8 things to do before the end of the tax year

It may not feel like it with the UK in the grip of snow and ice but we have already had the first day of Spring and the end of the tax year will soon be upon us. 

A little time spent planning in these last few weeks before the end of the tax year could provide useful savings. The tax year end for individuals is 5 April 2018.  Many self employed people also have their accounting year end as 5 April or 31 March to coincide with the tax year. For private limited companies, 31 March is also a common date for the year end. 

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 £45,000, £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 An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor. 

The £100,000 threshold is particularly unattractive from a tax perspective as the personal allowance is gradually withdrawn at a rate of £1 for every £2 of income.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 £123,000. 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. 

There is a £5,000 dividend allowance for 2017/18 where dividends are free of tax. The dividend allowance is 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 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 and additional dividend rates of 32.5% and 38.1% respectively are best avoided by capping gross income at the basic rate threshold of £45,000 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. This 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 2017/18. You can choose how you split this between stocks & shares and cash ISAs. There are also new 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 £11,300 annual exemption for 2017/18 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 2018 tax bill. It is unfortunate that however much we plan, many of us will still be faced with a tax bill for 2017/18, 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

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

New year, new goals?

The start of the new year is often a time for looking back and reflecting on the last 12 months and setting new resolutions and goals for the year ahead. This is true both personally and in business

But is it really necessary or should we just plough on, doing what we have been doing, especially if things are going reasonably well?

We all know the 'gym' syndrome of lots of people signing up for annual gym membership in January after over-indulging at Christmas. The gyms are full in January and into February and then things start to taper off. By March we are wishing we had never bothered. 

Some entrepreneurs favour BHAGs or Big Hairy Audacious Goals. I'm not sure why they are hairy. The danger with BIG goals and annual gym membership is that we are setting ourselves up to fail.

But goals are important. I'm reading 'Moonwalking with Einstein' by Joshua Foer at the moment. A great book about improving your memory. He describes the 'Plateau of ok' which most of us reach when we learn a new skill. We become comfortable at this plateau and stop improving. The only way to improve is to set new goals, stay curious and learn by your mistakes, i.e. stop being comfortable. So goals are critical if we want to keep improving, whether personally or in business

Maybe I'm setting my sights too low but I favour more modest but achievable goals and not having too many of them. Telling people about your goals is another way of helping you to achieve them. So I thought I'd increase my chances of success by telling you that my modest but achievable goals are to grow sales in my business by at least 10% and to start some language classes. Nothing big or hairy about them but they motivate me and I intend to focus on making sure they happen

What are your business goals for 2018?

If you need some inspiration why not come along to Base52 Growth Club in Hitchin on 25 January? Our guest speaker is Jess Butcher MBE co-founder of Blippar which has grown into a leading tech company in just 6 years! Use this link to book your place https://www.base52/events

Good luck with achieving your goals in 2018

www.base52.co.uk

Deal or no deal?

I had lunch with a lovely chap yesterday who helps people sell their businesses for a living. One of his many insights was that the people who get the best deals are ready to sell but also ready to continue running their business if the offer on the table isn't good enough. The other side of the coin is where the seller has had enough and is desperate to sell. Inevitably they end up getting a poor deal.

So the lesson is that if you are thinking of exiting from your business in the future, it's never too early to start thinking about it and plan your strategy. 

The topic of the moment is Brexit and there has been much debate about 'hard Brexit' and 'Crashing out out of the EU without a deal'. The reality is, from a negotiating perspective, the UK needs that alternative or they have an even weaker hand in negotiations with the EU.

In their acclaimed book about principled negotiation,'Getting to Yes', Fisher and Ury describe the concept of a Best Alternative to a Negotiated Agreement (BATNA). They argue that it is foolish to enter into an negotiation without a BATNA and you should work hard to make your BATNA as attractive as possible. This gives significant leverage in a negotiation and allows the holder to walk away until a better offer is put forward.

So if you are in a negotiation, be it a multi-million pound deal or a relatively minor customer complaint, think about your BATNA and be prepared to use it. It may help you achieve a better outcome.

www.base52.co.uk

What's your dream income?

Earning without working or 'passive income' is many people's ideal. Like the guy in Nick Hornby's, 'About a Boy' whose dad wrote a hit pop song and he was able to live a life of leisure on the royalties.

So how do you start to acquire passive income? Many people in employment (and more now with the Government's pensions auto enrolment initiative) will be putting funds aside into a pension. For most, that, along with the State Pension will be their passive income in retirement.

But what about passive income before retirement age? How can we start to build up investments which generate income whilst we are still young enough to enjoy it?

I like George S Clason's book, 'The Richest Man in Babylon'. It's full of tips about thrift and personal financial management purportedly based on the wisdom of the ancient Babylonians. Two tips which have stuck with me are (and I might be paraphrasing here), 'Pay yourself first' and 'Save 10% of what you earn'.

'Pay yourself first' means that you put some money aside for investment before you start paying the household bills etc. That is top of the list and gets done every month. What's left is to live on. 10% is his suggested minimum for setting aside. This is easy to say and much harder to do, particularly if finances are tight. His point is that 10% of even a small amount will not be missed and over time will accumulate if invested wisely.

So let's look at someone earning £30,000 after tax, or £2,500 per month. Paying themselves 10% before they do anything else would generate £3,000 over a year or £250 per month . Within a few years this could build up to a sizeable pot. Let's be clear this is not for a holiday or to put towards a new car. This is for investment, to generate a passive income. Sure, the £250 will be missed but Clason's point is it will not be missed as much as we think. Most people will adapt and reduce their discretionary spending.

What to invest in is a separate question and will depend on a number of things. There are lots of tax incentives for some investments in the form of ISAs, LISAs, Help to Buy ISAs etc. Clason suggests taking some time and doing some research to find the right investment for you. An Independent Financial Advisor can help devise an investment strategy suited to an individual's goals and attitude to risk.

Generating a passive income stream is not easy. It takes discipline and sacrifice but it can reap significant rewards and potential escape from the drudgery of work. Starting early is key so take a tip from the Babylonians and 'Make thy gold multiply'.

www.base52.co.uk

Is the price right?

Getting the price right, or setting price at a level which provides good value to the customer and profit for the business is one of the most important business decisions. It is an area that some businesses give little thought to however and as a result they get by on poor margins and struggle to make ends meet.

Steve Ballmer, ex CEO of IBM puts it more starkly, 'This thing called ‘price’ is really, really important. I still think that a lot of people under-think it through. You have a lot of companies that start and the only difference between the ones that succeed and fail is that one figured out how to make money, because they were deep-in thinking through the revenue, price, and business model. I think that’s under-attended to generally'

So what is the right price?

Ron Baker, Value Pricing expert argues it should be based on value provided to the customer rather than 'accounting' methods like chargeable hours or 'cost plus'. In his book, 'The firm of the future' he gives an example of an accountant who helps a wealthy client sell their business. He is at the client's beck and call for many weeks, uses his knowledge and lifetime experience to deliver an exceptional deal and then he is very pleased with himself when he eventually presents the client with a quite a large bill for hours worked. The client is even more pleased  because in the context of the business sale the fees charged were minuscule. If the accountant had charged a fee based on value delivered, his client would have still been very happy and he would have been able to charge significantly more than the self-limiting hourly rate. The same principle  applies to tradespeople who often limit their pricing with day rates when the value delivered is often significantly higher.

Let's be clear. This is not about overcharging. This is about thinking carefully about the value provided, agreeing terms in advance and then delivering on your promises.

'My business is different' you might say. 'It's very competitive, the price is set by the market'. This can be true of commodity products or services. If you are trapped in this mindset it is not a nice place to be. The challenge I think is try to differentiate your product or service offering so that you provide some unique value and are not competing solely on price.

All accountants know that an increase in price feeds straight through to the bottom line. It is additional profit with no energy expended other than making the decision and presenting it to your customers. A decrease in costs also increases profit (to  a lesser degree) but often there are consequences - you need to give something up, improve productivity, work with another supplier etc. Pricing is the biggest lever for increasing profits.

So I don't have all the answers but I do know that getting the price right is critical for business success. As Steve Ballmer says business owners need to think it through and keep thinking it through. It can be the difference between success and just muddling through

www.base52.co.uk