Thursday, 29 October 2015

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: 

Saturday, 17 October 2015

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.


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