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The election’s over, what’s next?

So now we know the outcome of the most unpredictable election in a generation. The question for good businesses is not “How did that happen?”, but

“What happens next?”

The Tories look like they will be just one seat short of an overall majority. They are likely to form a government without partners, as the opposition is too divided to vote them out, so another 5 years as PM for David Cameron is on the cards.

The main opposition is likely to come from within the party. By this, I mean from his euro-sceptic element. It is possible that EU membership becomes the main battle ground for the next five years.

This uncertainty will be damaging to business, and my hope is we get to the promised in/out referendum as soon as possible.

What does that mean for business?

In many ways it is good news for business. The economic policy will continue. Deficit reduction will remain the central aim. In fact, the aim will be to generate a surplus.

The uncertainty over our EU membership is perhaps the biggest worry for business, especially those who export to that bloc.

General comments

The stability that this result brings probably means that interest rates will stay low for a while longer. We should see a gradual rise back to “normal” levels by 2020. This provides an opportunity to pay down debt, and strengthen the balance sheet.

As I write (midnight on Election Day), sterling has risen on the FX markets, meaning UK exports are more expensive, but imported costs are lower. The pressure for an early rise in interest rates is much reduced.

Here are a few specifics, and some suggested action.

A lower target for tax avoidance revenue

Despite my question on TV (!), (http://www.bbc.co.uk/iplayer/episode/b05t39yq/election-2015-english-regions-election-2015-a-bbc-spotlight-special) we have no idea on where the Government will raise the extra £5bn they pledged in their manifesto. We can expect most of the “vanilla” planning to remain unchallenged.

Presumably, some of the more esoteric strategies will be attacked, and there may be a tightening up of the rules on some of the CGT reliefs. Tax relief on pension contributions may also be restricted.

Therefore, the action point is to review the normal salary/dividend mix, expecting the planning to remain available.

If you are planning to sell your business over the next five years, it might be sensible to start planning now, as the only major taxes not subject to the “no increase” pledge are CGT and Corporation tax.

More encouragement to take on workers

The Tories have pledged to continue the employment allowance, so employers will be able to take up to £2,000 per annum off their Employer NIC bill. The pledge was to keep it for five years!

They want to fund up to 3 million more apprenticeships, and aim for full employment.

Small businesses should now be considering whether this is the right time to take on an apprentice. The skills shortage is likely to be the biggest brake on growth over the next five years.

The action to take here is to develop a five year plan to recruit apprentices and train them up to be your next generation of managers.

More encouragement to start up businesses

The recent pension rule change has opened up a new source of funding. Up to 10% of retirement age people are considering using their pension pot to fund a new venture.

In addition, the Government want to triple the number of start-up loans to 75,000.

Those considering a new business venture should look outside of the traditional sources for funding; there are a huge number of alternatives to the “Big Four” banks.

Other taxes

Cameron pledged no increase in Income tax, VAT or NIC for five years. It is difficult to see where he can increase taxes, as the Tories want to increase the IHT limit to £500,000 per person (£1m for married couples and civil partners).

The UK is in a competitive market for non-EU companies, so it is difficult to see them reversing the recent trend in reducing corporation tax rates.

This pretty much leaves only CGT, business rates, council tax and consumer taxes (alcohol, tobacco and fuel duty) as the only major areas in which taxes could be raised.

The recently announced review of business rates is expected to increase the take by £1bn, so now is the time to review that rates bill and make appeals if you think you have a case.

Tax reliefs

The other way in which tax could be raised is to restrict tax reliefs. For example, tax relief for pension contributions and gift aid could be restricted to the basic rate of tax. Gift aid relief costs around £1bn a year. Cutting gift aid relief could protect another £0.5bn of tax, without “raising” any tax.

Pension tax relief costs around £4bn a year. Another £2bn could be protected by limiting relief.

If a pension contribution is planned, it may be sensible to do it sooner rather than later, as tax relief may be restricted after the next budget or Autumn statement.

Good housekeeping in general

Of course, major changes are always a good reason to review your prices and costs. We can assist in identifying the “low cost, big impact” changes that would have the most effect, and help you to implement them if required.

Contact us, or your current adviser for help with this.

Director/shareholder reward packages: The dynamics have changed

Introduction

The introduction of the Employment Allowance (“EA”) allows employers a discount of up to £2,000 off their liability to Employers’ NIC. This has added another factor into the salary vs dividend debate.

There is one other complicating factor as well. The level of other taxable, non-dividend, income enjoyed by the director/shareholder.

If there’s no other income

A salary equivalent to the director’s personal allowance is most efficient. The additional NIC paid by the director (at 12% on the excess over £8,060) is more than compensated by the additional corporation tax saving at 20%.

With no other employees, this works for companies with up to 5 directors/ shareholders.

What if the director has other income?

Many directors own the company premises, and enjoy a rent from that. Where rent (or indeed any other taxable income) is enjoyed by the director, a little more care is needed. The optimal position would be to create total taxable income (excluding dividends) of exactly £10,600 (for 2015/16). So if the director was receiving rent of £3,000 a year, the ideal salary would be £7,600.

What about pensions?

There are two aspects to this.

Contributions to a private pension scheme
Dividends do not count as pensionable income, and so tax relief on personal contributions would be limited to the amount of taxable salary. (Rent doesn’t count either).

The simplest way around this is to get the company to make an employer contribution, but you may need a different kind of pension scheme, and this may need to be negotiated/agreed with fellow directors.

I had just such a case where one of three directors wanted to top up his pension. Unfortunately, the wider savings from the low salary route meant his tax relief was limited to just £5,000, as he already had two smaller schemes running, and the company did not have sufficient profits to get full tax relief on even that small amount.

State pension entitlement
Employees are credited with a year’s worth of contributions if their weekly earnings exceed £112.00 (2015/16 rates). Therefore, the director will need a salary of at least £5,824 to add another year to their state pension accrual. In the example above, a salary of £7,000 meets the criteria, but what if the rental income was £6,000?

Voting a salary of £5,824 would take the director into income tax, as total income would exceed the personal allowance.

At 2015/16 rates, this would impose an income tax bill of £244.80 on the director, but would add a year to the pension entitlement. The cost-benefit decision is personal to each individual; is an extra year’s pension worth paying that tax?

The factors to consider are:

  • how many years before you can take your pension,
  • how long you think you’ll be around to enjoy it, and
  • how much more could you generate in income by saving that tax over the years before you retire/

among others.

Creating alternative income

If the circumstances allow, it may be more efficient to draw one’s income as rent or interest from your own company, rather than by way of salary.

Rent

Any rent charged must be at a market rate. We would suggest that a written agreement is drawn up, making it clear who is responsible for repairs etc., as well as covering the amount of the rent.

Interest

A director can only charge interest to his company if he has a loan account in credit, and there is an obligation on the company to pay interest. Any “interest” paid on a loan which was intended to be interest-free could be challenged and treated as remuneration. In order to avoid any uncertainty, we would suggest a written agreement, which makes clear the terms of the loan. The agreement does not need to be onerous, but a clear statement can help to avoid later disputes.

Action

The start of a new tax year is a good time to review your financial position, as many rates and allowances change. Thankfully, for directors’ salaries, the annual earnings period means you haven’t lost out if your review has not yet been completed.

Contact your adviser, or drop us a line if you’d like a review done of your personal situation.

Numbers (UK) Limited

5 May 2015

Work ON, not IN!

[Originally a guest post on www.owenjonesdesign.com]

 Introduction

It is a real problem when you are doing something you love isn’t it?

You set up your business because you are good at something, or you are passionate about it, or both, but you never seem to make progress. You are busy doing what you love, but somehow it’s not as rewarding as you’d thought it would be.

Very often, that is because you are working IN, and not ON your business.

What’s the difference?

If you are going to reap the rewards of your hard work, then you’ll need to balance these two aspects. Before you can do that, you need to understand what they are.

Working in the business

This is basically doing the stuff for clients/customers that the business was set up to do. For Owen, this is producing high quality design ideas, and implementing them as part of the branding strategy. It involves meeting with the clients, getting to understand both what the client does, and the ethos underpinning that work. Similarly, we follow the same process of understanding the client and their objectives, whether we are preparing a succession plan and managing the process, preparing an Inheritance Tax planning report or discussing a business issue with a client as part of our PMI program (“The Numbers”).

Working on the business is different

This aspect makes the business, or more accurately its owner, the client. It may seem odd, but businesses are merely means to achieve the ends of their owners. If not, the owners become employees of their business, and will often earn more, with less stress, by finding employment with someone else!

Working ON the business involves taking a step away from the day-to-day tasks, and asking yourself strategic questions, like:

What things are important to me?

What does my life need to look like in five years’ time if I can count them a success?

What kind of work/clients do I want for my business?

What things do I need to change to get to those goals?

So, if it’s so important, why doesn’t it get done?

There are several reasons why not, and each requires a different remedy. Here’s a few ideas to get started. (But contact Owen and give him your own ideas!)

1.   The tyranny of the urgent.

So, you have a client deadline fast approaching, and it’s not going too well. The client is demanding a proposal/finished product/sample/presentation…….. and you’re running out of time. This happens to us all, but if you find it happens more than three times a year, ask yourself these questions.

  •  Am I overpromising?

Most clients will be relaxed about an extended deadline if they know about it early enough. Estimate a completion date, and then add an extra week/fortnight to give yourself time to do a quality job.

  •  Is this client worth busting a gut for?

If they are always hassling you, slow in responding, and unreasonable in demanding late changes to your brief, then the answer may well be “no”.

  •  Is the fee worthwhile?

Remember, a large fee is not always a good thing. Think about the time commitment, (including the initial marketing time) and work out an effective hourly rate. You will earn more by taking on two smaller jobs with a higher effective rate.

2.  It can wait.

Of course, long term planning is exactly that, long term, but what will you say in five years’ time? Can it still wait? There’s an old Chinese proverb that states “The best time to plant a tree was twenty years ago; the second best time is now.”

The problem is, every year you delay it puts you back another year in achieving your goals.

3. It’s not what I set up my business to do.

This goes back to my introduction. We get excited about the work the business does, and most of us do not run strategic planning businesses. Therefore, it doesn’t give us that same “buzz” as a well-executed project.

How to make it happen

  1. Schedule your “blue sky” thinking time.

I have a fixed Friday morning appointment in my diary. This 3 hour slot is split between working ON my business, and doing a specific marketing task, such as recording a video for our YouTube channel, or writing a blog. (That doesn’t mean that I don’t do marketing at any other time of the week).

Studies have shown that scheduling a task makes it 20 times more likely to happen. It is much easier to say to a client that you have a commitment if it’s in your diary, than being caught unprepared when the phone rings.

2.  Appoint a business coach or financially literate outsider to work with you.

In this way, you have an accountability partner, and you will make more effort to avoid letting them down. You are far more likely to get out of bed and go for that morning run, if you are meeting a friend, than if you plan to go alone.

A good business coach will earn you far more than their cost, by helping you achieve your goals.

3.  Tell as many people as you can that you are going to do this.

While you are not as accountable under idea 2 above, it is very embarrassing to tell a lot of people that you haven’t done what you promised yourself you would do!

4.  If you cannot afford a business coach, find a fellow business owner, (not a competitor), with whom you can share ideas, problems and your thoughts.

Again, scheduling a regular meeting will benefit both of you. You’ll be surprised how clearly you see solutions to problems that are not your own. Conclusion

Working ON your business is crucial to achieving your goals, but it is not easy to create the sense of urgency or the time to do it. Finding people to help is almost as essential.

If you’d like further advice or ideas, or want Owen or I to help you achieve your goals, get in touch. We’d be delighted to help.

A Government give-away (with conditions)

Introduction

One of the goods things to come out of recent budgets is the new holiday for Employer National Insurance Contributions (“NIC”). The Employment Allowance allows small and medium enterprises (“SME”) to deduct up to £2,000 from their employer NIC payments.

The details

The holiday is worth up to £2,000 per annum. This starts on April 6th 2014, and must be claimed by qualifying employers. HMRC are expecting employers to take the deduction as early as possible, so many will see the benefit on 19 May 2014 (when the first payment is NOT made.

You can only claim it once, even if you run more than one PAYE scheme. If you are part of a group, only one company can claim the allowance.

Who cannot claim?

The main exclusions are companies and organisations that provide “public sector” services. These include:

  • NHS services
  • General Practitioner services
  • the managing of housing stock owned by or for a local council
  • providing a meals on wheels service for a local council
  • refuse collection for a local council
  • prison services
  • collecting debt for a government department

but also includes those;

  • who employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • already claim the allowance through a connected company or charity
  • are a public authority, this includes; local, district, town and parish councils

How do we claim it?

The claim is made using your own payroll software, or by using HMRC’s own Basic PAYE Tools. You can check how much of the allowance you have claimed by logging on to HMRC’s online service and “Viewing PAYE Liabilities and Payments’.

Arrangements have been made for those employers who are exempt from online filing, and more detailed guidance is available on HMRC’s website.

Other issues

If you have more than one payroll, you can only claim against one of them. At the end of the tax year, if you have not claimed the whole £2,000, you can apply to HMRC to have the balance refunded on the second PAYE scheme.

If you do not apply for a refund, and have an unused balance (i.e. you have paid Employer NIC that you haven’t covered with the EA), you can set the balance off against future PAYE liabilities. Please note, you cannot generate an unused balance in any other way. Neither can employer NIC in excess of £2,000 per annum cannot be used to generate an unused balance.

You can claim EA up to four years after the tax year has closed, but HMRC will set off the refund arising against future or existing PAYE liabilities, unless you specifically ask for a refund.

So what will you do with the extra cash?

A maximum saving of £166.66 per month is not life-changing, but it can be put to good use.

You could give a pay rise to a lower paid worker. Passing on part of that could mean a significant increase (in percentage terms) for that employee. It can also help to head off any discontent. Pre-empting the rise in the National Minimum Wage (“NMW”) can present you as a caring employer, rather than one who has to be forced into giving pay rises.

However, you should consider taking the opportunity to remind them of the difficulties faced by small businesses, and their critical part in making you’re a success.

Alternatively, you could just bank the savings. Cash is king, and particularly when the banks are still not providing enough finance to the SME sector. £2,000 a year may not sound like much, but it can help as a source of free funding.

Perhaps a better alternative would be to use it to invest in updated equipment. If your credit rating is good enough, there are sources of cheap funding around. Replacing older computers, perhaps on a lease or HP contract, will increase productivity, and boost morale. It will also address the need to move on from Windows XP machines, following Microsoft’s withdrawal of support for that operating system.

Words of warning

It is unlikely, but you could lose eligibility part way through a tax year. If that happens, you have to make the appropriate change to your payroll software, and repay the Employment Allowance previously given!

If you use an outside payroll agency, you will need to advise them if you qualify, and of you cease to qualify. Some payroll agencies do not know enough about your business to determine whether you qualify.

If you change payroll software, you may need to file another EPS, to activate the Employment Allowance within the software, although HMRC will roll forward the entitlement each year.

Some employers run a separate payroll for paying senior staff, to maintain confidentiality. If you have more than one payroll, perhaps run by different providers, YOU will have to decide which one gets the EA, and advise all providers accordingly.

You can only deduct the EA from the Employer NIC, not the employee NIC and/or PAYE deducted. Make sure your payroll staff or provider know this, as there are now penalties for late payment of PAYE/NIC.

You will need to maintain records proving entitlement and the amounts claimed, for three years after the end of the tax year to which they relate. You cannot rely on HMRC to record the amounts claimed, and proof of entitlement.

What should we do next?

So there are a few thoughts for consideration. If we can help in your decision-making, please let us know.