Sharing out the business cake

Never, ever, under any circumstances give away any shares in your own business. Period.

I'm paraphrasing Felix Denis, the late publishing billionaire here. He believes that business owners and entrepreneurs should hold onto their share capital as their greatest opportunity to retain wealth and as a fair reward for their enterprise and risk.

That's not to say he didn't believe in rewarding his employees. He argued that rather than through shares, this should be done by giving them a fair 'slice of the annual pie' of profits.

As a general rule I agree with Felix. Including employees and others as shareholders adds complexity and creates tensions. It also takes some incentive away from the entrepreneur to drive the business forward.

Are there exceptions to Felix's golden rule though?

I think there can be in cases of succession or exit or in exchange for providing finance and specialist knowledge, skills or contacts (Dragon style) but the entrepreneur should tread carefully and consider the pros and cons before taking this step. Once ownership is diluted things will never quite feel the same again for the founder so my default view is, 'Don't do it' unless there are compelling reasons.

As Felix says, 'Getting rich all comes down to ownership. Every single percentage point counts'.

Of course there is more to creating and running a business than getting rich but his point is well made. As the owner you are the one who has made sacrifices, had sleepless nights, strained your personal relationships, worried about paying the mortgage. If you give away the fruit of your endeavour lightly you may have a long time to regret your decision.

www.base52/consultancy

It ain't over 'til it's over

Turning 60 this week was something of a milestone. 

I had a nice relaxing day off work and England rounded things off by beating Colombia on penalties. Not that I could watch the finale, I had to walk around the block and learn the result when I got back. A good ending.

It does make you focus on your mortality. I'm set to draw two occupational pensions this year. So if I had stayed employed that would be it. I could hang up my boots (metaphorically speaking) and like Marlon Brando in the Godfather tend my vegetables and play with my grandchildren. Marlon did become a nicer version of himself in his old age (It's not hard to improve on murder and corruption) but he came to a sticky end in his pepper patch. Although I love my grandchildren, that's not overly appealing.

One of the plusses about running your own business is that you have choices.You can sell up and retire. You can carry on with 50 or 60 hour weeks and hope you keep your health and energy levels. Or you can keep going but change how you work and what you do. Maybe do less of everything but more of the things that you like and are good at. This last option appeals to me most.

My favourite quote about retirement comes from an unlikely source. Ex US President, Richard Nixon may not be everyone's idea of a role model. Sure, he had his faults but a strong work ethic and sense of duty (occasionally flawed) were part of his make up. His view on retirement was, 'To me, the unhappiest people in the world are those in the watering places, the international watering places like..uhhh..the south coast of France and Newport and Palm Springs and Palm Beach; going to parties every night, playing golf every afternoon, then bridge. Drinking too much, talking too much, thinking too little. Retired. No purpose.' The Palm Springs set may disagree. Pottering about in the sun sounds fun but I think the novelty would soon wear thin. So I'm with Richard on this

Then there is Stephen Hawking who says, 'Work gives you meaning and purpose and life is empty without it'. People find meaning and purpose in different things. To Stephen it was understanding the universe. Most of us have more modest ambitions. For me, being 60 changes very little. I still find purpose, great enjoyment and satisfaction in running a business. If that changes I may try something else but for now its business, more or less, as usual...

www.base52.co.uk

GDPR and all that...

These things keep coming along.

It starts with maybe a newspaper article, then a post on Linkedin or Facebook, then more posts and articles. Pretty soon there seems to be a whole industry built around the latest ‘thing’. Recent ‘things’ have been PPI claims, bitcoins, blockchain, crypto currencies and pensions auto enrolment.

The new kid on the block is GDPR. Can we ignore it and hope it just goes away? Well for a while perhaps we can. But the new General Data Protection Regulation (GDPR) comes into effect on 25 May 2018. For all businesses who hold data relating to customers, employees and other contacts there are new rules coming into force and a penalty regime for non compliance. So the time for putting this in the ‘too difficult’ box has passed. Businesses need to act fast to assess what the new rules mean for their business and how they can ensure they are compliant.

The Information Commissioner’s Office (ICO) is responsible for overseeing compliance with the new regulations in the UK. They have published a guide and other reference material which is a useful starting point.

We have also prepared our own summary here GDPR - what is it all about?

If you are still struggling we are running a training event in Hitchin on 18 April which will help you evaluate what you need to do to ensure your business complies with GDPR.

This link provides further details and booking instructions GDPR event Hitchin

When in a hole you MUST stop digging - when insolvency strikes

As business owners we are invariably optimists. Things will get better. Work a bit harder. Tweak a few things.

But what if the business is insolvent?

This can creep up on a business. One or two unprofitable projects, a significant bad debt perhaps and all of a sudden cashflow is extremely tight. The definition of insolvency is a business not being able to meet its payment obligations to creditors when they fall due. This is not a short term cashflow blip, but something more systemic. On the balance sheet liabilities will exceed assets. Of greater concern is when short term liabilities - bank overdraft, tax due and payments due to suppliers exceed cash and payments due from customers.

In this situation the directors of the business have legal obligations. They can't just keep calm and carry on. Choosing to pay some creditors in preference to others when the business is insolvent is a legal offence and the directors could be held personally liable if the business fails.

The choices for the directors are:

1. Contact all creditors and see if you can reach an informal agreement

It is recommended that a financial projection is prepared in advance of any discussions with creditors so that there is a realistic view of what is affordable. A turnaround plan may involve deferring payments on 'old' debt whilst keeping up to date with new obligations. It is critical that the plan shows that the business is profitable going forward. This is likely to require significant cost cutting and restructuring

2. A Company Voluntary Arrangement

This is where an Insolvency Practitioner is engaged to make binding arrangements with creditors. Unlike the informal arrangements at 1 above, this is a formal arrangement the creditors must adhere to. The company can continue to trade during the CVA

3. Administration

Again this is a formal arrangement where respite can be gained from creditors and the company can continue to trade. Property may need to be sold to cover debts

The final option is liquidation where the company is wound up and any assets are sold and distributed to creditors

So when the company is insolvent, carrying on as normal is not an option. The choices listed above must be followed or the directors will be open to the charge that they treated some creditors more favourably than others

With speed and resolve, following option 1 can turn a company round and bring it back to stability. If action is taken too late, it is more likely that the business will fail and liquidation becomes the only option.

If you think your business may be insolvent I would recommend an urgent discussion with your company accountant.

www.base52.co.uk/services/consultancy

How do you know if your business is in a turnaround situation...and what should you do about it?

Business can be tough. Some business owners dig in when times get hard. They work longer hours, get more stressed, do more of the things they have always done. But sometimes that isn't enough. The business keeps trading unprofitably, suppliers demand payment and the business finances get worse.

Spotting the signs of a struggling business early enough can make the difference between survival and failure.

What is needed is a radical review or 'turnaround plan'. My own professional body, The Chartered Institute of Management Accountants describes this as 'a set of actions required to save an organisation from business failure and return it to operational normality and financial solvency'

There are 6 stages in a turnaround situation:

• Management accept the need for change
• Carry out a business review and identify underlying problems
• Prepare a recovery plan
• Implement the plan
• Stabilise the business
• Embed the change

Often an external consultant or turnaround specialist can help senior management make the challenging decisions which will be needed. There is a an Institute for Turnaround which recognises the specialist nature of the skills required to deliver this kind of work. Finance professionals also have a key role in supporting a turnaround - reporting on the financial status of the business and the areas of poor performance and setting up reporting systems to track improvements. Good financial forecasting models are also essential.

I have been involved in several turnarounds in my role as an external accountant, usually working alongside a turnaround specialist and the business owner. The most successful outcomes have been where the business owner has accepted the need for change at an early stage and put their full weight behind a turnaround plan. The few instances where management have just carried on doing the same thing and hoping for the best have inevitably not ended well

The tell tale signs of a business which might need a 'turnaround' remedy are:

1. Shortage of cash
2. Pressure from suppliers for faster payments
3. Showing continued losses in monthly or quarterly accounts

If your business is in this position taking urgent and radical action is probably required. If you would like an informal discussion to see how we can help please get in touch using the link below

www.base52.co.uk/services/consultancy

A tale of two sales

Last year my wife and I had the holiday of a lifetime in India. It was a wonderful experience with fantastic monuments, history and culture, great food and the warm and friendly people.

We came back with lots of stuff we hadn't really intended to buy due in no small measure to the local merchants' talent for selling.

The format usually went something like this. We would have a morning's sightseeing with a local guide. On the way home he would invite us to drop in at a local merchant - jeweller, potter, fabric trader etc. Let's use the jewellers as an example but the experience was similar, whatever the trade, 'Would you like to visit a local jewellers? The owners are very nice and they have a workshop on the premises which they will be happy to show you'. 'Why not?, we thought. There was no 'hard sell', we were free to say no but we usually opted to have a look around. We were greeted by the owner and several others at the entrance and warmly welcomed. Masala tea was offered and we were invited to look around the workshop. We had a personal tour and were shown the journey from raw gem stones, through cutting to designing and manufacture of the jewellery. Nothing was too much trouble. Lo and behold at the end of the tour we ended up in the jewellery shop. More tea was brought in and we were asked about our holiday so far. 'Would we like to see some jewellery?' No one asked us to buy anything but somehow we just did. Not things we needed or had planned to buy but presents and mementos from an enjoyable trip.

Let's contrast this with a trip to a carpet shop at home this weekend. We are in the process of redecorating our house. My wife has thought very carefully about the decor, we just needed the carpets and wanted advice on what to buy. We were ready to be sold to. We had a budget (well sort of) and a deadline. A couple of sales people were sitting down as we entered. We were welcomed and shown a few samples and basically left to potter around and well...leave. We had lots more questions, we wanted some ideas, some input, to let us know what was possible. A cup of tea and a chat would have been nice.

Ok so it's a different situation but I think illustrates a point. In India we had not intended to buy but were shown the possibilities and buying was made easy. So we bought. In the carpet shop we were ready to spend. We had the money ready and wanted help. The kind of help we wanted wasn't forthcoming so we didn't buy.

Off to a new carpet shop today so will see how that one goes...

www.base52.co.uk

9 things to do before the end of the tax year

It's that time of year again when some planning in the last few weeks before the end of the tax year could provide a useful tax saving.

The tax year end for individuals is 5th April 2017. 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.

Here are some ideas:

1) Buy business assets and bring forward 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.

Click here for more details

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 £43,000, £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 painful from a tax perspective as the personal allowance is withdrawn. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £122,000. So best avoided if you don't need the income and can defer this to another year.

3) Consider the effect of the new dividend tax

A new dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year. There is a £5,000 dividend allowance where dividends are free of tax. Above this level however new 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 rate dividend rate of 32.5% is best avoided by capping gross income at the basic rate threshold of £43,000. Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases

Click here for more details

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. 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 £15,240 for 2016/17 and the limit will be increased to £20,000 for 2017/18. You can choose how you split this between stocks & shares and cash ISAs. 

Click here for more details

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 £11,100 2016/17 annual exemption effectively. For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance.

Click here for more details

8) Review use of the VAT Flat Rate Scheme

For businesses using the VAT Flat Rate Scheme the government have introduced a new definition of a 'Limited Cost Trader' whose expenditure on goods is less than 2% of VAT inclusive turnover. If using the scheme you should consider if you are a LCT in which case it is likely to be advantageous to revert to Standard VAT Accounting from 1 April 2017.

Click here for more details

9) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2017 tax bill. 

If all or some of your income is not taxed at source however, it is likely that you will be faced with a tax bill for 2016/17.

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 panics in January 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 give you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January.

Note - This draws on a Blog first published in February 2016 and is updated for new tax rates and allowances.

www.base52.co.uk

Join our VAT simplification scheme - oops no, that's aggressive tax abuse

The VAT Flat Rate scheme was introduced by HMRC in 2002 as a 'simplification scheme'. The idea being that it was simple and beneficial for the small businesses who were eligible to participate and simpler for HMRC in terms of compliance. Essentially the way it works is that a business pays a lower 'flat rate' VAT to HMRC which varies according to their sector. As a trade off the businesses are not able to recover any VAT on expenditure. So a win/win and small businesses signed up for the flat rate scheme in droves. HMRC even offered a 1% discount on the flat rate for the first year of VAT registration.

So all this changed in the last Autumn statement. HMRC have introduced a new concept of a 'Limited Cost Trader' to describe businesses which have minimal expenditure on HMRC's definition of 'goods'. For these businesses they will need to use a new flat rate of 16.5% of VAT inclusive turnover which by my maths comes out at 19.8%. Er...no thank you, we might give that a miss. 

That's all fine but instead of HMRC saying they got it wrong initially and the rates were too generous (even without the 1% first year discount they threw in) or that economic circumstances have changed, low and behold, HMRC have blamed it all on the businesses who took up the scheme.  There is a Technical Note on HMRC's website with the heading, 'Tackling aggressive abuse of the VAT Flat Rate Scheme'  - as if these businesses were doing something wrong? I'm struggling to understand what is aggressive or abusive about adopting a scheme which HMRC devised and promoted and then changed their minds about.

For many businesses the best option will be to revert to standard VAT accounting and recover VAT on their expenses. Depending on their turnover and business sector some businesses will be a few thousand pounds worse off each year as a result of this change. Coming on the back of the dividend tax introduced last April and pensions auto enrolment it's another unwelcome burden for some of the smallest of small businesses. Implying that it was their fault that the scheme is being changed adds insult to injury.

www.base52.co.uk

Another busy January

I was just thinking about our January tax return workload and reflecting on how things have changed over 14 years at Base52.

In the early years there were just a handful of tax returns, mainly for our business clients. I did the tax returns myself along with most of the business accounts.

14 years on we now deal with a range of tax returns from the routine with self employment profits or PAYE and dividend income, to the more complex with capital gains tax computations, entrepreneurs' relief, foreign income, enterprise investments schemes etc. We have also seen the rapid growth in buy to let ownership. Nowadays, many of our clients have buy to let income on their tax returns. Another change has been the requirement for 'high income' taxpayers who earn more than £100,000 per annum to file a tax return.

One thing that hasn't changed is the January rush. Almost inevitably a high proportion of our tax return work still falls in December and January. There is a nothing like a deadline for focussing minds and helping everything to come together before HMRC penalties apply.

We do try and keep a little in reserve however so despite being a very busy time we are still, 'open for business' in December and January and delighted to welcome new clients.

There is more change on the horizon with the introduction of a dividend tax and changes in buy to let tax from this tax year and Digital Tax Accounts and quarterly reporting from 2018. We are already making plans for the new digital reporting regime and want to be in the best position to support our clients and help them adapt to the new requirements.

So it's heads down for a busy last few weeks to the end of a another tax season. Roll on January 31!

www.base52.co.uk