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Changes in dividend rules effective from 6th April 2016

You may be aware there are some changes in the calculation of tax on dividends announced in the last budget.  

From April dividends will be taxed in a new way. Gone will be the 10% tax credit and the basic rate banding. Which effectively meant you didn’t pay any tax on dividends if your total earnings didn’t exceed c43K.

Under the new rules the first £5,000 of divided income won’t be taxed. Then the next £32,000 is taxed at 7.5%. But only after other income has been taxed into consideration.

 

We would suggest you review the amount of dividends taken so far in this tax year together with other income. If its less than £43,000 (plus any additional pension relief for higher rate tax payers) there may be an opportunity to save some tax if the dividends were paid in the tax year 2016/17.

 

10 things to remember when setting up or expanding a business

It’s coming to the end of the year and lots of people are wondering what 2013 might hold, some even might be thinking of a career change and becoming self-employed. Here’s a quick checklist before you make that step into oblivion….

1. Do the research, is there a market for the product/service?

Think about the whereabouts of potential customers, are they in reach?

Be clear about the decision to take this course; if it’s a hobby business treat it as such.           If you want to secure your future then be really critical.

Ask friends and family for advice.

2. Does your idea need a patent?

There are loads of valid reasons why you don’t want to register your idea, right up to the    point somebody nicks it.

If you’re looking for investment it unlikely a business angel would be prepare to back the business if the product is not secured.

3. Make sure you’re not in breach of any restrictive covenants

If you are a director or an employee of a company check your employment contract to ensure you are not in breach of any restrictive terms.

4. Do some basic costings

Figure out both selling pricing and costs, is there enough margin?

At some point you will need to complete a business plan which can be time consuming but you probably won’t get any finance unless it is completed.

5. Check if there are any grants or tax incentives available.

There are often local grants for expanding businesses or taking on new staff.  HMRC   have a number of schemes available including EIS and EFG.

6.Join industry or regional networking groups

Subscribe to Linkedin and join groups in your industry, people love to share information.

They may not always be competitors but potential customers and suppliers.

Your local Chamber of Commerce is often a great source of information

7. Figure out how much financing you’ll need and where to get it

Do a cash flow forecast for at least 3 years. The first year is about set-up and getting a   foot in the market, the second is where the momentum begins, and the third is where you start to become established.

8.Think about the legal structure of the business

The is not all about tax, there are loads of factors to consider including costs

9.Don’t forget about the taxman

Frankly the days where you can trade under the radar are long gone. Just like CCTV, he’s watching and will catch up with you. Then you’ll have to pay back taxes, fines and   interest. He will not be content with just the tax you avoided paying.

So get it right first time, register.

This is a list of taxes that may apply to you

  • Betting and Gaming Duties
  • Capital Gains Tax
  • Construction Industry Scheme
  • Corporation Tax
  • Environmental taxes
  • Excise Duties
  • Income Tax
  • Inheritance Tax
  • Insurance Premium Tax
  • National Insurance Contributions
  • PAYE
  • Petroleum Revenue Tax
  • Stamp Duties
  • VAT

10. Contact OD Financial Services

Enterprise Finance Guarantee (EFG)

There is a lot of talk about the Seed Enterprise Imitative Scheme (SEIS) and Enterprise Imitative Scheme (EIS), I’ve even written a couple of blogs about them too. Let’s be honest about it, they are very appetising. But not every SME is eligible. In the last budget they introduced a new incentive for SMEs to help them expand called the Enterprise Finance Guarantee (EFG). Strangely it is exactly the same as the Business Enterprise Scheme (BES) the government introduced a few years ago. At least the banks and the government know how it works and it is just a bit of re-branding.

That aside, it really is an excellent scheme though not generally publicised, or for that matter actively supported by the high street banks in my experience. I’m told there has been a change recently. In fact since 2009 some 18,000 SMEs have been supported to the tune of £1.8b, according to the official website.

So what is it?

“The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme to facilitate additional lending to viable small and medium size enterprises lacking adequate security or proven track record for a normal commercial loan.”

The government will guarantee 75% of lending to a SME, meaning the business has a 25% exposure if the venture is not successful.

Most business sectors are eligible though not all. The borrowing can be for almost anything business related:-

  • New term loans (unsecured and partially secured) for working capital or investment purposes including R&D.
  • Re-financing of existing term loans, where the loan is at risk due to deteriorating value of security or where for cash flow reasons the borrower is struggling to meet existing loan repayments.
  • Conversion of part of all or an existing utilised overdraft into a term loan in order to release capacity in the overdraft to meet working capital requirements
  • Invoice finance guarantee providing a guarantee on invoice finance facilities to support an agreed additional advance on a SME’s debtor book, to supplement the invoice finance facility on commercial terms already in place (available for terms up to three years).
  • Overdraft guarantee providing a guarantee on new or increased overdraft borrowing where the SME is viable but has inadequate security to meet a lender’s normal requirements for the level of overdraft requested (available for terms up to two years).

The business must operate in the UK, with turnover less than £41m (where did that random number come from?) and with repayment periods for 3 months to 10 years.

What they don’t say on the website is that they will only lend to existing businesses, no new enterprises.

The SME still must have a viable business plan and must still meet banking criterion for lending. It is not a way to circumvent normal credit checks. The banks will still credit score in precisely the same manner as all other loan applications; including ability to repay and loan period. They may still ask for personal guarantees too but not on personal property.

The cost, the bank will charge their normal tariff interest and charges plus a further 2% annual premium that goes to support the scheme.

Disaster Recovery Planning

Watching the events in the US over the last few days got me thinking about disaster recovery planning.  To some degree all businesses need to have some formal procedures in place in the event the unforeseen occurs. Businesses must have an adequate recovery plan in order to ensure the continued survival of the company for the owners, staff and customers.

Here's a checklist

Be prepared

First and foremost have adequate insurance; it doesn’t take much to review it with your broker.

Put together a list of key stakeholders with contact details that can be accessed. We all have smartphones so create a directory. Better still use dropbox where key staff can access the information.

Complete regular back-ups in the cloud; and check they work

Response

It’s difficult to plan a response if one can’t design endless scenarios. It’s probably not a useful exercise anyway.

The ability to respond has two elements: short-term and long term.  Look at the situation and decide what can be done to minimise the damage immediately and what resources are needed, available and within your means.

Recovery

This is the longer term response, getting the business back to the position it was prior to the event.

Often when short-term and long-term objectives are mixed chaos ensues.

Mitigation and prevention

In an ideal world this should be the first priority but life’s not like that and generally under Health and Safety rules most of this should have been covered, no matter what industry.

A few weeks back I wrote about Dashboard Reporting and qualitative research. If you know there is a Hurricane Sandy on the way don’t ignore it

A final thought, there are always annual events, some good and some not so. Just because a particular situation hasn’t occurred before doesn’t mean the resources are not available. There is always help at hand.

Dashboard Reporting

There’s a new word that crept into the financial vocabulary a few years ago: “Dashboard”. It’s not a new way of working, just a new word. The software companies latched on to it, instead of having a management reporting module it’s now called a “Dashboard” and in fairness, it is more than just historical financial information shown in tabular format which made us all yawn.

The difficulty is defining what is relevant and what is overload.  A dashboard should be a snapshot, no greater than a page long, often with information shown as graphical presentation. Its purpose is to show how the business is performing against its objectives. The information should be current, not just relevant at the time of going to press.

The dashboard report should be more than just the financial results with colours. All dashboards comprise of four elements

Drivers Results
Quantitative research Qualitative research

 

The Drivers are the key performance indicators (KPI), generally not the financial data a business needs.

The Results are can be described as the numbers; profits, balance sheet data, comparisons.

Quantitative research gathers data in numerical form which can be put into categories, or in rank order, or measured in units of measurement.  This type of data can be used to construct graphs and tables of raw data. Generally the data is sourced from CRM (customer relationship management)systems.

Qualitative research gathers information that is not in numerical form, such as open-ended questionnaires, unstructured interviews and unstructured observations. Qualitative data is typically descriptive data and as such is harder to analyse than quantitative data. By far the most difficult and subjective. It’s importance is the link between benchmarking against historical data and applying the strategy for the business to go forward. It might even be as simple as an observation in market trends.

When designing a dashboard there are two final points to note.  The data must be measurable and secondly apply some form of warning system, traffic lights are the obvious choice, universally understood.

Tax Penalities

It has been said there are two things we can’t avoid, death and taxes. There is now a third to add: interest and surcharges when making late submissions of returns to the taxman. The idea of the taxman charging for late returns is a fairly new concept.

“ICTA88/S203 (9) provides that interest on late paid PAYE is not deductible in computing income, profits or losses for any tax purpose. Sub-paragraph 4B of paragraph 6 of Schedule 1 Social Security Contributions and Benefits Act 1992 has the same rule for interest on late paid Class 1, Class 1A and Class 1B NIC”.

In the good old days the taxman didn’t enforce this, he was just happy to get what was due. If it was late or extremely late, they rarely imposed fines or surcharges.

Then government cut-backs started to take hold in 2008 and HMRC like all government departments had its budgets cut. Somebody had a eureka moment and came up with the idea to use the legislation and started issuing penalty notices.

I remember attending a HMRC seminar back in 2010. The tax inspector giving the presentation was up-front about the new strategy of income generation.

Since then the tax office has been cranking up its strategy. It started by issuing late fines of £100, in the early days if appealed they would often be rescinded. Today if a tax return is filed late or not paid on time, a fine is issued includes surcharges or interest and often both as a matter of course. These fines apply to both individuals and businesses and for all forms of tax.

Ignorance of the rules is not a defendable response. Look at the increase in the number of people having to complete self-assessments. Everybody needs to be vigilant, any change in circumstances should be reviewed from a tax perspective - perhaps have that phone call with the tax office.

Appealing is not always straightforward nor does it automatically have the desired effect of HMRC reversing its position.

We have had two successful appeals recently. The first was for a self-assessment fine of £1,200. The other was for Class 2 NIC demand. This was rather nasty where the debt recovery department wanted six years of payments amounting to almost £700 we negotiated a settlement of £120.

So what can you expect to pay if you’re late?

It depends on the type of tax due, but expect to pay at least 3% interest whereas if you are eligible, HMRC pays interest of 0.5% (tax free!!!)

You can also look forward to receiving penalties which vary depending on the severity; suffice to say it’s expensive.

On a separate blog there is a list of these penalties. If you’re late with any tax returns from 1 April 2010, penalties will apply to the following taxes and duties:

  • Betting and Gaming Duties
  • Capital Gains Tax
  • the Construction Industry Scheme
  • Corporation Tax
  • Environmental taxes
  • Excise Duties
  • Income Tax
  • Inheritance Tax
  • Insurance Premium Tax
  • National Insurance Contributions
  • PAYE
  • Petroleum Revenue Tax
  • Stamp Duties
  • VAT

A couple of final points, if you have a tax bill and are not in a position to pay, HMRC can be accommodating. We have assisted many clients over the years and can speak on your behalf.

Any fines or interest imposed are deemed to be non-deductible for the purposes of completing any tax return.