8 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 2016. 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 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:

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 £42,385, £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 An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor.

The £100,000 threshold is particularly painful from a tax perspective as the personal allowance is withdrawn.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 an eye watering 60% at income levels between £100,000 and £121,200. 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 is being introduced from 6th April 2016. This will affect 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 will apply for varying levels of income. 

This will affect business owners in particular who may be used to drawing a relatively high proportion of their income as dividends. In some cases, if you are considering a substantial dividend, it may be advisable to bring this forward to 2015/16 rather than receiving the dividend in 2016/17 when the new taxes will apply. This will depend on your particular circumstances and it would be advisable to discuss this with your accountant before making any decisions.

http://www.base52.co.uk/news/latest-news-for-business/archive/news-article/2016/January/dividend-allowance-and-rates-of-tax

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 now save up to £15,240 for 2015/16 and this limit will be maintained for 2016/17. You can choose how you split this between stocks & shares and cash ISAs. 

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

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 2015/16 annual exemption effectively.

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

8) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2016 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 2015/16.

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.

www.base52.co.uk

What has the government ever done for us?

Mimicking the famous line about the Romans in 'Life of Brian', let's imagine we have a group of men and women who run their own small businesses and one of them asks this question about the current government. Just to clarify, when I say 'small' business, I mean 'small'. Let's say below £200,000 annual sales. I don't have the precise numbers to hand but I would imagine that this would cover the vast majority of businesses currently trading in the UK. Typically the owners are not fantastically wealthy. The more successful ones will have taken risks and made sacrifices to get their business to a stage when they can draw a reasonable income from it. 

Let's look at the positive things the Government has done for this sector. Corporation tax rates are relatively low and are set to fall further from the current level of 20% to 18% by 2020. They have introduced an employment allowance for employers which reduces their national insurance bill. In 2016/17 this will be an allowance of £3,000 per annum. (Note though that this only benefits businesses that have employees on the payroll above the NI threshold and it does not apply to single director businesses). The capital allowance thresholds are relatively high but in reality these only benefit larger businesses who invest at a higher level. That's about it. Oh, there's also small business rate relief although that only benefits businesses that own or rent their business premises. 

Now let's look at the negatives. The biggest debit has to be the introduction of the new dividend tax from April next year. This will add a significant personal tax burden to small business owners who run their own limited companies. The stark choice is that they  will need to make cuts to their own personal drawings or cut back in their businesses. It is also becoming increasingly apparent what a huge overhead the new mandatory employment pensions will be for the smallest businesses. For businesses struggling to keep up with HMRC compliance this is another unwelcome administrative burden being foisted on them, with minimal practical support. Then there is the new National Living Wage being introduced from April. Larger businesses have the capacity to cope with this. Our smallest retailers, hairdressers etc will find this a major challenge, especially with the other measures outlined above compounding their financial difficulties. They have also made it more expensive for these entrepreneurs to exit from their business. Changes to the rules on solvent liquidations mean that entrepreneurs' relief will no longer be available in these circumstances from April. Many business owners will now face a much higher capital gains tax liability on exit than they had planned for.

So let's go back to the original question put to a room full of small business people. What has the government ever done for them? Well, looking at the most recent changes, the answer would have to be, 'Not a great deal and they are making our lives a lot more difficult.'

The Government will point to the positive measures above and the difficult decisions they have had to take to stabilise the public finances. In my opinion, some of the burden is falling disproportionately on the smallest of small businesses. Some of these adverse measures will really start to bite this year and particularly in 2017/18 and I believe there will be a negative impact on business profits and investment in these businesses. By nature this group tend to be positive and resilient and not given to making a fuss. I believe the government should not take their goodwill for granted however and they are running the risk of alienating a cohort who should be their natural supporters.

www.base52.co.uk

Tax doesn't need to be taxing. Does it?

Well, Christmas is over and for accountants it's back to working towards that tax deadline at the end of end of January. This is often the busiest time of the year for accountancy firms with a rush to complete the remaining tax returns.

So why does the bulk of the tax work often fall in December and January? After all the tax year ends in April, almost 10 months before the January deadline. Surely that's plenty of time to get the bulk of the tax work done, just leaving a bit of mopping up work in December and January? Well yes, you'd think so but the things that need to be factored in are human nature and individual preferences. 

We start requesting records from clients in May or June and then send regular reminders well into January. We try and spell out the benefits of getting tax returns done early - it's off your list, you know what tax is due and can plan for this, it stops us pestering you etc etc. Most of this is to no avail. The clients that want to send us their records early will do so. Those that don't, don't. If that sounds a bit fatalistic I'm sorry, but the evidence bears this out. Individual clients (I'm not mentioning anyone by name so I'm sure they won't mind) will not even think about their tax return until after Christmas. If we are lucky they will give us the records in mid January and give us a fighting chance of meeting the deadline. One or two will wait until a week or so before the deadline before they are motivated to dig out their records. 

So we kind of gear ourselves up for this and try and keep things flexible in January so we can get the work done.

We are not complacent though. In February we will sit down and say, 'How can we do this better?' 'How can we encourage clients to bring in their records earlier?'. We will then work hard to implement any improvements. Maybe next year will be the year we will have a less frenetic January.  I'm always optimistic about this but I won't be booking any holidays in January just yet.

Three weeks to go and we might allow ourselves a quieter day or two in February before we move onto the next round of deadlines. Well we'd get bored if we weren't busy.

Www.base52.co.uk

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

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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.