Our focus now as business advisors will be to help our clients plan for this new tax and to take steps to mitigate the impact where possible. 

The summer budget received a broad thumbs up from small business groups when introduced earlier this year. Now that the dust has settled it is becoming clearer that for owners of the smallest limited companies, they will be significantly worse off as a result of the new dividend tax.

This link gives further details: 

http://www.base52.co.uk/news/latest-news-for-business/archive/news-article/2015/September/taxingdividends-from-april-2016

Base52 Growth Club - Autumn book review

We held our first Base52 Growth Club meeting this month. At every meeting we will be having a book review and the book for this quarter is 'The E Myth Revisited' by Michael Gerber. The popularity of the book was underlined by the fact that around about a third of those attending the meeting have already read it.

The 'E' in the book title stands for 'Entrepreneur' and Gerber describes the myth that most small businesses are run by heroic entrepreneurs, battling all obstacles and emerging successful against the odds. In fact, he explain, most small businesses are started by technicians - an accountant starting an accountancy business, a plumber starting a plumbing business and so on. The problem is that many of these erstwhile entrepreneurs remain as technicians and as a consequence their businesses remain in infancy, or at best reach a chaotic adolescence. The owners are often overworked, stressed and feel trapped by their business. The vast majority never reach maturity where the owner has some freedom and space to guide and develop the business further.

Part of the solution is for business owners to wear 3 different hats and adopt different behaviours depending on the needs of the business. The roles he describes are the entrepreneur (the visionary), the manager (the organiser) and the technician (the doer). 

The other big idea behind the book is to run a small business like a franchise. He gives the example of McDonalds  which, he argues, didn't become a great business just because it has great products. It became a great business because it has great store design, great customer service processes and great production processes. In short it is how McDonalds does business that makes it great, rather than what it sells.  He describes what he calls the 'Turn Key Revolution' where these business franchise formats principles can be put into practice by small business owners, to dramatically improve their outcomes.

The story is told through the eyes of Sarah who starts a pie making business inspired by her late grandmother and a love of baking. It quickly becomes a nightmare with Sarah trapped by her business and lurching from crisis to crisis. Gerber plays the role of the wise consultant who coaches her in the 'franchise' principles and gradually leads Sarah out of her predicament to achieve greater success and fulfilment.

It's a good and easy read and one I recommend to all business owners. I have read it many times and each time I pick up something new from it. For a relatively new business, struggling to manage growth, it is a 'must read' with some practical tips to help you move on to the next stage.

If you would like to come to a future growth club meeting and share your favourite business book with other business owners please let us know.

www.base52/events

Follow us on Facebook and Twitter too - Base52 Growth Club

EC Sales Lists - penalties

For those that do not have to complete them, EC Sales Lists are a piece of EC Beaurocracy. It is administered by HM Revenue and Customs and connected to VAT administration. Broadly it is a quarterly report listing any sales a company has with customers in the rest of the EC.

So there is no tax collection aspect to this. It is something UK business is required to do to help the beaurocrats prepare their statistics.

We prepare these reports for some clients and sometimes they can be fairly labour intensive. The process to set up and file the reports on line is also a bit cumbersome. The reports hold no value for our clients and we or our clients gain no reward or credit for preparing them.

So here's the rub. HMRC are inclined to issue penalties for late submission of these reports, sometimes without prior warning, many months after the reports are overdue. By this time daily penalties have clocked up to a staggering £500! The penalty bears no relation or any tax undeclared (there is none) or even the value of sales understated. So a one off £10 sale to a customer in Europe could result in a £500 fine if a report is not submitted. Is this fair and proportionate? I think not, but reading some Tribunal reviews, in many instances these penalties appear to be upheld.

I think a much gentler compliance regime would be appropriate for these reports. Maybe more helpful reminders and support to file the reports and less of the 'blunt stick' of a disproportionate penalty sent without prior warning. This smacks of a revenue raising scheme by HMRC and I wonder how may other businesses have been caught out by this?

Networking for growth

When I first started my accountancy practice 12 years ago I asked a contact who had run his own business successfully for several years for some advice. 'Use your network' was how he put it succinctly. We expanded on this on what he meant was keep in touch with people who know you, be they ex work colleagues, friends, local business owners etc and let them know your plans. Keeping in touch could be the occasional email, meeting for coffee or lunch or maybe a phone call. These days the explosion of social media has made it much easier to stay in touch through a variety of tools.

There was wisdom behind this advice. The network you have built up through friendship or shared work experience already has a foundation of trust. If these people already know you they are much more likely to be supporters of your business, either directly by becoming clients or by spreading the word.

I was very lucky in that many of my old work colleagues became clients and many are still clients to this day. I hope we are continuing to do a good job for them. Even now, 12 years after leaving my previous employer we still receive referrals from 'Someone who knew someone I worked with who said you had an accountancy practice'. It is amazing how word gets around and people want to work with someone they have personal experience of or are recommended by someone they know and trust.

So that was great advice that I'm very glad I listened to and acted upon. Since forming my own business I have also done lots of networking with local groups. This has ranged from the tightly structured, such as BNI to the more informal. Both have their place and often it is about finding a group which suits your business and your personality.

After careful thought we are about to launch our own networking group at Base52 called the 'Growth Club' staring in October 2015. The name of the group gives a clue to its focus. We will be doing our best to help visitors grow their businesses. Anyone is welcome, be they clients of Base52 or not. The format of the meetings will be a guest speaker and some facilitated networking. Surprise , surprise, the speakers will usually be fellow business owners and entrepreneurs I have met on my own business journey. In the main, they will be speaking about aspects of business growth, drawn from their own business experience. The structured networking part of the meeting will give visitors an opportunity to raise the profile of their own business and meet other business owners who could be potential customers, suppliers or supporters.

For more details of our first Growth Club meeting and to book your place, please follow this link http://www.base52.co.uk/events. Tony Blair once famously said his three priorities for government were 'Education, education, education'. For business owners a good mantra could be, 'Network, network, network'. I hope you can join us.

Surprised by statistics

Lots of things ping into our inbox and Twitter feed these days and if you are like me most of it gets ignored or sent to trash. The other day though I saw a tweet from a bank about local insights. Following the link I was able to drill down to my constituency, 'Hitchin and Harpenden' and see some interesting insights about consumer spending, business growth, business start ups etc

Some of the insights were as expected but several were not. It made me think that as a small business owner I should pay more attention to this kind of data.

Here is an example of some statistics I was a little surprised by. Apparently growth in the construction sector has declined compared to the same quarter last year whereas retail is thriving. That does not fit with my own experience where broadly our construction clients are doing very well indeed and some of our retail clients are still finding it tough. Overall small businesses grew by about 5% compared to the same quarter last year. The professional and administration sector is booming with growth above 11%.

Perhaps the most surprising statistic (well it was for me) is that nearly one in 3 of people living in Hitchin and Harpenden are over 60.

A statistic I have heard many times that still holds true is that more than one in three new businesses fails within three years. Most of these new businesses appear to be started by people who are, how should I put it, passed the first flush of youth. The average age for someone starting a business is 48. The average age for small business owners overall is 52, so I am pushing the average up a little now. The proportion of female business owners is 20%. I don't have this statistic to hand in my business but I'm sure that our proportion of female business clients is significantly higher than this.

So as someone once said, 'There are lies, damned lies and statistics', but what are the lessons to be drawn from these facts and figures? Well for me there are several. Number one is I need to make more use of this local information to help with business planning. Number two is I need to work a bit harder - if our sector is growing by 11% we need to do much better than this. Number three is I need to think more carefully about marketing to business - I may think I know the profile of business owners, but the stats may say something different. I hope there is some useful learning here for your business too.

The millionaire next door

I read lots of business books. Some are an interesting read at the time, some are instantly forgettable but one or two stick with me and help shape how I do things.


One book that made an impression on me is, 'The millionaire next door' by Thomas Stanley and William Danko. Both authors are PhDs and the book is an empirical study of millionaires in the US. It sounds very dull and dry but is a surprisingly good read.

I loaned this book out a couple of years ago. I can't remember who I loaned it to now and I don't think it is coming back so I have just bought a new copy to browse again.

One thing that sticks in my head is that many American millionaires are ordinary people with fairly ordinary jobs. Hence the title. There are a few things that make them different, however and these mainly come down to decision making and lifestyle rather than income.

These are some of the attributes of the millionaires:

1) They don't try and keep up with the Joneses

Many live in ordinary suburbs in nice but not extravagant houses. They drive mid range cars and have regular holidays but perhaps not the most exotic in the brochure. They may have less income than the young upwardly mobile couple next door but they don't spend it all every month

2) They make regular savings into an investment they understand

Others have advocated this, including 'Rich dad, poor dad' author Robert Kiyosaki. Broadly, rather than putting their spare cash into a low interest bank account they take time to learn about a specific area of investment. They become expert in this and invest for the long term. It could be buy to let, shares, antiques, their own business etc but they try and reduce the risk by learning how to do it really well

3) They help their children to be financially independent

With high house prices, increasing student debt and low wage growth, the cost of providing for children, even beyond school and university years, is increasing. The 'boomerang generation' is a real issue and the costs to parents when their best earning years are behind them can be significant. The millionaires in the survey managed to make their children financially independent. You could call it 'tough love' if you like but their kids knew that 'bank of mom and pop' was not available and they found another way.

4) They earn a living doing something they are good at

Sounds blindingly obvious but not everyone manages to do this. Many people drift into something and then find it hard to find a way out. Doing something you enjoy and are good at has been a recipe for success with the millionaires in the survey.

There are more attributes than I have listed, but these are the ones I remember and struck a chord.

OK, so being a millionaire is not the be all and end all. In itself it is a fairly shallow goal. Lack of financial security however, can create a good deal of stress and unhappiness. Perhaps copying some of the things these self made millionaires have done can help us to have wealthier and ultimately happier lives?

Seven things to do before the end of the tax year

The tax year end for individuals is 5th April. Many self employed people also have their accounting year end as 5th April or 31st March to coincide with the tax year. For private limited companies, 31st March is also a common date for the year end.

So what's the big deal? Another tax year ends, on to the next one. Well the deal is, that now is the ideal time for tax planning. There are decisions you could take now which could result in significant savings in the tax year or accounting period. Here are some ideas:

1) Buy business assets before the year end

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one. This provides a significant cashflow benefit so is worth planning for.

See this link for more details http://www.base52.co.uk/resources/tax-rates-and-allowances/capital-allowances

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £41,865, £100,000 or £150,000.

The £100,000 threshold is particularly painful from a tax perspective as the personal allowance is withdrawn. This gives an effective rate of tax at an eye watering 60%! So best avoided if you don't need the income and can defer this to another year.

3) Contribute to a pension

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill.

http://www.base52.co.uk/news/latest-news-for-business/archive/news-article/2014/march/pension-changes

4) Use gift aid for donations

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00. 

5) Use your tax free savings allowance

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. 

From 1 July 2014, the rules were relaxed. You can now save up to £15,000 in 2014/15 and £15,240 from April 2015. You now get to choose how you split this between stocks & shares and cash ISAs. 

http://www.base52.co.uk/factsheets/personal-tax/individual-savings-accounts

6) Use your annual capital gains exemption

If you have personal assets (shares, property etc) and are intending to sell them soon, consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,000 annual exemption effectively.

http://www.base52.co.uk/resources/tax-rates-and-allowances/capital-gains-tax

7) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2015 tax bill. 

If you are a high earner however and your income is not taxed at source, no amount of planning will eliminate your tax bill. Setting a percentage of your income to one side to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute scraping around in January to find the funds.

www.base52.co.uk

Take control of your accounting routines

High profile entrepreneurs like Richard Branson and Felix Denis, the late publishing billionaire and author, have stressed the importance of having excellent financial management and accounting routines. I can't think of any successful business I know that doesn't manage their finances well, but have come across many that have failed or lurch from crisis to crisis, who are not in control of their finances.

In my experience, many small businesses deal with some aspects of financial management but focus mainly on compliance. They deal with tax returns and Companies House administration with help from their accountants. Often the parts that get ignored, or are done less well, are monitoring performance on a regular basis and looking forward rather than backwards. I would argue that these aspects are critical for business owners who are serious about building sustainable, profitable businesses.

It is difficult for small businesses to find the resources and skills in-house to put in place comprehensive and effective financial management routines. This is why outsourcing is a sensible option. At Base52 we provide affordable outsourcing solutions to small businesses. As well as providing essential compliance services like year end accounts, payroll and tax returns, our outsourcing service also includes:

* Bookkeeping
* Credit control
* Monthly or quarterly management accounts
* Forecasting
* Financial management advice
* Advice on tax effective drawings for the business owner

Another advantage of outsourcing is that it is scalable. We adapt the level of support your business needs depending on your stage of development. For example, some businesses may require bookkeeping support at the start-up stage. When they are more established they may recruit their own bookkeeper but continue to outsource management accounts which require a higher level of skill and expertise to prepare.

Whatever you need, it's important to find a team you can work with and rely on in what is a vital part of any growing business.

If you would like to find out more about our outsourcing solutions please contact me on  fred@base52.co.uk or call 01462 423152

www.Base52.co.uk