VAT - a killer for some small businesses

The quarterly VAT bill.

It can literally be the death knell for some small businesses. The worst affected are those who deal with 'Joe public' rather than trading with other businesses in competitive sectors like retail and the trades.

Unlike VAT registered businesses, individuals cannot recover any VAT charged on to them so the VAT is just part of the price they pay. If the VAT registered business is competing with other businesses who are not VAT registered this makes things even more difficult.

Businesses on the cusp of the VAT registration threshold of £85,000 feel the pain the most. They don't quite have the volume or profit to be financially comfortable and they have the double whammy of charging and paying VAT and being less competitive.

Many are faced with the 'Hobson's choice' of keeping their businesses small and staying below the VAT registration threshold or going for growth and volume and dealing with the extra cost and administration of VAT

So how can small businesses manage the dreaded VAT and stay solvent and viable?

Well firstly they should investigate whether any of the special VAT schemes will help. There are retail schemes, a flat rate scheme, a cash accounting scheme and others. Choosing the right scheme can save on tax and also make administration simpler. Your accountant should be able to help you evaluate which scheme (if any) is best for you.

The next thing is to 'know your numbers'. I would strongly recommend modelling your business profits, allowing for VAT and ensure that you can achieve your desired profits and the business model 'stands up'.

What is not generally an option is to split your business into two or more smaller businesses to keep one or both of the businesses below the VAT threshold. HMRC would consider this to be an 'artificial separation of trade' if the purpose of splitting the businesses is to avoid paying VAT.

Examples of artificial separation could be:

• a pub which separates drinks and catering.
• a retail outlet which opens a smaller branch or branches but the branches have the same brand, ownership and resources.
• an entertainer with business (VAT registered) customers and non business (not VAT registered) customers.

If HMRC investigate a case of 'artificial separation' and the business is at fault the arrears of tax and penalties can be significant, not to mention the stress caused by a lengthy tax enquiry.

So there is no easy fix for the smallest businesses to deal with VAT

With care and planning it can be managed however and the most important factor is the underlying business model

VAT is just a cost of doing business.

The passive or disorganised business owner will blame VAT for all their woes.

The savvy and proactive owner will accept that it is something which needs to be dealt with and adapt accordingly

www.base52.co.uk

8 tips to save tax this year

Record high temperatures and a change in the air.

Spring is approaching and we are also not far away from the end of the tax year on 5 April.

A little planning and action now could save you tax when this becomes due in January next year.

Here are some ideas:

1) Buy business assets and bring forward business expenditure 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.

Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow. Similarly if you are intending to carry out some repairs or maintenance work, doing this before the year end will reduce your next tax bill.

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 £46,350, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor.

The £100,000 threshold is particularly unattractive from a tax perspective as the personal allowance is gradually withdrawn at a rate of £1 for every £2 of income. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £123,700.

So best avoided if you don't need the income and can defer this to another year.

3) Consider the effect of the dividend Tax

A dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year – mainly business owners with their own limited companies.

The 'tax free'  dividend allowance has reduced to only £2,000 per annum from 2018/19 onwards. It makes sense to use this allowance if you have scope to pay a dividend. Above this level different rates of dividend tax apply for varying levels of income.

The dividend tax has a significant impact on business owners who may be used to drawing a relatively high proportion of their income as dividends. If possible the higher and additional dividend rates of 32.5% and 38.1% respectively are best avoided by capping gross income at the basic rate threshold of £46,350 if this is feasible.

Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases.

4) 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. The tax savings are particularly attractive for higher and additional rate taxpayers. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered.

5) 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.

6) 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. You can save up to £20,000 for 2018/19.

You can choose how you split this between stocks & shares and cash ISAs. There are also ISAs such as the Lifetime ISA and ͚Help to Buy͛ ISA which are aimed at first time home buyers and offer additional incentives.

7) 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 £11,700 annual exemption for 2018/19 effectively.

For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance.

8) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2019 tax bill. It is unfortunate that however much we plan, many of us will still be faced with a tax bill for 2018/19 payable in the following January.

Setting aside a percentage of your income to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics trying to find the funds.

Another tip is to get your tax return completed as soon after the end of the tax year as possible. This gives you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January.

If you would like Base52’s advice and assistance with any aspect of your tax planning, please contact us.

www.base52.co.uk

I, capitalist

Being a capitalist is not something one would normally shout about.

As a word it is sometimes followed by 'pig' and spat out as an insult. So capitalists tend not to brag about being one. It's just not good form.

But maybe some of us are capitalists without realising that we are?

A good place to start is with a definition.

Wikipedia defines a capitalist as:

'A person who uses their wealth to invest in trade and industry for profit in accordance with the principles of capitalism'

Ah, so that would be George Soros, Warren Buffet and co. The super rich who invest billions in the stock market. Not us ordinary Joes and Joannas who strive for our daily crust.

But what about the self employed and small business owners? Are we capitalists? Well, some self employed - 'the gig economy', who sell their own services are probably acting more like an employee. Employees with a little more choice and freedom, but 'employee-like' nonetheless. They are an essential part of the capitalist system but are not exhibiting capitalist behaviour themselves.

On other other hand, the business owner who has built his or her business to a reasonable scale and has employed people and resources to achieve this, is probably now a capitalist. The cafe owner, the chap with the small industrial unit, the boss of small professional services firm. They may have built the value in the the business with their own 'sweat' capital or their own modest savings but (going back to our definition) they have 'invested in trade and industry for profit'. So they make the cut as capitalists.

So that's the Buffets of this world, other wealthy investors and business owners. That's a small slice of the population who are described by the 'c' word.

But under a change by the government introduced from 2012 it could be argued that we are all (or most of us) capitalists now. Pensions auto enrolment means that all employees above a certain earnings threshold need to be enrolled into an employer pension scheme. The pension provider will on their behalf invest the employee's and employer's contributions in trade and industry, hopefully for profit.

We can of course opt out, or maybe choose our own pension scheme which invests in  government securities rather than the capitalist stock market. But the returns are likely to be much less. Do we really want to choose to be poorer?

Maybe we could insist our pension provider looks at ethical investments? Yes but that is still capitalist - softer and fluffier, but capitalist.

So don't say it too loudly, but most of us, knowingly or unknowingly, are capitalists.

And probably better off for being so.

www.base52.co.uk

Getting paid

Most of us are in business because we are doing something we love or are good at.

We didn’t go into business because we are good at negotiating a price for our product or service and then collecting payment when the work is done.

Without sorting out that part of business however, we could end up being busy but poor.

So how do you reduce the risks of not getting paid?

Here are a few steps which could apply to most businesses:

1. Agree a price in advance for your product or service.
2. Agree payment terms and ideally have a formal written agreement which outlines the work you will do, when it is finished and when and how you will be paid.
3. For new customers or start up business ask for some or all of your payment in advance.
4. When the work is done send your invoice in a timely manner.
5. Follow up if the customer doesn’t adhere to the payment terms.
6. Use the small claims court if the customer persistently avoids paying or breaks promises to pay by a specific date.

These steps won’t guarantee you will be paid every time but they will reduce your risk.

Another good tool in your ‘getting paid’ box is , ‘change orders’ or variations to your contract. These are important when you start off doing the work you were asked to do and the customer keeps asking for something else.

Referring them politely back to the scope of work in your agreement is a first step. If they want the new work doing and it is material, this is where your change order comes in to agree new terms for the additional work.

Someone once said that stripped down to the basic processes, business is simple - ‘make, sell, bill, collect’.

The last one can be tricky to manage but if you want to stay in business you need to do it well.

If you are a one person business you will need to do the collecting yourself. For established or growing businesses, having robust processes and resources in place to manage this key activity is essential.

www.base52.co.uk