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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.

How do I pay a dividend?

Introduction

Director/shareholders of privately owned companies have long been able to reduce their tax and NIC bills by adopting a remuneration structure consisting of a low salary, topped up with dividend payments.

The attraction

A typical family company might make £50,000 a year in profits. At this level, the combined income tax and NIC bill would exceed £13,300. Running the business as a limited company would cut the tax on business profits to less than £8,500. The saving of over £4,800 could be used to enhance the living standards of the owner’s family, reduce the length of their working week, or provide funds for investment in the business.

So what has changed?

On 13 April 2013, HMRC announced that PA Holdings had abandoned its appeal in a complex tax avoidance case, involving the payment of dividends. It also announced that there was no change in policy towards OMBs and their dividend planning.

So that sounds OK but…..

They can still challenge dividends and treat them as remuneration if they are not voted properly.

The legal background

Dividends can only be voted from distributable reserves. These are measured using the accounting rules. It can be a particular problem in the first year of a business, if no accounts have been drawn up. How can you prove that profits have been earned before you have accounts?

Many of our clients employ us, or other bookkeepers, to keep them up to date. In this case, it is easy to prepare a simple, interim, statement, to show an up to date profit position. In fact, if the previous accounts show insufficient profits accumulated, it is ESSENTIAL to have management accounts drawn up, before a dividend is voted.

If the dividend is deemed illegal, the shareholders can be forced to repay it, and HMRC can treat the payment as a loan on which notional corporation tax (the S455 Liability) and income tax (on a beneficial loan) may be levied.

Interim vs final dividends

Most companies now pay interim dividends, which are proposed by the directors without reference to their shareholders. In private companies, there tend to be the same people, so it isn’t an issue, but it is not always the case. Interim dividends are taxed when they are paid. “Payment” in this case can mean being credited to the directors loan account, transferred to an account as requested by the director/shareholder or otherwise made available to spend (by paying down a personal credit card bill for example).

Final dividends can only be authorised by the shareholders in general meeting. They cannot approve more than is recommended by the directors (who have a duty to ensure that the company is managed prudently and in the interests of various stakeholders). As most private companies no longer hold AGMs, it is increasingly rare for final dividends to be voted. The main implication is that dividends are taxed on the date it is declared, unless a later date is specified on the resolution.

General practice

Most reward payments run on a monthly cycle, so you would expect dividends to reflect that. However, it is not always practical, or cost effective, for businesses to prepare the necessary financial reports, and hold a Board meeting to approve dividend payments on such a regular basis. In this case, dividends are usually paid, and later formalised after the company’s year end.

HMRC’s guidance

HMRC state (at EIM 42280) that, a payment cannot be earnings if there is an obligation to repay it. Furthermore, they state they “in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director.” Problems can still arise where the later credit to the DLA is a mixed bag of dividend and/or salary/fees/bonus.

So what should we do?

Do check your Articles of Association to ensure interim (or any) dividends are allowable.

Do ensure that each dividend is properly supported with Board Minutes, vouchers and an appropriate resolution.

As far as possible, make sure you actually pay the dividend by bank transfer, rather than credit to the DLA, as this makes the payment date clear. If necessary, the cash can be reintroduced later.

Avoid dividend waivers, as thee are easily attacked under tax avoidance case law.

Remember, dividends can also be paid by the transfer of assets (“in specie” is the legal term), if cash is not readily available.

Conclusion

A low salary/ dividend top up reward package is still available for owner managers who are not subject to national minimum wage legislation. However, care is still needed to ensure dividends are properly paid and documented. Contact your adviser, or us, if you are unsure you comply. Don’t make yourself an easy target by getting the basics wrong.