Company Bonus Or Dividend?

In many small companies, the owners are also the directors, and this gives considerable scope for deciding how profits should be taken out of the company.

Important

The declaration of a dividend has for many years been a strategy adopted by many small businesses. In 2008 the Government announced they were going to introduce new rules relating to income shifting. In November 2008 they announced that they were deferring the introduction of new rules.

Traditionally, small companies pay salaries to the directors and tend to ignore their second role as shareholders, which entitles them to receive dividends.

Where profits are retained within a company, the situation is governed by the corporation tax rules, but when you draw profit out, income tax rules take over, and national insurance rears its ugly head.

The main current considerations for choosing between salary and dividends are:

Corporation tax

This is charged on the profits of the business after taking into account all salaries. Paying a salary reduces profits and hence reduces the corporation tax bill.

Income tax

As mentioned above, income tax is chargeable on all profits withdrawn from a company. On salary, it is collected through the PAYE system. A dividend carries with it a 10% tax credit, and for a basic rate taxpayer there is no further tax to be paid. A higher rate taxpayer will have to pay further income tax equal to 22.5% of the gross dividend, while an employee liable to the 50% rate of tax will be liable to pay additional income tax equal to 32.5% of the gross dividend. Thus dependent on the rate of tax payable the tax on dividends is either 10%, 32.5% or 42.5%.

National insurance contributions

National insurance contributions are payable on salaries, but not on dividends. There are two elements - employee contributions and employer contributions. Employees pay 11% on earnings between the earnings threshold and the upper earnings limit, and 1% on earnings above this without any upper limit. Employers pay 12.8% (increasing to 13.8% from 6 April 2011) on all salaries above £5,715 p.a. without any upper limit.

Company law

Salaries can be paid even when a company is making a loss. Dividends can be paid only out of profits for the year, or any undistributed profits from previous years.

Other shareholders

Salaries can be allocated to different directors at any rate. A shareholder is entitled to a dividend in proportion to the number of shares held. This means that non-working shareholders would participate in any dividend declared.

This lack of flexibility can be countered by creating different classes of share with different dividend entitlements.

Cashflow

PAYE and national insurance are payable monthly; corporation tax is payable nine months and one day after the company's year end. Additional income tax on dividends is payable on 31 January after the end of the tax year in which the dividend is paid (payments on account may be required).

Pensions

Payments of additional salaries can enhance the contributions that can be paid to pension schemes. For certain types of scheme, benefits can be based on the pay for the best three out of the last ten years before retirement, so planning for high salaries can be used to advantage.

Example
The details below illustrate the potential advantage of using dividends rather than a salary bonus to extract profits of £10,000 from a small company. The examples assume that the directors are already being paid salaries that take them into the higher rate of income tax (40%). As this is above the national insurance normal upper limit, employees' contributions at 1% and employers' contributions will be payable.

	Tax rate 40%		Tax rate 50%
	Bonus £	Dividend £	Bonus £	Dividend £
Profit	10,000	10,000	10,000	10,000
Employers' national insurance	(1,135)		(1,135)
Salary available	8,865		8,865
Corporation tax on £10,000 @ 21%		(2,100)		(2,100)
Dividend		7,900		7,900
Income tax @ 40%	(3,546)
Income tax @ 50%			(4,433)
Employees' national insurance			(89)
Additional income tax		(1,975)		(2,853)
Net amount available	5,319	5,925	4,343	5,047

This example shows an overall saving of £695 by paying a dividend. Care and professional advice should be taken in all cases. An individual's and company's specific circumstances must be reviewed and the advice tailored to the particular needs.

It is clear that many factors must be considered when deciding whether directors should be paid by dividend or salary/bonus. In practice, a mixture of each is usually the best course, subject to the impact of 'IR35'.

Do call us if you would like further help or advice on this subject on 01708 854943 or http://www.truemanbrown.co.uk/.

Employed or Self Employed?

The question as to whether someone is employed or self employed is not as straightforward as it might at first appear. Many people assume they are free to choose, but HM Revenue & Customs emphasises that this is not the case.

How do you decide?

Although there is no clear-cut answer to this question, HM Revenue & Customs has published a leaflet (ES/FSI employed or self employed?), which sets out a series of questions to test the particular circumstances of any working relationship. These cover areas such as:

• Ultimate control of the work
• Profit element, and risk of loss
• Provision of materials and equipment
• Integration with the employer's business
• The intention between the parties
• Usual conditions in the industry

Note, however, these are matters of general employment law, and not specific tax legislation.
During the recession it may be tempting to cut payroll costs by engaging former employees as self-employed contractors. There are risks attendant with this strategy but if done correctly this can be a tax efficient approach.

For HMRC to accept the self-employed status it should be evidenced that:

• The worker operates a business assuming risks such as rectifying work, invoicing and waiting for payment;
• The worker is not required to work for a particular engager,
• The engager is not obliged to use that worker's services; and
• The engager does not have the right to control what the worker does.

What are the practical differences?

Employees are taxed under the PAYE system and are liable to Class 1 national insurance (NI) contributions. If the worker is an employee, the employer also has to pay Class 1 NI over a limit set each year, the employee's NI rate reduces to 1%, but for employers, NI continues at the full rate, with no upper limit. The employer also assumes responsibility for paying statutory sick pay and statutory maternity pay.

Employees have rights under health and safety and employment laws, such as the rights to redundancy payments and not to be unfairly dismissed. Moreover, the range of social security benefits is greater for employees than for the self employed.

Did you know?
According to Kent university 3% of graduates report that they are self employed immediately after graduation which if applied nationwide represents 7,000 graduates a year immediately going into business. Three years after graduation this figure increases to almost 7%. However, a Gallup poll reveals that 67% of students would prefer to be self employed.

Self employed workers are taxed under self assessment, and are allowed more scope in claiming expenses. They also pay Class 2 and Class 4 NI contributions, the combined burden of which is lower than Class 1 NI. Their 'employers' are not subject to NI.

It is not surprising, therefore, that many businesses show a marked preference for self employment status for their workers!

What if you are wrong?

It is the responsibility of the person making the payment to get it right. If you treat a worker as self employed and he or she is subsequently ruled to be an employee, you could find that all the payments you have made will be treated as net payments, and you will have to pay the corresponding tax and employees' NI, as well as the employer's NI. You have no right in law to recover such items from your employees after the event.
You may also have to pay interest and penalties for incorrect returns.

Can you create conditions to favour self employment?

If you want to substantiate a classification of a worker as self employed, we strongly recommend that you have drawn up and enforce a suitable contract defining the services provided. In line with the tests referred to above, you will need to give particular consideration to the following points:

Pricing
One of the main requirements is that self employed workers bear some element of risk in the arrangement, which means you will have to avoid the 'hourly rate', in favour of a 'price for the job'. The main principle is that the price, scope, and timing of the work should be agreed, and evidenced in writing, before the job commences.

Workmanship
Within reason, the more freedom the worker has in the detail of the way the work is carried out the better. You must also make it clear that the worker will have to put right any faulty work at his or her own expense.
One of the strongest tests of self employment is the right to substitute a worker who is equally capable of carrying out the work.

All self employed workers should hold public liability insurance.

Provision of equipment
Where practical, the worker should supply at least some of the important equipment or tools. Of course, the extent to which equipment is required depends upon the nature of the work.

What about the construction industry?

The construction industry is subject to exactly the same rules as any other type of industry. However, there are some special considerations.

Where the work entails use of heavy equipment or expensive plant, it is sometimes recommended that contractors hire the equipment to their subcontractors, who then include the cost within their 'price for the job'. Such arrangements may seem artificial, and there is the danger that with substantial hire costs being included in the pricing, the subcontractor's turnover may breach the VAT threshold and force him or her to register for VAT. However, this is not necessarily a bad thing because VAT registration is often cited as further evidence of self employment.

With regard to pricing work, a competitive tender is best, but in practice it should not really matter who makes the first suggestion of an appropriate price.

Although there is a special scheme for taxing construction industry workers, registration as a subcontractor under the scheme in itself does not necessarily prove self employment status.

What about personal service companies?

These guidelines apply equally to the so called 'IR35' rules to test whether a worker would be treated as an employee of the client, if it were not for the existence of an intermediate service company.
Visit the HM Revenue & Customs site for their view on employment and self employment.

Do contact us if you would like further help or advice on this subject on 01708 854943 or at http://www.truemanbrown.co.uk/ .

IR35 - Who is caught by the rules

The IR35 rules aim to catch anyone who, by placing an intermediary between himself and his employer, gains some tax (including NIC) advantage.

Personal service companies

The example most frequently quoted is the consultant who, rather than working under a direct contract with a customer, contracts his services through his one-man company. Such a company has become known as a personal service company - a company which exists to provide the services of one or more particular individuals. The test for IR35 is whether, ignoring the existence of the company, the contract as it operates between the customer and the consultant is one which would lead to the consultant being classified as an employee of the customer, rather than self-employed. If the answer is that the consultant would, indeed, be classified as an employee, then IR35 applies. If he would be classified as self-employed, it does not.

If you operate your business through a personal service company, IR35 will only apply to you if:

• More than 5% of the ordinary share capital of the company is owned by you or your family, or
• You or your family are entitled to more than 5% of any dividends the company pays, or
• You are in a position to be able to receive payments or benefits from the company which are not salary i.e. not earnings to which PAYE is applied, but which represent payment for the services you provide to relevant clients.

Partnerships

Another example is a member of a partnership - self-employed - who is contracted by the partnership to a client under terms that would amount to an employment if the contract had been directly between the partner and the client. HM Revenue & Customs have in the past quoted the example of a vet in a large veterinary practice who is contracted to work by the local zoo for set hours per week. In this example, it is the services of one particular partner which are contracted, and as such, IR35 would apply. But if the zoo had instead contracted for the practice to provide any vet of suitable qualification and experience, it is unlikely the contract would be caught by IR35.

Again, there are restrictions on cases where IR35 will apply. For those providing their services through a partnership, the rules will not apply unless:

• You and / or your family are entitled to at least 60% of the profits of the partnership, or
• Work for one client generates all or most of the partnership's income, or
• Your profit share reflects the payments received for your services to clients in circumstances where the IR35 rules apply.

Please call Trueman Brown on 01708 854943 or contact us at http://www.truemanbrown.co.uk/ .

An Introduction To IR35

For many years, people leaving jobs to become self-employed were advised to instead set up one man companies to provide their services. One reason for this might be the security offered by limited liability, but in many cases the use of a 'personal service company' was to create the opportunity for some quite substantial savings, particularly of national insurance contributions (NICs).

Consider James and Robert, who have for many years worked as managers in a local professional business. They have, until now, each been paid a salary of £75,000 pa. In 2010/11, each would pay income tax of £19,930.00 and primary Class 1 NICs of £4,509.60. In addition, their employer would pay secondary Class 1 NICs of £8,867.84 x 2 = £17,735.68. So, at a cost to his employer of £83,867.84, James would receive £50,560.40 net. Likewise Robert.

James and Robert decide to become self-employed. James finds office accommodation and begins to build up his own client base. Robert instead arranges to work for different firms - say mornings for one and afternoons for a second. In the first case, there is little doubt that James's change to self-employment would be genuine, but in the second there is a strong case for saying that rather than having become self-employed, Robert in reality has two jobs, and PAYE tax and NICs (both primary and secondary) are payable.

The rules for people like James and Robert have existed for many years

The tests for deciding whether someone is accepted as self-employed for tax purposes are a little vague, but if Robert in reality has what amount to two part-time jobs, the mechanics exist for him to be classified as an employee of the two firms he works with, and for PAYE to be operated accordingly. The effect of all this is for extra costs, in the form of primary and secondary Class 1 National Insurance to be payable by Robert and his employers.

A possible solution

To avoid this, Robert could in the past have set up a limited company, and contracted for the company to provide his services to the two customers. Robert would then have been both the owner of, and an employee of, his own personal service company. He could then choose to take part of his remuneration in the form of dividends - with scope for a substantial increase in his income.

Assume that Robert's company has profits, before Robert takes any salary or dividends, of £83,867.84, and that he takes £7,200 in salary and the balance of the profits, after tax, in the form of dividends.

First, we need to consider the company's tax position - the company will have to pay Robert his salary and secondary Class 1 NICs of £189.44, but the remaining profit will be charged to corporation tax - amounting to £16,060.46. On this basis, Robert can take net dividends of £60,417.94 - plus, of course, his salary of £7,200.

Robert's tax position for 2010/11 would be:

Salary	7,200.00	Gross income	74,331.00
Dividend	60,417.94
Add tax credit	6,713.10	Income tax	13,638.20
Gross income (say)	74,331.00
Personal allowance	6,475.00	Primary Class 1 NICs	162.80
Taxable income	67,856.00
		Net income	60,530.00
Tax at 10% on	37,400.00
Tax at 32.5% on	30,456.00	Compared with	50,560.40
Tax due	13,638.20
		A saving for Robert of	9,969.60
Primary Class 1 NICs	162.80

The aim of the IR35 legislation is to stop people who, if they were claiming to be self-employed would in fact be re-classified as employees with all the consequences for primary and secondary Class 1 NICs, using an intermediary. This intermediary being in the form of a personal service company or a partnership to obtain a tax advantage over other workers.

IR35 achieves this by forcing the company to operate PAYE in respect of an amount of notional remuneration, being basically the difference between the company's profit on work caught by the IR35 rules and the remuneration drawn by the owner-director in respect of that work.

Of course, on the facts, James will not be caught by the IR35 rules, and could set up a limited company through which he can operate his business. Operating his business through a limited company could save James over £3,300 compared with operating as a self-employed sole practitioner.

Self-employed profit	83,867.84	Gross income	83,867.84
Personal allowance	6,475.00
Taxable	77,393.00	Income Tax	23,477.14
		Class 2 NICs	-124.80
Tax at 20% on £37,400.00	7,480.00
Tax at 40% on £39,992.84	15,997.14	Class 4 NICs	-3,452.73
Tax equals	23,477.14
		Net income	56,813.18
Class 2 NICs	124.80
		Compared with	60,530.00
Class 4 NICs	3,452.73
		Costing James	3,716.82

If you have any queries then please contact Trueman Brown on 01708 854943 or at http://www.truemanbrown.co.uk/ .

Working From Home

 

Some of us have to work at home; others see the idea as the perfect solution to a noisy office, endless interruptions, or a long and expensive commute. But if you are seriously thinking of leaving the office on a permanent basis, there are a number of questions you must first consider.

What you can claim

If you are a self-employed person, you can claim costs in your accounts that are incurred wholly and exclusively for the purpose of your business.

Having somewhere to do your business paperwork is essential. If you don't maintain a separate office, you can claim a reasonable proportion of those household running costs that represent the space and time in which your office operation occupies your home. This includes a proportion of your rent, council tax and water rates.

If you are an employee

If you are an employee, you can only claim the additional variable expenses incurred by working at home. These costs amount to the increased energy needed to heat and light your property for longer, and the extra water used if that is metered.

You can also claim the cost of business related telephone calls, but not a proportion of telephone line rental, or part of your mortgage or insurance costs. These amounts are considered to be fixed whether or not you work from home, so you can't reclaim any part.

Is it justified?

The relaxed and comfortable atmosphere generated by your home environment may sound good for morale but it is also a key reason for you to question your motives. Make sure you're not looking for an easy option, because this is not it. And make sure that your physical absence is not going to leave your business in serious trouble.

Reclaiming the costs

HMRC prefers employees to reclaim the costs of home-working from their employers. If you have agreed with your employer that you will work at home for all or part of your working time, your employer can reimburse you for the extra energy used during that time.

If you want to claim more than £3 per week, excluding telephone calls, you must be able to demonstrate that your energy bills have increased by more than this amount.

Can you maintain the work/life distinction?

Working from home offers flexibility but it also requires true self-discipline and organisation. Making a mental and physical distinction between your home and your working life is essential, both to resist the distractions of the television or garden, and, at the other end of the scale, to prevent work from wholly consuming your life.

Creating a dedicated working area is essential, while separate telephone lines for home and business could help you to maintain the boundary between 'work' and 'home' time.

Do you have the right working environment?

Take the creation of your home office seriously. It should be comfortable, well-lit and properly equipped. Working at the kitchen table is rarely conducive to an efficient frame of mind. Bear in mind that you may need to revise your insurance policy to cover business equipment in the home.

Will others support you?

It is one thing to be disciplined yourself - you will also need the support of those around you: beware of constant family interruptions! As a practical tip, a 'Do Not Disturb' sign on the office door can work wonders.

Home working Do's and Don'ts

• Do establish a daily routine and stick to it
• Do schedule the day's tasks and meet your own deadlines
• Do stay in regular contact with the main office

• Don't take work home that requires group decisions or input
• Don't sleep late on working days
• Don't run to the refrigerator too often!

For any further information please contact Trueman Brown on 01708 854943 or at http://www.truemanbrown.co.uk/ .

National Insurance - Make sure you pay the right amount?

One of the big dangers of overpaying National Insurance is if you are both employed and self employed. For example, you may have full-time employment but run a small self employed business on the side.

If that is the case then there is danger in overpaying national insurance!

Profits From Self-Employed Business Are Small (less than £5,075)

If your profits are less than £5,075 (for 2010/11) per year you can apply for a certificate of small earnings exception and not pay Class 2 National Insurance contributions. To apply for exemption you need to fill in the Form CF10 which you can find here:

http://search2.hmrc.gov.uk/kbroker/hmrc/forms/viewform.jsp?formId=433


But what if you pay too much national insurance contributions than you need to?

The prescribed annual maximum normal contribution for an individual is 53 weeks at the standard primary (employee) Class 1 contribution rate between the earnings threshold and the upper earnings limit. For 2010/11 this works out to be £4,279.22. There is also an additional 1% payable on earnings in excess of the upper earnings limit.

If you think there is a chance of your exceeding this limit, you can apply for deferment of contributions on the 'surplus' employments and/or self employment.

If you think that you will exceed this limit then a claim may be made to defer payment of Class 2 or Class 4 NI using the Form CA72B which can be found in the link below.

http://search2.hmrc.gov.uk/kbroker/h...jsp?formId=409


Class 2 Contributions

Your class 2 contributions may be deferred if you can show that you are otherwise likely to pay above the annual maximum normal contribution (£4,279.22 as set out above) in class 1 and class 2 contributions.

Class 4 contributions

Your Class 4 contributions may be deferred if your normal national insurance contributions (Classes 1, 2, and 4) are likely to exceed the maximum for Classes 2 and 4 normal contributions on their own (£3,180.00 for 2010/11).

Contribution refunds

If you do not apply for deferment in time, it is still possible to claim a refund of overpaid national insurance contributions. The time limit for claiming is broadly six years after the end of the tax year in which the payment was made.

For any further information please contact Trueman Brown at 01708 854944, http://www.truemanbrown.co.uk/ or Truemanbrown@aol.com .

Separation and divorce

It is an unfortunate fact of modern life that many marriages do not survive. When separation, divorce or dissolution occurs, there will almost inevitably be some tax consequences.

Allowances

The married couple's allowance has been withdrawn, except for those couples in which at least one spouse or civil partner was born before 6 April 1935. The allowance will cease at the end of the tax year in which separation occurs.

The childrens tax credit, is available to each former spouse or civil partner with one or more children living with him or her (ie, each spouse will be entitled to the credit, as a single parent, if one or more children live with him or her).

Maintenance payments

Maintenance payments qualify for tax relief only where a spouse, civil partner or former spouse or former civil partner was born before 6 April 1935 and only if they are legally enforceable. This will be the case if they are made under a court order, a Child Support Agency assessment, or a legal deed of separation. Such maintenance payments must be made to your divorced or separated spouse or civil partner (if they are not remarried or have not entered into a new civil partnership) for the benefit of him or her or of your child under twenty-one living with him or her.

The maximum tax reduction available is £267.

Maintenance payments received do not count as taxable income.

Transferring assets

Assets transferred between spouses or civil partners in a tax year during which they have lived together, including the year of separation, are exempt from capital gains tax (CGT) and inheritance tax.

From the end of the year of separation until the decree absolute, the former spouses or civil partners are still regarded as connected persons for CGT purposes, and therefore all transfers between them will be treated for tax as if made at full market value, even if no consideration changes hands.

Thereafter, transfers will be treated as 'at arms length' and therefore transfers will, for CGT purposes, be treated as disposals or acquisitions for only such amount as changed hands.

Please contact us on 01708 854943 or at http://www.truemanbrown.co.uk/ if you would like further help or advice in this area.

Tax planning - don't let the tail wag the dog

 

Tax planning is a year-round activity - and a very important part of your overall financial strategy. With good professional advice and judicious planning, you may be able to achieve considerable gains and savings.

However, your tax planning must fit in with, rather than dictate, your business and other financial objectives. In no way should you allow the tax planning tail to wag the financial dog.

To help you get the most out of your tax planning, we list here some general guidelines:

1. Do not purchase assets simply to obtain capital allowances to reduce your taxable profits. Similarly do not deliberately incur losses in your business simply to create tax losses and reduce your tax bill.
2. Do not allow your tax-saving strategy to cause unhappiness to you or your family. For example, don't distribute family company shares around the family if it will cause sleepless nights.
3. There are times when making substantial gifts can result in considerable tax benefits, but take care not to give away too much too early. Make sure the financial welfare of you and your spouse is adequately protected.
4. Before making outright gifts to younger members of your family, consider whether or not they are sufficiently mature to handle the responsibilities entailed. If you have any doubts you can always consider trust arrangements, under which they will not have control over the use of the funds until a later stage.
5. In assessing your likely future needs, take full account of the life expectancy of you and your spouse - and of the effects of inflation.
6. Do not draw too rigid a distinction between income and capital in your planning. It is not necessarily unwise to live off capital. Good planning sometimes involves spending capital as well as income, for example to facilitate gifts by older people. The trend these days is for the tax treatment of income and capital to converge, and so both should be considered fully when planning.
7. Remember, tax rules change - especially before / after elections - so try to avoid schemes that take a long time to come to fruition; and try to keep your plans flexible so you can adapt them when the rules do change.
8. Do not put off tax saving measures, but make the most of opportunities while they last. You never know when the rules will change. Provided you can afford a particular tax planning arrangement, and it makes sense regardless of whether or not the law changes, do not delay in implementing it.
9. Finally, be sure to take professional advice. The tax laws are complex, and expertise is required to optimise your tax position. You may do well to take advantage of our in-house expertise and wide network of contacts.

Call us on 01708 854943 or contact us at http://www.truemanbrown.co.uk/ if you would like to arrange a tax planning review.

Limited Companies - Tax Saving Strategies

 

Expenses

Expenditure incurred before the company year end might reduce the current year's tax liability instead of next year's. Bringing forward expenditure by even a few weeks on, for example, building repairs, advertising, sales and marketing campaigns, and any other item deductible from profits can accelerate the tax relief by twelve months.

Plant and equipment

Investment in plant and equipment (but not cars) attracts an allowance of up to 100% of the cost, up to £100,000 (this will reduce to £25,000 in April 2011). The allowance of £100,000 relates to a full 12 month period, and is reduced proportionately for short accounting periods, and where the accounting period spans the commencement date. The allowance is only available once for a group of companies, but where companies are under common control of one or more individuals, multiple allowances will be available unless the companies also occupy the same premises or carry on the same type of business. The allowance is not available to partnerships with limited company members.

There is a further allowance, called the writing down allowance. This allowance is 20% and is applied to the unrelieved expenditure brought forward. Note that the writing down allowance is calculated on the tax written down value. There is a lower rate of 10% available which applies to assets with a useful life of 25 years or more, and to integral features in buildings such as lighting and power supply.

Spending money on energy efficient technology and water saving technology (including very low emission new cars and electric vans) attracts a 100% allowance, over and above the annual investment allowance. Companies which spend significant sums on energy efficient or water saving technologies (but not cars) so that they incur tax losses can also surrender that loss for a tax credit payment of up to 19% of the loss. The payable tax credit arrangements are currently subject to EU approval.

Hire purchase and lease purchase

Hire purchase and lease purchase may provide a useful method of financing the purchase of an asset. Plant and equipment purchased on hire purchase will qualify for writing down allowance on the full purchase price, even if the company has paid only the deposit.

Industrial buildings

Expenditure on new industrial buildings qualifies for writing down allowance of 1% on cost. 2010/11 is the final year the writing down allowance is available. Used industrial buildings may also qualify for an allowance, dependent upon allowances available to previous owners.

Industrial buidlings allowance is to be phased out on 5 April 2011.

Provisions

Specific provisions against bad debts or stock are allowable for tax purposes, but general provisions against stock writedown are not. For companies a general bad debt provision may now attract tax relief as a result of recent changes.

Bonuses to directors and staff

A proper provision may be made in the annual accounts for specific bonuses paid up to nine months after the year end. Take care to ensure that these are charged to PAYE and NI as appropriate, and that the staff become entitled to the bonus before the year end. You may need to make a board minute to record that entitlement.

Capital gains

Capital gains are taxed at the effective rate of corporation tax. Gains are calculated after deducting from the sale proceeds the market value at March 1982 (or cost of acquisition, if later), costs incurred in improving the asset, an indexation allowance, and certain disposal costs.

Reducing capital gains

Rollover Relief
Claim rollover relief if your company buys new chargeable business assets within one year before or three years after selling a business asset. This effectively postpones any tax liability until the new asset is sold. Special rules apply if the new asset is a wasting asset (an asset with a useful life of less than 60 years).

Negligible value claim
Claim relief on assets that have become worthless. A loss can be claimed even though the asset has not been sold, and this can then be offset against chargeable gains.

Getting the timing right

The timing of certain payments and receipts of income is crucial for tax purposes. By moving a date of payment or receipt by just a few days either side of the company’s year end, you can reduce the tax bill and defer payment until the next tax year.

Do

• Ensure that charges on income (for example, annuities and royalties) are paid before the year end
• Ensure that any provisions made are against specific costs, not a general estimate
• Ensure that any pension contributions are paid before the year end
• Consider whether any additional remuneration/bonuses should be voted to directors in respect of the current accounting period (these can be paid up to nine months after the year end)
• Ensure that you value stock and work in progress taking into account any reduction arising as a result of obsolescence.
• Plan to bring forward any capital expenditure into the current accounting period

Don’t

• Sell assets, such as property or shares, that will give rise to a large chargeable gain until after the company's year end
• Forget the effect this will have on your accounts as if you reduce your profits, the bank manager may wonder if that lending was such a good idea after all!
• Sell assets on which capital allowances have been claimed until after the year end

Do call us on 01708 854943 or contact us at http://www.truemanbrown.co.uk/ if you would like further help or advice on this subject.

Insuring your business

 

Although most business people understand the need for insurance, a surprising number of businesses are uninsured, under-insured, or insured with out-of-date policies.

Experts usually advise that your planning should centre on insuring for a catastrophe. You should therefore check that your insurance for fire, loss of profits, employers liability, public liability, and product liability is correctly arranged with suitable sums insured or indemnity limits.

Any business could suffer a major loss in any one of the areas mentioned above. Under-insurance will result in a proportionate reduction in an insurance claim, and could threaten the future of the business, or at the very least reduce its ability to trade.

Did you know?

That the UK insurance industry comprises more than 900 companies employing more than 313,000 people. Of these companies there are more than 700 who provide general insurance cover. General insurance premiums are in excess of £33 billion. Source: ABI: 2009 key facts

Conversely, over-valuation will mean wasted premiums because the liability of an insurance company usually extends only to the cost of reinstatement of the insured asset.

In times of inflation, when property and stock values increase, make sure you still have adequate levels of insurance cover. In times of recession when property decreases and stock levels fall, make sure you are not over-insured.

Shop around

Do not accept that your existing insurers will necessarily continue to offer you the best value for money. The services of an independent broker can be invaluable in establishing the best cover at the most competitive level of premium.

Some of the more common types of insurance risk are:
Public liability - claims for damages to third parties.
For example, a fire might start on your premises and spread to your neighbours' premises. Losses here might include profits or records.
The highest awards presently being made are in respect of third party claims for personal injury. An award of over £1 million has been made recently for a customer tripping over a piece of flex left trailing across the floor!
Employers' liability - acts performed by your employees or subcontractors.
Product liability - injury or damage caused by a failure of your product.

The Consumer Protection Act has placed a greater onus on anyone dealing directly with the public. Proof of negligence is no longer required; the fact that a product causes injury places the blame on the supplier.

Fire and special perils

Decide whether the valuations placed on premises and plant reflect a fair cost of reinstatement to new condition. Too often, plant is insured on a second-hand value, and building values fail to take account of all the costs of rebuilding or reinstatement, including:

• The cost of debris removal
• Professional fees, e.g. architects
• Planning or possible anti-pollution requirements that might be imposed by the local authorities

Please note: Standard policies will normally restrict the loss due to terrorist explosion (check this restriction with your insurer) - additional cover can be purchased.

Security

Insurers are placing greater emphasis on security of all types; sometimes insisting on NACOSS approved burglar alarms and specifying designated fire extinguishers.

It is still very common for back-up copies of computer data to be left adjacent to the computer system, so that even a small incident can cause serious damage to the business. Consider keeping your back-up off the premises.

Vehicles

Have you considered the options available for insuring business vehicles? Will you opt for full protection, or accept costs below a particular level and insure for the excess? Discounts are often available for fleets of more than five vehicles.

Stock and work in progress - loss or damage

Is the insured value adequate to cover seasonal fluctuations?
Are goods in transit or goods held in trust covered? Do check before working on customers' goods whether they need to be covered under your policy.
Are stocks vulnerable to special risks, e.g. flooding or power failure?

Loss of profits - consequential loss

You can insure against loss of profits or increased costs that may arise as a result of disruption to your business. However, this type of cover is often the least well planned.

In essence, the insurers pay for loss of gross profit as a result of reduction in turnover. For example, if you run a transport company, a fire could destroy the office, but turnover could be maintained because the vehicles can still continue to haul goods. There would consequently be no loss of turnover and therefore any gross profit claim would not be covered.

You should take into account a dependency on particular suppliers or customers. If they have a fire at their premises, it could have a serious effect on your business.

You also need to think about how long it would take you to rebuild your turnover to its original level. Before this can even start, you may be involved with:

• Replacement of machinery
• Planning permission for a new building
• Construction of a new building

Most insurance policies cover you for twelve months, but is that enough?

Once the indemnity period has been chosen, it is vital to check that the sum insured is adequate. If, for example, your policy is due for renewal on 1 January 2010 and a claim occurs on 18 December 2010, the sum insured should be sufficient to cover you for the gross profit you would expect to have earned by 18 December 2010. It is not sufficient to look at your last set of accounts - you must project forward to the end of the next insurance period.

Factors you need to take into account include:

• Loss of sales, accounting or business records
• Replacement of lost plant and equipment
• Costs of maintaining the business as a going concern, e.g. paying the wages and salaries and other standing costs
• The professional fees in preparing estimates upon which to base claims

Engineering insurance

Do you have potentially dangerous or unstable assets, e.g. pressure boilers, lifting gear, cranes etc.? Such items are subject to statutory inspection.

With the advent of various electrical installation regulations, the onus on the employer is greater than ever. Insurance companies can provide an inspection service and are independent, whereas unscrupulous manufacturers or suppliers of equipment might have a vested interest in overemphasising unimportant faults.

Cash - theft or loss

Such losses might arise on business premises or in transit, e.g. taking cash to the bank.

Keyperson insurance

Are you covered for any damage or costs that might arise as a consequence of your death, or the death or serious incapacity of key staff members?

Personal accident and permanent health

Have you considered insuring against your own serious illness or death? How would you or your dependants deal with:

• The continuation or disposal of the business
• Hospital and convalescence expenses
• Loss of present earnings
• Repayment of your own mortgage
• Payment of inheritance tax

Life assurance

Have you considered the benefits of life assurance as a tax efficient method of investment?

Personal assets

You should also consider your insurance levels for your house, jewellery, credit cards, furniture, caravans and boats, and electrical equipment etc.

Do call us on 01708 854943 or contact us at http://www.truemanbrown.co.uk/ .

Sole Traders - Choosing Your Accounting Date

 

Q : Can I select any date for my accounting year end?

A : The choice of a year end accounting date is for the business owner to decide.

The rules still allow businesses a free choice of accounting date. Under the current year basis, the taxable profit for a particular tax year is determined by the accounts that end in that year.

Thus, for 2010/11 tax, accounting dates will vary between 6 April 2010 and 5 April 2011. So what is the best date to choose?

Sometimes, compelling commercial reasons relating to the nature of the trade will dictate the most appropriate accounting date. Otherwise (as in many tax matters), there is no easy answer - it all depends on the particular circumstances. There are several basic considerations:

Overlap relief

The system is designed so that, over the life of a business, tax is paid on no more and no less than the cumulative profits of the business. However, unless your accounting date falls between 31 March and 5 April (inclusive), there will be some element of double counting, or overlap, in the first full tax year on the current year basis.

Overlap relief will be held in reserve for use when the business ceases (or on an interim change of accounting date). One concern is that, because of inflation, overlap relief will be worth less in future years than it is at present.

Bunching of terminal profits

The converse of the overlap situation is the 'bunching' effect of profits when a business ceases. The assessment for the final tax year will be based on the profits right back to the accounting date in the previous tax year. The earlier in the tax year the accounting date falls, the longer will be the period of account relating to the final assessment.

Thus a cessation date of, say, 31 December means that the final tax assessment will be based on a period varying in length between 9 months (5 April accounting date) and 21 months (6 April accounting date). This effect may be lessened to some extent by overlap relief, but the overall distortion is illustrated in the example set out below.

Partnerships

Partners are each deemed for tax to have an individual business so the points already mentioned for new businesses and those ceasing apply equally to partners joining or leaving a continuing partnership.

Pattern of profits

If profits do not vary significantly from one year to the next, the accounting date will not affect the assessable profit for each tax year.

Where profits show a trend, the rule of thumb is that (all other things being equal) it is beneficial to have an accounting date early in the tax year if profits are rising, and late in the year if profits are falling.

External factors

Of course, all other things are not equal, and in evaluating the advantages and disadvantages of particular accounting dates there are a number of factors to be considered, including:

• interest rate movements
• the effects of inflation
• changes in rates of tax
• changes to the tax system

No one can say how these will change over time, and so, not surprisingly, businesses tend to be swayed by the short-term advantages, which have at least some degree of predictability.

Timing of payments on account

It is as well to remember that the date for the first payment on account falls over two months before an accounting date of 5 April, but nearly ten months after an accounting date of 6 April. Thus, with an accounting date later in the tax year, you could pay too much tax on account where profits are falling, and this is a further factor affecting cashflow.

Examples

On the following table, there are examples of the effects of the two extreme accounting dates (5 April and 6 April) in one situation where profits are rising consistently, and another where profits are falling consistently.
The figures relate to two businesses, which start on 6 April 2010 and cease on 31 December 2015, with profits derived from the accounts as follows:

	Business A (£)	Business B (£)
Year ending 5/6 April 2011	50,000	95,000
Year ending 2012	60,000	85,000
Year ending 2013	70,000	80,000
Year ending 2014	80,000	70,000
Year ending 2015	90,000	60,000
Period ending 31 December 2016	75,000	35,000
Total	425,000	425,000

The assessable profits will be as follows (for the sake of simplicity the effect of the odd extra day in the first period has been ignored):

Business A (rising profits)
Tax year	Assessable profit (£)		Difference (£)
	Year end - 5 April	Year end - 6 April
2010/11	50,000	50,000	-
2011/12	60,000	50,000	(10,000)
2012/13	70,000	60,000	(10,000)
2013/14	80,000	70,000	(10,000)
2014/15	90,000	80,000	(10,000)
2015/16	75,000	115,000	40,000
Total	425,000	425,000	-

Business B (falling profits)
Tax year	Assessable profit (£)		Difference (£)
	Year end - 5 April	Year end - 6 April
2010/11	95,000	95,000	-
2011/12	85,000	95,000	10,000
2012/13	80,000	85,000	5,000
2013/14	70,000	80,000	10,000
2014/15	60,000	70,000	10,000
2015/16	35,000	-	(35,000)
Total	425,000	425,000	-

Of course, the total assessable profits are the same in each case, and equal to the total profits derived from the accounts. The variations arise because of timing differences in the assessment of tax.

These assessment timing differences will obviously affect the tax payable on the normal payment dates of 31 January and 31 July each year. It is therefore vital to consider the implications of these cashflow differences in assessing the advantages and disadvantages of particular accounting dates.

Conclusion

Using a 5 April (or 31 March) accounting date leads to the simplest application of the current year basis of assessment. However, it does mean that the timetable for tax payments and returns is very tight, and there is therefore an increased risk of incurring penalties. Also there is now less time to allow for tax and business planning relating to tax issues.

If you expect your profits to show an overall upward trend, there are clearly cashflow advantages in having an accounting date at or shortly after the beginning of the tax year. In these circumstances, it is important to ensure that you make proper provision for the increased liability that will occur when the business ceases.

For further information please contact Trueman Brown on 01708 854943 or at http://www.truemanbrown.co.uk/ .

VAT Do's and Don'ts

• DO keep a monthly record of your turnover - late registration can result in severe penalties
• DO notify your local HM Revenue & Custom's office when major changes take place - changes must be notified within thirty days
• DO retain records for the last six years - these could be demanded by law
• DO obtain and keep VAT invoices - these are your authority to claim back VAT on supplies made to you
• DO charge VAT on supplies to your staff
• DO charge VAT on any equipment or vehicles (except motor cars) that you sell or part-exchange
• DO account for VAT on fuel used for private motoring using the appropriate scale charge

• DON’T claim the VAT paid on the purchase of a motor car - it is not recoverable except in some very special cases
• DON’T claim the VAT paid on goods or services used for private purposes. Where there is an element of private use (e.g. telephone) an appropriate percentage should be claimed. Special arrangements apply to private use of petrol (see above)
• DON’T claim the VAT paid on entertaining
• DON’T forget to account for VAT on inter-company charges
• DON’T charge VAT on the transfer of a business as a going concern (make sure contracts incorporate appropriate VAT provisions)

For further information call Trueman Brown on 01708 854943 or contact us at http://www.truemanbrown.co.uk/ .

The National Minimum Wage

 

An employer must pay their workers a minimum amount per hour as defined by law. This is called the National Minimum Wage (NMW)

Who is covered by the NMW?

NMW applies to all workers, with certain exceptions such as:

• those under the age of 16
• apprentices under the age of 26 during their first year of apprenticeship
• those who are genuinely self employed
• family members working in the family business
• people working and living as part of a family (e.g. au pairs)
• voluntary workers

What are the rates of NMW?

From 1 October
	2010	2009	2008	2007
	£	£	£	£
Adult rate	5.93	5.80	5.73	5.52
18 - 21 year olds development rate	4.92	4.83	4.77	4.60
16 - 17* year old rate	3.64	3.57	3.53	3.40
*16 and 17 year old apprentices are exempt from the young workers rate.

How is the NMW calculated?

The Regulations set out a rather complex procedure detailing the calculation of the NMW.
Benefits in kind, expenses, certain allowances and most deductions are not included. Enhanced payments for particular work will not count, but incentive or profit related payments will be included.

What working time counts for NMW?

Job-related travelling and training time is included. Periods of holiday or absence do not count (even though holiday pay is now obligatory), nor does time taken as rest breaks or industrial action.

What if the pay is not time-related?

The previous 'fair estimate agreements' has been replaced, and employers must pay their workers the minimum wage for every hour they work or a 'fair piece rate' initially set at 100% of the minimum wage.

What about family businesses?

Although there is an exemption for family members working in the family business, the regulations specifically refer to the employer's family. If the family business (i.e. the employer) is a limited company, then it does not have a family. Even if the family business operates as a sole trade or partnership, the only family members exempted are those who actually live at home.

What about company directors?

In common law, company directors are classed as office holders and can do work and be paid for it in that capacity. This is true no matter what sort of work they do and how it is rewarded.

The NMW does not apply to office holders, unless they also have contracts which make them workers.
It is unlikely that a company director will have an implied contract which makes him a worker. The rights and duties of an office are defined by that office, and it exists independently of the person who fills it. Directors can be removed from their office by a simple majority of the votes cast at a general meeting of the company. This contrasts with the rights and duties of an employee which are defined in a contract of employment.

What records have to be kept?

For workers earning in excess of £12,000 per year, employers simply have to keep sufficient records to demonstrate that the NMW has been paid. For workers earning less than £12,000 per year, full details of the NMW calculation must be kept.

Records should be kept for six years.

What rights does the worker have?

Individuals have the right to apply to a court or tribunal for non payment of the NMW. They are also protected from suffering any loss for such proceedings. There is a national helpline (0845 6000 678) which takes complaints from workers, employers and third parties. These lines operate Monday to Friday from 8 a.m to 6 p.m.

Telephone	0845 6000 678
Minicom	0845 915 3296
Orderline	0845 845 0360
Callers can be assisted in 30 different languages

What about employers who do not comply?

The minimum wage regulations are enforced by HM Revenue & Customs, who can issue enforcement notices.

From 6 April 2009

Employers face a penalty if HM Revenue & Customs discover that the NMW has not been paid. Workers are entitled to the arrears of wages at current rates.

Further there is a penalty which is calculated based on the underpayments occurring on or after 6 April 2009 and this is set at 50 percent of the underpayment subject to a minimum of £100 and maximum of £5,000. Where employers comply fully with any notice of underpayment within 14 days of service there is entitlement to a discount of 50 per cent on the penalty.

Prior to 5 April 2009:

HM Revenue & Customs can also issue penalty notices, imposing civil fines of £9.70 a day until the underpayment is made good. However officers will give employers every chance to comply before considering any penalty. The maximum penalty is a fine of £5,000 for committing a criminal offence, covering refusal or wilful neglect to pay the national minimum wage; failure to keep national minimum wage records or keeping false records; and obstructing an enforcement officer.

For any further information, contact Trueman Brown on 01708 854943 or at http://www.truemanbrown.co.uk/ .

Preparing your business plan - Planning not to fail!!!

 

Failing to plan is the first step toward planning to fail. Recording your ideas, plans and strategies is essential given the current economic climate when so many business owners are struggling to maintain profit and cash flow.

Don't lose sight of the fact that a business plan is not just about obtaining finance.

Although this may be the result you are looking for your business plan will be most effective if it is positioned as a 'working document' that is continuously evolving and so needs to be updated to reflect market conditions and the business' performance.

After all, in the absence of a crystal ball even the most forward thinking management team will have difficulty predicting tomorrow.

Planning is:

• Taking prudent, calculated risks rather than blindly reacting to events
• Making the best use of available resources
• Setting a path to achieve the lifestyle you want

All businesses plan to some extent, but the planning is often informal and ill defined. You should always set out your plans in writing, however roughly, because this forces you to define your ideas clearly.

The current economy

With the global economy still seeking to move on from recession you must be certain to take account of how the ongoing economy is going to impact you and your customers. How robust is the demand for what you do?

Planning to plan

Consider:

• What information you need to assemble
• The initial decisions to be made
• The sales and marketing options open to you

Enlisting support

Assess the expertise and assistance you already have, and decide what additional help you will need to prepare your plan and harness your resources effectively. For example, you might need accountancy, information technology / internet or marketing assistance.

Define your business

Examine your business ideas critically and check these against your initial perception of the marketplace. Identify the key features of your business.

• Analyse its strengths and weaknesses
• Consider opportunities open to you, and the challenges you face

Scanning the market

The marketplace is the key to the success of your business. You should review the market for your goods or services, and the competition you face.

• Use market segmentation to identify potential customers
• Use market survey methods to characterise your customers and their needs

Identify your niche

Only the largest businesses can afford to provide an overall service to all customers. Most companies have to choose between offering general services to a restricted range of customers, or offering a niche or specialist service.

How can you best achieve profits?

You could, for example, restrict customers by geographical area, or by some other classification within a wider area.

• Identify the features of your key goods or services
• Identify the advantages you have over competitors
• Identify your ´USP´ (unique selling proposition)

People profile

Now you can review the skills and knowledge needed to run the business. Compare this list with the abilities of the people currently working for you.

If certain skills or knowledge are lacking, consider whether training would be appropriate. Remember, it is often better to buy in certain skills such as accountancy and marketing as and when they are needed. Other skills, such as selling and production, are needed constantly and so should be available in-house.

Prices and profits

Identify the relationship between prices and profits. Most businesses price low to maintain turnover, but the additional profits from higher margins can often outweigh any loss of turnover.

Decide on the impact of competitors’ pricing policies and the expectation and ability of customers to pay as a result of the recession.

Marketing strategy

Marketing is deciding how best to reach customers, maintain marketplace intelligence, secure additional customers, and generate further business.

• Determine how you will attract potential customers
• Design the message and the medium required to evoke a response
• Prepare staff to deliver outstanding customer service, through training if necessary
• Perhaps prepare a separate, more detailed, marketing plan

Capital expenditure and liquidity

Having defined the business you are aiming for, you now need to consider the financial resources you will require. It is easier to arrange borrowing in advance rather than approach your bank manager when you have exceeded your overdraft limit!

Review the capital expenditure needs of the business and alternative ways of meeting this expenditure while retaining adequate liquidity.

Financial forecasting

We will be pleased to put together financial forecasts from your business plan. These will cover:

Sales revenue

• Taking into account current turnover and any potential increase
• Making full use of marketing survey data
• Converting forecasts into targets

Expenditure

To estimate the expenditure that will be incurred in running the business, we will:

• Identify and estimate fixed costs item by item
• Calculate variable costs on the basis of projected revenues

Profitability

We will forecast the level of anticipated profits from the assumptions made to date about the business. Because nothing is certain in business, it is vital to apply a sensitivity analysis to the assumptions to identify which ones are critical to success. Then you can carefully plan your reactions to possible scenarios, such as:

• What is the effect of the recession on your margins and profitability?
• How will you respond if a competitor starts a price war?
• Could your production facilities cope with a large order? What would be the effect on your cashflow?

Funding review

We will review funding provisions for the business in the light of the capital and cashflow requirements. The review will include:

• Identifying assets and liabilities, including money owed to you and stocks held
• Drawing up balance sheets based on the forecasts
• Identifying how much of the cash needed can be financed from profits or trade creditors. The remainder needs to be provided either by the proprietors or by borrowing(s)

Once the plan has been prepared:

Management information

To achieve the best results, you will need to monitor your performance against the plan. This will give you early warning for when you should reconsider your actions in response to market developments.
Consider the key information you need to manage the business, and hence the systems that will provide this:

• Plan to monitor revenues and costs
• Plan to manage cashflow
• Plan to manage people

Updating the plan

You will need to decide when the plan should be updated and how this should be done:

• Short-term problems may require immediate revisions
• The year end review of results will help in amending the plan
• Do not neglect to review the marketplace from time to time

This is a never-ending process

Businesses evolve and so should your plans. Plans should be designed to enable you to forecast the future, to help you stay ahead of the competition and to assist you in realising your full potential.

Six planning steps to success...

Step 1: Establish your mission

In essence, your mission statement explains why your business exists. When you encounter a problem or a key decision, the answer will be informed by your mission. Think about why you started the business, what needs of the marketplace you aim to satisfy, and imagine where you want it to be in the future. These elements will provide your mission statement.

Step 2: Analyse your SWOT

With your mission in mind, analyse your business's strengths, weaknesses, opportunities and threats. List each category in full and be honest. Done correctly, this 'SWOT' analysis will help you to take an objective, critical, unemotional look at your business in its entirety.

Step 3: Develop a plan

Try this exercise: from each SWOT category, choose three to five important items. Then set goals to maximise your strengths, correct your weaknesses, make the most of your opportunities and nullify your threats. For example, you could decide to focus more strongly on a particularly successful product or service (a strength), and abandon a side-project which is costing time and money for little return (a weakness). Remember that you can't do everything yourself. Think about how you will delegate tasks and involve all the staff. Avoid dwelling on the negatives - set yourself realistic strategies for improving the business.

Step 4: Create a budget

All missions and strategies need adequate financial resources to succeed. A smart budget will help you to regularly review your expenses and make financially beneficial decisions. You may need to take a wide variety of factors into account when setting your budget.

Step 5: Put it in writing

Make sure you write down your finished plan. Include the mission statement, SWOT analysis, goals and plans, budget and forecasts, and make it clear who is responsible for doing what. Share it with your key staff and shareholders, and encourage their input.

Step 6: Make it a living document

This is vital! Make your business plan a living document that you and your staff can frequently update and improve. Consider reviewing it monthly to track your progress and readjust your strategy as necessary. Hold yourself and your staff accountable for meeting the plan's goals, and think about introducing an incentive programme to keep everyone motivated.

Six reasons why plans fail

You may well have prepared a business plan some years ago to present to your bank manager. If you revisit that plan now, you will probably be surprised by how little relationship the position of your business now bears to that predicted in the plan. The reality is that most business plans fail. Here are some of the traps to avoid:

1: A dead document

A business plan that is created for a purpose and then discarded will always become obsolete fast. Making your business plan a living document (see step 6) is essential if you don't want the whole process to be a failure. Only a regularly reviewed and updated plan can be the spur to look critically at your business on a recurring basis.

2: Over-optimism

Most business plans are over-optimistic, especially as regards predicted sales, often massively overestimating the size of the market. Research your market thoroughly. Too many business plans include a SWOT analysis, but concentrate on the strengths and opportunities and ignore the threats and weaknesses. For most, a recession is a time to be cautious and prudent.

3: Ignoring the competition

Business plans commonly assume that the competition will make no competitive response or indeed, will have no new initiatives of their own. Study your competitors and try to second-guess their plans. A living document will take into account their actions.

4: New or old?

Too many business plans depend on doing something new, when what is needed is to find a better way of doing what is being done now.

5: Ignoring risk

What are the risks attached to the plan? Think through these and the costs of failure as well as the rewards of success.

6: Profit or turnover?

Remember the old adage, turnover is vanity, but profit is sanity? If expansion is planned, it should result in increased profits, not just sales. Expansion requires finance, people and other resources. Do you have adequate resources?

Remember, a good business plan is as much about the process as the final document. Creating your plan will open your eyes to the realities of your business. Keeping it updated will help you stay on the right track. For help with developing your plan, contact us at Trueman Brown on 01708 854943 or http://www.truemanbrown.co.uk/ .

How do you fund your children's education?

Every parent wants to give their children the best possible start in life - but the prospect of funding a child's education right through to university can be daunting. However, with careful planning and good advice, you can avoid those education headaches.

Private or state school?

If you wish your offspring to attend a private school, you will of course have to pay fees. These range from around £6,000 to £17,000 or more a year, depending on the school.

But even the state sector begins to look expensive when you do the sums, including the cumulative cost of transport, school trips, books, and school uniforms to see your child through from age five to sixteen.

Clearly, even a 'free' education will cost you money - but if you start planning and saving now, you will be able to budget to meet these costs.

Higher education

A few years ago, many university students qualified for a grant which helped towards their tuition fees and living costs. Now students, or their parents, can expect to foot a fairly substantial bill each year.

One solution is to take advantage of student loans, which can be repaid after graduation. But the latest findings suggest that students can expect to leave university with average debts that can be as much as £10,000 - £37,000, where the course is an intensive five year course, such as medicine. This level of debt has increased as a result of the top-up fees. However tuition fees will increase these debts significantly to maybe £37,000 or more for many students. So if you wish your children to avoid starting their career already in debt, you should consider planning now to help fund their higher education.

Taking the right action now could give your children a head start, not a millstone round their necks.
If you have children, or if you intend to start a family, it is essential to start considering the costs of their education. Good financial management will help you meet your needs, so why not contact us, and we'll help you develop plans to provide for these costs.

Education essentials

• Calculate carefully how much you will need
• Start planning early and save as much as you can in advance of times of major expense
• With school funds tight, don't overlook the potential advantages of educational toys, books and computer software
• Choose savings schemes carefully, making sure you can withdraw money as the costs need to be paid, or look at specific school fees plans
• Check for bursaries or scholarships that may be available through the school or your local authority
• If your child is going to university or college in a distant city, consider helping him or her to buy a house instead of renting a flat. With care and rising property prices there is potential to fund the mortgage by taking in lodgers and for a tax-free gain on the sale of the house if you get all the steps right

Take the right financial advice if you are considering savings plans, school fees plans or helping your child to invest in property.

Do contact us if you would like further help or advice on this subject at 01708 854943 or http://www.truemanbrown.co.uk/ .

Does your estate planning pass the test?

 

It is never too early to plan your estate. If it is large, it could be exposed to inheritance tax at 40%, and if it is small, advance planning can help you ensure that your assets will go to your chosen beneficiaries. Currently only 2% of estates have a liability to IHT.

Currently most transfers of property between spouses or civil partners are exempt from IHT. This means that when one partner dies leaving some or all of their property to their spouse/civil partner they may not make full use of their nil-rate band (£325,000 until 5 April 2016).

It is now possible to transfer unused nil-rate band allowances between spouses or civil partners. The new rules apply to allow a claim to be made to transfer any unused IHT nil-rate band on a person's death from the estate of their deceased spouse/civil partner where the second death occurs after 9 October 2007.

The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, then 50% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £325,000, then that would be increased by 50% to £487,500.

Any claims for transfer of unused nil-rate band amounts can be made by the personal representatives of the estate of the second spouse or civil partner to die when they make an IHT return. The rules apply to all surviving spouse/civil partner estates from 9 October 2007, including those when the death of the first spouse/civil partner occurred prior to that date.

Making a will

Estate planning begins with the following decisions:

• Who will inherit your assets?
• When should the recipients receive them?
• What limitations will be placed on the recipients?

A will should also stipulate who is to be your minor child(ren)’s guardian. Although making a will makes your decision legally binding, the will can be amended any time you change your mind.

Where should you begin?

Start by completing the following survey. Every ‘no’ answer indicates an area where estate planning issues should be addressed.

1. Have you made a Will?
2. Has your Will been safely lodged so that others can access it after your death?
3. Does your Will name a guardian for your children if both you and your partner die while they are still in their minority?
4. Have you considered how to fund the inheritance tax liability?
5. If you die suddenly, will your executors be able to locate all your records easily?
6. Do you have medium-term and long-term financial objectives?
7. Do you know the present value of your estate?
8. Are you comfortable with the executor(s) and trustees you have selected?
9. Have you arranged your affairs to take advantage of the inheritance tax exemptions?
10. Are you sure you have the right type and amount of life assurance?
11. Have you considered a trust to prevent assurance proceeds from being taxed as part of your estate?
12. Have you considered making gifts to family members that take advantage of the inheritance tax and capital gains tax exemptions and reliefs?
13. Are you sure your estate plan is up-to-date and takes into account all your personal wishes and all your potential tax saving strategies?
14. Have you considered how inheritance tax will affect your business?
15. Do you know what will happen to your business if you die?
16. Do you know that business assets can be given away without you having to pay capital gains tax?
17. Do you know how to give away business assets free of inheritance tax?
18. Have you considered the use of trusts in estate planning?
19. Do you know the advantages of an accumulation and maintenance trust?
20. Do you know the intentions of relatives with substantial estates?

For any further advice please contact us at Trueman Brown on 01708 854943 or at http://www.truemanbrown.co.uk/ .