Strategies for your business
Embarking on a new venture
Starting a new business venture is an exciting and challenging proposition, which also carries an element of risk. There are many factors to consider, including: the nature of the business; your target market and competitors; the potential for profit; how you will extract those profits; how fast the business will grow; how the business will impact on your life; the potential risks involved; and how you plan to exit the business when the time comes.
Business plan: A comprehensive business plan is essential. This should include: your sources of funding; tax-efficient borrowings; whether the business needs a PAYE scheme and/or to be VAT registered; and, not least, the business structure that will best meet your needs (sole owner, partnership, limited liability partnership or limited company). We can help you through the decision-making process - and to make the appropriate registrations. A good cash flow forecast can help you spot potential times when cash will be short, and regular updates will help you to determine how your business is performing.
Business structure: You will need to decide which business structure best suits your needs. There are both advantages and disadvantages for each trading structure and each has implications for control, perception, support, and costs. For example, careful consideration is needed regarding whether or not to retain personal ownership of any freehold property on an incorporation.
Choosing a year end: It is also important to choose the right year end for your business. Is there a time of year when it will be more convenient to close off your accounting records, ready for us? What would be the best time of year for stock-taking? To what extent is your business seasonal? From a tax viewpoint, the choice of a year end early in the tax year for an unincorporated business usually means that an increase in profits is more slowly reflected in an increased tax bill and over time the delay between earning profits and paying the tax can create a source of working capital for the business. Conversely, a reduction in profits will more slowly result in a lower tax bill.
HMRC registration: Informing HMRC when you become self-employed, and probably liable to Class 2 national insurance contributions (NICs), may not be very high on your list of priorities in the first weeks and months of a new business. However, failure to notify may attract a penalty if tax or NICs are unpaid as a result. We recommend that you register as soon as possible to begin paying NICs and notify HMRC of your new self-employed status.
Regional employer NICs holiday for new businesses
This is a scheme intended to assist new businesses that start up (or started up) during the period on or after 22 June 2010 to 5 September 2013 in targeted areas of the UK. Employers eligible for the scheme may not have to pay the first £5,000 of Class 1 employer NICs due in the first 12 months of each employment. This will apply for each of the first 10 employees hired in the first year of business.
The targeted countries and regions are: Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East and West Midlands and the South West.
|Starting a business - Action plan|
|Prepare a robust business plan|
|Ensure that you have access to suitable funding|
|Check your right to use your chosen trading name|
|Choose the right business structure|
|Register with HMRC|
|Register for VAT|
|Register your business name|
|Trade and professional registrations|
|Choose your year end|
|Plan to reduce your tax liability|
|Develop your branding|
|Involve the family|
|Plan to avoid fines and penalties|
Making the most of deductible expenses
Our role is to work with you to minimise your taxes, and it is important to take advantage of all the opportunities available.
You will pay tax on your taxable profits, so it is essential to claim all deductible expenses, many of which will be included in your accounting records. If you are self-employed and carry on your business from home you can claim tax relief on part of your household expenses, including insurance, repairs and utilities.
You may also be able to claim for the cost of travel and accommodation when you are working away from your main place of business. You must keep adequate business records - including a log of business journeys - because in addition to ensuring your accounts are accurate, these records may be requested by HMRC.
You might want to consider using an appropriate computer package for record keeping.
Claiming capital allowances
'Capital allowances' is the term used to describe the deduction we are able to claim on your behalf for expenditure on business equipment, in lieu of depreciation.
Annual Investment Allowance (AIA): For the period up to 1 January 2013 the first £25,000 of the year's investment in plant and machinery, except for cars, is allowed at 100%. However, in the recent Autumn Statement, it was announced that there would be a temporary increase in the AIA to £250,000 per annum for a two year period from 1 January 2013. This applies to any size of business and most business structures, but there are provisions to prevent multiple claiming. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as long-life assets or integral features) - see below.
Enhanced Capital Allowances (ECA): In addition to the AIA, a 100% first year allowance is available on new energy saving or environmentally beneficial equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit payable at 19% but subject to limits).
There is a separate ECA scheme for electric and low CO2 emission (up to 110 g/km) cars, new zero-emissions goods vehicles (the last, for five years from 1 April 2010 (corporates) or 6 April 2010 (others)) and natural gas/hydrogen/biogas refuelling equipment. They still qualify for the 100% first year allowance, but do not qualify for the payable ECA regime.
Writing Down Allowance (WDA): Any expenditure not covered by the AIA (or ECAs) enters either the main rate pool or a special rate pool, attracting WDA at the appropriate rate - 18% and 8% respectively, with effect from chargeable periods ending on or after 1 April 2012 (corporates) or 6 April 2012 (other businesses). The special rate 8% pool applies to long-life assets and integral features of buildings, specifically:
- Electrical systems (including lighting systems)
- Cold water systems
- Space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
- Lifts, escalators and moving walkways
- External solar shading
- Active facades (climate-responsive features).
The main rate applies to most other plant and equipment, including some cars (see below).
Businesses may claim a WDA of up to £1,000 where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
Transitional rules for AIA and WDA
Where basis periods straddle 5/6 April, transitional rules apply.
Enterprise Zones: The Enterprise Zones in assisted areas qualify for enhanced capital allowances. In these areas, 100% First Year Allowances will be available for expenditure incurred by trading companies on qualifying plant or machinery.
The qualifying expenditure must be incurred between 1 April 2012 and 31 March 2017.
Cars: The main rate of 18% applies to cars with CO2 emissions exceeding 110 g/km. However, cars with CO2 emissions above 160 g/km will be restricted to the special rate of 8%. Expenditure incurred before April 2009 on 'expensive' cars continues under the old regime (£3,000 per year cap on capital allowances). For non-corporates, cars with a non-business use element continue to be dealt with in single asset pools, so the correct private use adjustments can be made but the rate of WDA will be determined by the car's CO2 emissions.
Buildings: A maximum 100% initial allowance is currently available for conversion of parts of business premises into flats (up to 1 April 2013 for corporates and to 5 April 2013 for other businesses) and for business premises renovation allowance. WDA of 25% (on a straight line basis) applies to expenditure on which an initial allowance is not claimed.
Investing in Research and Development
Tax relief is available on research and development (R&D) revenue expenditure at varying rates. Current rates of relief are:
- For small and medium-sized companies paying tax at 20%, the maximum rate of tax relief is 45% (that is a tax credit on 225% of the expenditure)
- For small and medium-sized companies not yet in profit, the relief can be converted into a tax credit payment worth 24.75%
- For larger companies paying tax at 24%, the maximum rate of relief is 31.2% (that is a tax credit on 130% of the expenditure).
SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project will be able to claim the large company R&D tax credit. This means that they will qualify for relief on 130% of their R&D expenditure.
A family affair?
You can employ family members in your business, provided the package is commercially justifiable. Family members can be remunerated with a salary, and perhaps also with benefits such as a company car or perhaps medical insurance, and you can also make payments into a registered pension scheme.
You can also take family members into partnership, thereby gaining more flexibility in profit allocation. In fact, taking your non-minor children into partnership and gradually reducing your own involvement can be a very tax-efficient way of passing on the family business. However, be aware that taking family members into your business may put the family wealth at risk if, for example, the business were to fail.
Have you considered providing a van as an alternative to a company car? The maximum annual tax bill on the use of a company van with unlimited private use is only £1,500 or £1,775 including employer provided fuel.
HMRC may challenge excessive remuneration packages or profit shares for family members, so seek our advice first. If you operate your business through a trading limited company, under current tax law you can pass shares on to other family members and thus gradually transfer the business with no immediate tax liability in most cases. However, a tax saving for the donor usually impacts on the donee, and you need to steer clear of the 'settlements legislation', so again, contact us for advice first.
Business profits are charged to income tax and Class 4 NICs on the current year basis. This means that the profits 'taxed' for each tax year (ending 5 April) are those earned in the accounting period ending in the tax year.
Case Study 2
Helen, a sole trader, draws up her accounts to 31 July each year. Her profits for the year ended 31 July 2012 will normally be taxed in 2012/13.
There are special rules for the early and final years of a business, and for partnership joiners and leavers.
There is a growing number of 'fines' for those not complying with the rules and regulations of Government departments. We have already mentioned income tax and Class 2 NICs, but other 'traps' to avoid are:
- Late VAT registration
- Late filing penalties
- Late payment penalties and interest
- Penalties for errors in returns
- Penalties for failing to operate a PAYE or sub-contractors scheme.
If we are to help you to steer clear of these traps, you must let us have all the details for your accounts and Tax Returns in good time, and inform us of any changes in your business, financial and personal circumstances.
Employed versus self-employed
Determining whether someone is employed or self-employed is not as straightforward as it might first appear. There is no statutory definition of 'employment' or 'self-employment'.
Rather, there is a series of 'tests' which HMRC will apply to ascertain whether someone is classified correctly.
As large amounts of both tax and NICs can be at stake, HMRC can take quite an aggressive line and mistakes can cost you dearly, so advice tailored to your situation is essential.
'IR35' rules require businesses to consider each and every contract they enter into for the provision of services. The test is whether or not the contract is one which, had it been between the owner or partner and the customer, would have required the customer to treat the owner or partner as an employee and therefore be subject to PAYE.
The contract 'passes' if the owner/partner would have been classified as self-employed; it fails if the owner/partner would have been classified as an employee. If the contract 'fails', the business is required to account for PAYE and NICs on the 'deemed' employment income from the contract at the end of the tax year.
This is done using specific rules. We can advise you about these.
If the question is whether an individual is an employee or self-employed, the risk lies with the 'engager' or payer - with a potential liability for the PAYE which should have been paid over without right of recourse to the 'employee'. If the question is whether or not IR35 applies, the question (and any liability due) is for the individual and his/her company (the payee).
Debtors and unbilled work
It is a feature of the tax system that businesses must include in their turnover for the year the value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed, all as at the end of the year.
We will need to discuss with you exactly what needs to be identified and the basis of valuation. And whether you are starting a new business or running a more mature business, keeping an eye on debtors and unbilled work is crucial to your cash flow.
Considering a limited company
You could form a limited company if the limitation of liability is an important consideration - but do bear in mind that banks and other creditors often require personal guarantees from directors for company borrowings.
Trading through a limited company can be an effective way of sheltering profits. Profits paid out in the form of salaries, bonuses, or dividends may be liable to top tax rates, whereas profits retained in the company will be taxed at rates from as low as 20%.
Retained funds can be used to buy equipment or to provide for pensions - both of which are eligible for tax relief. They could be used to fund dividends when profits are scarce (spreading income into years when you might be liable to a lower rate of income tax?) or capitalised and taxed at 10% or 18%/28% on a liquidation or sale.
An increasing number of businesses have incorporated, but there are important implications which we would be happy to discuss with you, before you decide whether or not to incorporate your business.
National insurance contributions (NICs)
While leaving profits in the company can be tax-efficient, you need money to live on, so you should consider the best ways to extract profits.
A salary will meet most of your needs, but do not overlook the use of benefits, which may save income tax and could also result in a lower national insurance liability.
Six key ways to save NICs:
Increasing the amount the employer contracts to contribute to company pension schemes - but watch the annual and lifetime investment limits and discuss with us if the proposed payment will bring the total for the current accounting period to more than 210% of the amount paid in the previous accounting period
Share incentive plans (shares bought out of pre-tax and pre-NIC income)
For some companies, disincorporation and instead operating as a sole trader or partnership
Instead of more salary, paying a bonus to reduce employee (not director) contributions
Paying dividends instead of bonuses to owner-directors
Provision of childcare and other tax-free benefits.
Owner-director? Increase your net income
As an example, consider how much you might save if, as an owner-director, you wanted to extract the £10,000 profit (pre-tax) your company makes in 2012/13 by way of a dividend rather than a bonus.
Case Study 3
As you can see in this case study, the net income is increased by more than 17% by opting to declare a dividend.
Be sure to discuss this with us, as this is a complex area of tax law.
|Profit to extract||
|Income tax @ 40%||
|Net amount extracted||
Remember that dividends are usually payable to all and are not earnings for pension contribution and certain other purposes. Although it is possible to waive dividends, this can result in tax complications, so a better option may be to have different classes of share. Finally, you need to consider with us the effect of regular dividend payments on the valuation of shares in your company.
Taking action before the year end
Tax and financial planning should not be left until the end of the tax or financial year, but undertaken in advance of the end of YOUR business year. Issues to consider include:
- The impact on your tax position and financial results of accelerating expenditure into the current financial year, or deferring it into the next
- Additional pension contributions or reviewing your pension arrangements
- How you might take profits from your business at the smallest tax cost, and how the timing of payment of dividends and bonuses can reduce or defer tax
- Strategies to avoid overvaluing stock and work in progress
- Improvements to your billing systems and record keeping, or a general systems review to improve profitability and cash flow
- National insurance efficiency and employee remuneration packages with potential cost savings for both you and your employees.
Avoiding late filing penalties
Reducing the amount you pay HMRC includes avoiding incurring late filing penalties. The cut-off dates are shown in the calendar at the end of this guide, but current penalties are:
|Return one day late||
Return up to 3 months late
An additional £10 per day
Return up to 6 months late
Add £300 or 5% of the tax due
Up to one year late
Add £300 or 5% of the tax due*
*In more serious cases, this penalty may be increased to 100% of the tax due.
Tax payment deadlines - avoiding a penalty
The timetable of tax payments is relatively straightforward for the self-employed.
- 31 January in the tax year, first payment on account
- 31 July after the tax year, second payment on account
- 31 January after the tax year, balancing payment.
There is also a system of interest and penalties to encourage prompt payment.
For example, if any balance of tax due for 2011/12 is not paid within 30 days after 31 January 2013, HMRC will add a 5% late payment penalty as well as the interest that will be charged from 1 February 2013.
A further 5% penalty will be added to any 2011/12 tax unpaid after 31 July 2013, with a final 5% penalty added to any 2011/12 tax still unpaid after 31 January 2014. In addition, interest is charged on outstanding penalties, as well as on unpaid tax and NICs.
If you have incorporated your business the company will be paying corporation tax. Corporation tax is normally payable nine months and one day after the end of the accounting period.
If cash flow is tight, HMRC could be persuaded to accept a spreading of your next business tax payment - you will have to pay interest at the HMRC rate, but keep to the agreed schedule and late payment penalties will be waived.
Arrangements need to be put in place before the due date for paying the tax, so talk to us in good time if you need or wish to apply.
Reducing payments on your account
Payments on account are normally equal to 50% of the previous year's net liability.
A claim can be made to reduce your payments on account, if appropriate, although interest will be charged if your actual liability is more than the reduced amount paid on account.
Do not wait until it's too late - please keep us informed of any factors which might affect your tax liability.
We can only suggest business solutions if you tell us in good time about any issues facing your business.
Payments on account are not due where the relevant amount is less than £1,000 or if more than 80% of the total tax liability is met by income tax deducted at source.
In these cases, the balance of tax due for the year, including capital gains tax, is payable on 31 January following the end of the tax year.
Case Study 4
Jeremy is self-employed. His accounts are made up to 31 August each year. When we prepare the 2012 Return we will be including his profit for the year ended 31 August 2011, and that is the profit which will be taxed for 2011/12.
Jeremy's payments on account for 2012/13 will automatically be based on the 2011/12 liability.
If we know that Jeremy's profits for the year to 31 August 2012 are significantly less than the previous year, we can discuss the figures, perhaps even prepare the annual accounts, and make a claim to reduce Jeremy's 2012/13 payments on account, easing his cash flow by reducing the tax payments due in January and July 2013.
Protecting your business
Planning to protect your business is always important, but in times of economic difficulty it is even more vital to keep an eye on the essentials. Some of the key points you may want to consider include:
Examine areas where the business might be able to cut its expenditure. For example, you might want to review your levels of stock - are you carrying more than is sensible?
Monitoring cash flow
Drawing up a realistic cash flow forecast is essential and will allow you to identify the likely peaks and troughs in net cash over the coming months. This will then enable you to take appropriate action if the business is expected to encounter difficulties.
Managing credit control
Late payment can pose a serious threat to a business. Minimise the risk by performing credit checks on new and potential customers, sending invoices in a timely manner, and enforcing a rigorous debt collection policy.
Planning ahead could be key to your business's survival and growth, particularly in times of change and economic uncertainty. Through forward planning you can not only minimise the amount of tax you pay, but also protect and strengthen your business for the future.
Follow-up - Contact us about…
- Starting up and obtaining finance
- Timing capital and revenue expenditure to maximum tax advantage
- Minimising employer and employee NIC costs
- Improving profitability and developing a plan for tax-efficient profit extraction