Dividends – Some pitfalls

Many directors of SME companies take both a salary and dividend from the company with salaries set at a tax effective level. This is accepted to HMRC and should not give cause for concern.  The salary itself should be treated in the normal way via the payroll system and normally is.

However with dividends it’s a different story. And here problems start to arise. Not only from a compliance perspective but also because of tax issues arising. Continue reading

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SME’s and Cash flows

It’s tough being a SME especially when it comes to cash. Banks are restricting their lending especially to SME’s and when they do lend charge interest rates well above that extended to the large corporates. The average interest rates for loans less than £1 Million are double that for loans above £20 Million (N Blake Economic Advisor Ernst & Young).

Corporates further put pressure on their SME suppliers by paying suppliers on average 34 days after term dates (range 30 to 90 days). In the UK late payment is endemic despite an EU directive for all companies to pay within 30 days and a public sector commitment to pay invoices within 10 days. Ask any SME owner dealing with Government (Inst. of Credit Management).

Yet the SME sector is significant as proven by some statistics:

  • SME’s comprise 59.1% of private sector employment
  • 48.6% of private sector turnover
  • Turnover in the SME sector is £3.2 Trillion!
  • They employ 22.5 Million people

(Dept. for Business Innovation & Skills)

Yet their experience of the economic climate is vastly different then for the corporates. The increasing delay in both international and domestic payments (British Chamber of Commerce Quarterly Economic Survey) combined with the lack of access to funding is playing havoc with cash flows.

So what can be done? Many strategies can be adopted but one which is neglected in that 90% of invoices are still submitted on paper is e-invoicing. Aside from cost savings it will ensure early arrival at customers. The use of direct debit systems is increasingly being adopted with SME‘s lagging as perceived to be difficult to set up. Using DD will be especially useful to SME’s selling B2B. A scheme which uses this is the SEPA B2B Scheme and is used for lending decisions as well as it ties in well with the increasingly tightly integrated physical supply chains.

Enlightened corporates such as Tesco, B&Q and M&S have introduced supply chain finance to ensure that not only suppliers are paid more quickly but also enables these suppliers to borrow at a lower rate of interest. The key to this model is the visibility of the supply chain finance which enables banks to make decisions on real-time information as opposed to the traditional historic based balance sheet lending. This model will work less well when the customer base is themselves SME’s.

Relying on paper based invoices and traditional accounting processes leaves the SME with little bargaining power. By adopting both sales and supplier invoice e-invoicing with direct debit payments mechanism this will ensure terms are adhered too and payment will be sooner and being visible and transparent to banks easier to fund at better rates.

With the economic outlook remaining poor SME’s will need to look at alternatives to managing cash flow from the traditional methods.

(Additional sources AIA July/August 2012)

Warning signs of a business in trouble

Below are the signs that a company is in trouble. Some of these should be an indicator to the directors but some will be apparent to companies extending credit as well. If any are pertinent to your company you should seek advice from turnaround specialists.

Bank 

  • The overdraft is always at the limit.
  • The bank always wants more information.
  • The bank has returned cheques.
  • The bank has refused to increase the overdraft or wants its facility reduced.
  • The bank refuses to provide a term or EFG loan.
  • The bank wants to introduce investigating accountants for an independent business review. Note, the banks uses the big six so fees, which are paid by the company, are huge with amounts of £6,000+ the norm.
  • The bank asks for increased security.
  • The bank wants personal guarantees or increase them.
  • The bank wants a charge on personal property.
  • The covenant with the bank is often contravened. Continue reading

Gabelle Tax Analysis: Draft legislation for statutory residence test published

On 21 June 2012 the Government published its response to the consultation on the introduction of a Statutory Residence Test (SRT) along with draft legislation for Finance Bill 2013.  The SRT will take effect from 6 April 2013.

(In the commentary which follows we also highlight the specific changes from the original proposals.)

There will be three tests to determine whether an individual is resident in the UK:

  • The ‘automatic overseas test’ (formerly referred to as Part A: conclusive non-residence).
  • The ‘automatic residence test’ (formerly referred to as Part B: conclusive residence).
  • The ‘Sufficient Ties test’ (formerly referred to as Part C: other connection factors and day counting).

Continue reading

Memo to Bank of England: it’s time for a new 3i – that’s innovation, innovation and innovation

Article by Michael Baxter 18 June 2012

©2012 Investment and Business News. 

The Bank of England bravely turned its tail and fled. By the standards of the UK’s central bank the plan that was unveiled last week was revolutionary. By the standards of what the UK economy needs, it was totally inadequate.

Credit where it is due, George Osborne was in fine form when he made his recent Mansion House speech. Full of jokes, and witticisms: they say laughter is the best medicine, and if that was true, Mr Osborne revealed a cure to the UK’s ills last week. But then if that was really true, the cabinet should resign and make way for Michael McIntyre, Eddie Izzard and the rest of the gang. Greece could say to the rest of the Europe: “tatty bye everybody.”

But in fact the UK chancellor and Mervyn King, Governor of the Bank of England, fell short – a long way short – of what is required. Alas the duo showed themselves unaware of the seriousness of today’s crisis, and indeed its causes.
Continue reading

GETTING YOUR BUSINESS READY FOR A SALE – THE PRACTICALITIES

In order to maximise the value of your business and the ease in selling the business needs to be prepared to look attractive to any potential purchaser.

The purpose of this note is not to give guidelines as to valuation, selling methods but to address the practicalities which will influence a buyer once he starts looking at the business and to ensure any due diligence will go smoothly without the need for renegotiating the price.

Accounts

Bring the accounts up to date as to year-ends as well as the monthly management accounts.

  1. Ensure there are no outstanding entries or other information that should be included
  2. Have the accountant tidy up the ledger so that all unresolved items have been finalised
  3. Ensure all supporting documentation supports the ledger entries, are logically filed and cross referenced.
  4. Have a note of all expenditures which are not fully business related and which require an adjustment to the accounts. These typically are;
    • Excessive directors salaries
    • Family members employed but not active in the firm
    • Two cars per director
    • Computers and equipment for private use at home
    • Staff and material used for private purposes
  5. Have a set of accounts prepared with the adjusted figures per 5. The valuation should be based on this 2nd set of figures as the true value.
  6. Have a full asset list with all assets clearly identifiable, when purchased, purchase value, depreciation and current book value. If possible have current market value included
  7. Have all accounting processes documented.
  8. Have all accounting policies documented

Debtors Ledger

Have an current aged debtors listing

  1. Write of all bad debts.
  2. Ensure you have a credit control policy documented
  3. Have all debt collection activity documented, especially any subject to legal follow up.
  4. Have all debtors correspondence filed and cross referenced, not forgetting E-Mails.
  5. List poor payers
  6. Have all terms give fully documented and on the accounting system, especially special arrangements

Creditors Ledger

Have a current aged creditors ledger

  1. List all items under dispute with full motivation
  2. Ensure all terms obtained are documented and entered onto the creditors ledger
  3. List any special terms negotiated and whether applicable to any buyer.

Loans

All loans should be centralised with full documentation for each loan

  1. Prepare a schedule of loans taken, due and payments required each month
  2. If there is an overdraft facility have the limit and conditions documented

Financial

Have a budget ready which reconciles to the forecasts prepared in the Sale Memorandum

  1. Have a full motivation ready for the entries especially where changes from historic performances are made.
  2. Prepare a valuation with motivation – this is for internal use only for negotiation preparation

Tax

Have all tax up to date. This includes corporation tax, PAYE, NIC and VAT

  1. Resolve any outstanding tax issues or fully document those that cannot be resolved as yet
  2. List all tax dates applicable to the company.
  3. Have a note on file of the directors tax position and whether this requires input from company data or has a knock on effect on the companies tax position

Legal

Have all legal documentation centralised. These should comprise as a minimum;

    • Premises lease
    • Shareholders agreements
    • Insurance agreements
    • Equipment/asset rentals
    • Asset leases
  1. Any litigation currently under way or contemplated should be fully documented
  2. Check if premise leases are transferable to new owners.

Company secretarial

  1. Ensure all company secretarial data is accurate and up to date.
  2. Check share certificates are issued and correct
  3. List all shareholders with their holdings and loan accounts if any
  4. Have directors board minutes filed and available
  5. Ensure all board decisions are documented have been acted upon or are in progress

HR

Check all employees have a valid employment contract

  1. Have job descriptions for each employee
  2. Prepare an organigram showing reporting lines and position
  3. List all employees with years service, age and pay as well as qualification/experience
  4. List critical employees – that is employees critical to the on-going operations
  5. Prepare a confidential report on each of the critical employee
  6. Ensure all compliance issues have been addressed or are in progress, especially those pertaining to the sale of the company
  7. Have all policies and other employee manuals up to date and fully compliant

Health & safety

Bring all H&S documentation up to date

  1. Ensure policies are documented
  2. Where required ensure all safety certificates are up to date and current

Stock

Take a stock take and identify obsolete and slow moving stock

  1. Dispose of all obsolete stock and sell of slow moving
  2. Tidy up stock rooms/areas with locality and item bins clearly marked
  3. Ensure stock records are up to date and accurate
  4. If computerised check link into the accounts are correct and have been updated
  5. Have stock records available for inspection

Operations

Manufacturing

  1. Factory should be tidied up
  2. All lights and plugs should be working and be safe and neat.
  3. All machinery should be clean and fully operational with appropriate certificates
  4. All machinery manuals should be centralised for easy access and use
  5. All machinery and adjacent areas should be clearly marked and signed
  6. All safety issues should be addressed
  7. The environment should give an impression of light, ease of work and cleanliness
  8. All manufacturing processes should be documented

Retail

  1. All redundant stock to be removed
  2. Review the merchandising of the outlet and improve where possible
  3. Declutter the area and ensure clean.

Services

  1. Tidy up work areas removing unnecessary equipment/documents to store rooms
  2. All machinery to be fully functional
  3. Try and have staff keep desks/work tops reasonably tidy and clean.

Policies and processes

Have these documented and up to date.

  1. If having special registrations – e.g ISO 9001, then ensure documentation and certificates are up to date.

General

List suppliers and reliability/quality

  1. Any IP issues
  2. Have a copy of the market and sales plan ready for review
  3. Have a clear idea at all times what is being sold – e.g. company including debtors/creditors?.

What re-organisation is required with shareholders leaving

Have some notes on what any buyer will have to think about if a deal is consummated and the shareholders leave. Typical are;

  1. 2nd tier staff that could take over
  2. Personalities of clients
  3. Personal contacts with clients and suppliers and the effect
  4. Retention of skills/knowledge
  5. Premise lease
  6. Loans – transfers

To find out more, call us on 0845 009 5360 or email us at richard@rhtbusiness.com

Tax tables 2011-12

Tax tables 2011-12

Posted by AccountingWEB.co.uk in Tax on Thu, 09/12/2010 – 13:32

These tables reflect announcements made on 24 March, 22 June and 2 & 9 December 2010. For more detail on these rates, see Annual uprating of certain tax and tax credits rates and thresholds (112kb PDF)

Income tax, capital gains tax, and inheritance tax

Per year 2010-11 2011-12
Income tax personal and age-related allowances
Personal allowance (age under 65) £6,475 £7,475
Personal allowance (age 65-74) £9,490 £9,940
Personal allowance (age 75 and over) £9,640 £10,090
Married couple’s allowance* (age 75 and over) £6,965 £7,295
Married couple’s allowance* – minimum amount £2,670 £2,800
Income limit for age-related allowances £22,900 £24,000
Income limit for under 65 personal allowance £100,000 £100,000
Blind person’s allowance £1,890 £1,980
Capital gains tax annual exempt amount**
Individuals etc. £10,100 £10,100
Most trustees £5,050 £5,050
Individual inheritance tax allowance £325,000 £325,000
Pension schemes allowances
Annual Allowance £255,000 £50,000
Lifetime Allowance £1,800,000 £1,500,000

* Married couple’s allowance is given at the rate of 10%.

** 2011-12 annual exempt amounts for CGT not yet confirmed.

Income tax: Taxable bands

2010-11 2011-12
Savings starting rate*: 10% 0 – £2,440 0 – £2,560
Basic rate: 20% 0 – £37,400 0 – £35,000
Higher rate: 40% £37,401 – £150,000 £35,001 – £150,000
Additional rate : 50% Over £150,000 Over £150,000

* only available if non savings income is less than this amount

Capital gains tax rates

2010-11 2011-12
Standard rate of CGT 18% 18%
Higher rate (from 23/6/10) 28% 28%
Entrepreneurs’ Relief fraction (to 22/6/10) 4/9 n/a
Rate for Entrepreneurs (from 23/6/10) 10% 10%

 

Corporation tax on profits

£ per year (unless stated) 2010-11 2011-12
£0-£300,000 21% 20%
£300,001 – £1,500,000 Marginal rate Marginal rate
£1,500,001 or more 28% 27%

National insurance contributions

per week (unless stated) 2010-11 2011-12
Lower earnings limit, primary Class 1 £97 £102
Upper earnings limit, primary Class 1 £844 £817
Upper Accruals point £770 £770
Primary threshold £110 £139
Secondary threshold £110 £136
Employees’ primary Class 1 rate between primary threshold and upper earnings limit 11% 12%
Employees’ primary Class 1 rate above upper earnings limit 1% 2%
Employees’ contracted-out rebate – salary-related schemes 1.6% 1.6%
Employees’ contracted-out rebate – money-purchase schemes 1.6% 1.6%
Married women’s reduced rate between primary threshold and upper earnings limit 4.85% 5.85%
Married women’s rate above upper earnings limit 1% 2%
Employers’ secondary Class 1 rate above secondary threshold 12.8% 13.8%
Employers’ contracted-out rebate, salary-related schemes 3.7% 3.7%
Employers’ contracted-out rebate, money-purchase schemes 1.4% 1.4%
Class 2 rate £2.40 £2.50
Class 2 small earnings exception (per year) £5,075 £5,315
Special Class 2 rate for share fishermen £3.05 £3.15
Special Class 2 rate for volunteer development workers £4.75 £5.10
Class 3 rate (per week) £12.05 £12.60
Class 4 lower profits limit (per year) £5,715 £7,225
Class 4 upper profits limit (per year) £43,875 £42,475
Class 4 rate between lower profits limit and upper profits limit 8% 9%
Class 4 rate above upper profits limit 1% 2%

Working and child tax credits rates

£ per year (unless stated) 2010-11 2011-12
Working Tax Credit
Basic element £1,920 £1,920
Couple and lone parent element £1,890 £1,950
30 hour element £790 £790
Disabled worker element £2,570 £2,650
Severe disability element £1,095 £1,130
50+ Return to work payment (16-29 hours) £1,320 £1,365
50+ Return to work payment (30+ hours) £1,965 £2,030
Childcare element of the Working Tax Credit
Maximum eligible cost for one child £175 pw £175 pw
Maximum eligible cost for two or more children £300 pw £300 pw
Percentage of eligible costs covered 80% 70%
Child Tax Credit
Family element £545 £545
Family element, baby addition* £545 n/a
Child element £2,300 £2,555
Disabled child element £2,715 £2,800
Severely disabled child element £1,095 1,130
Income thresholds and withdrawal rates
First income threshold £6,420 £6,420
First withdrawal rate 39% 41%
Second income threshold £50,000 £40,000
Second withdrawal rate 6.67% 41%
First threshold for those entitled to Child Tax Credit only £16,190 £15,860
Income disregard £25,000 £10,000

* The baby element of the Child Tax Credit will be removed from April 2011.

Individual Savings Account (ISA)

Annual ISA subscription limit
2010-11 2011-12
Overall limit £10,200 £10,680
of which cash £5,100 £5,340
of which stocks & shares £10,200 £10,680

Stamp taxes and duties

Transfers of land and buildings (consideration paid)
From 1 January 2010

Rate Residential in disadvantaged areas & Non residential Residential outside disadvantaged areas
Total value of consideration
Zero £0 – £150,000 £0 – £125,000
1% Over £150,000 – £250,000 Over £125,000 – £250,000*
3% Over £250,000 – £500,000 Over £250,000 – £500,000
4% Over £500,000 Over £500,000

* First time buyers can claim relief from SDLT on residential transactions up to £250,000 between 25 March 2010 and 25 March 2012

Fuel Duty

The next increase in fuel duty will be implemented in three stages: 1 pence per litre on 1 April 2010, 1 pence per litre on 1 October 2010, and 0.76 pence per litre on 1 January 2011.

 

Finance Bill 2011 at a glance

Posted by AccountingWEB.co.uk in Tax on Fri, 10/12/2010 – 13:26

As part of its new approach to tax policy making, the government published 500+ pages of draft clauses and accompanying explanations on 9 December 2010 for measures that will be included in the Finance Bill 2011.

The Finance Bill 2011 will also legislate the annual changes in rates and duties that were announced previously. With the exception of the Capital Gains Tax threshold for individuals in 2011-12, which has yet to be set (and statutory maternity pay rates that we’re still trying to find), the key tax allowances and rates are set out in our 2011-12 tax tables.
This article details a comprehensive list of published measures, with links to those that are of most relevance to AccountingWEB.co.uk members. Further details are available from the HMRC and Treasury websites.
Key topics
  • Restricting pensions tax relief (HMRC guidance) – the Finance Bill will enact arestriction on pensions tax relief for individuals by reducing the annual allowance from 2011 to £255,000 and the lifetime allowance from 2012 to £1.5m. Further details can be found on the Treasury website.
  • Pensions annuitisation (Treasury PDF 485kb) – the rules requiring members of registered pensions schemes to secure an income by age 75 will be repealed. Further detail is set out in the responses to the consultation document published today. The government intends to publish draft legislation covering this element by February.
  • Retirement savings programme (Treasury PDF 130kb) – legislation will be introduced to deal with unintended tax consequences which arise due to the interaction of Pensions Act 2008 and tax legislation.
  • Disguised remuneration – in a written ministerial statement on 6 December Exchequer Secretary David Gauke explained the government’s plans to crack down on trusts and other third-party employee reward arrangements designed to avoid or defer income tax or NICs. These will include Employee Benefit Trusts and Employer Financed Retirement Benefit Schemes (EFRBS).
  • Group mismatches – groups will not be able to use loans or derivative contracts to generate profits or losses purely as a result of accounting asymmetries.
  • Derecognition of Corporation Tax loan relationships – avoidance of Corporation Tax will not be possible for loan relationships and derivative contracts not fully recognised for accounting purposes. This was confirmed in the written ministerial statement on 6 December 2010.
  • Functional currency switch schemes – rules tightened to counter avoidance involving changes in the functional currency of an investment company. Investment companies will be able to elect for a functional currency for tax purposes other than that in the accounts.
  • VAT supply splitting – printed matter connected to services provided, but sourced from different suppliers will no longer be zero-rated.
  • Financial securities for PAYE – proposals put forward for consultation to let HMRC take a security from employers for PAYE and NICs that is seriously at risk.
  • Data-gathering powers – bulk information gathering powers planned to enable HMRC to carry out cross-industry analyses.

 

 

 

Top tips for better working capital management

Top tips for better working capital management

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Posted by Hugh Williams in In practiceIn business on Mon, 06/12/2010 – 14:44

 

Cash is the number one priority for businesses and yet many CFOs are afraid of leading the charge when it comes to working capital management initiatives. Hugh Williams explains why it’s time for CFOs to get their hands dirty.

A lot of firms are currently undertaking some initiative to better manage their working capital because they cannot fund their businesses in the same way as they did in the past. Credit is either too difficult to get or much more expensive than before. Most have taken short term measures to stem the flow of cash (paying suppliers more slowly, getting money in faster from customers, and indeed cutting jobs) but these measures are running out of steam and are bad for long-term business relationships and for the wider economy.

Successfully managing working capital requires an executive sponsor who can mediate across a range of operational and financial functions, and it’s the CFO who has the best chance to lead this effort and make it work. Unfortunately for many of them, this falls outside their comfort zone, since it requires complex planning skills, and as a result many businesses are missing a huge opportunity to improve their profits.

The low-hanging fruit
Most working capital management initiatives nowadays focus on finance wanting to get its hands on the cash tied up in finished goods stock and anywhere else that they have significant inventories – and who can blame them? However, CFOs need to bear in mind that excess stock is just a symptom of poor internal policies, silo-based behaviour, cross-functional mistrust, and blind risk-taking. So getting out the big scissors to cut stock will not stop it from coming back, yet it will unwittingly create significant supply chain problems for the business which will far outweigh the temporary savings that have just been made.

In some cases there are massive shortages of supply (and lost sales) because businesses have cut people (for people, read capacity); poor customer service and product availability because stocks have been cut blindly; and badly controlled new product introduction (lost sales, obsolete stocks) because demand and supply chain planning is poor.

Conflicting KPIs are the greatest enemy of successful integrated business planning (IBP). In most companies management gives each departmental silo in the business a target to achieve that it is hoped will drive the business towards its goal.

Dr Eli Goldratt, author of The Goal, once said, “The sum of the local optimums does not equal the global optimum”. There are examples almost everywhere where businesses still think this is the way to manage and it usually doesn’t work. “A fair day’s work for a fair day’s pay,” they argue. Yes, but only to produce something the customer wants today, not at some point in the future. That’s why we have so much stock!

Finding the high-hanging fruit

If CFOs want better working capital management, they must step forward to lead end-to-end supply chain management, and not just issue unrealistic dictates – or worse still, wait to count the cost. They must understand, embrace and drive forward IBP and really get involved in the value or supply chain rather than marginalising this as some kind of ‘trucks’ and ‘sheds’ logistics planning to delegate downstream.

Today, IBP depends on purging the silo mentality and removing departmental KPIs that are local optimums. Sales and operations, for example, work at cross-purposes in too many companies and become adversaries – this needs to stop. These should be replaced by performance measures and drivers that make everyone work together towards the same end. These measures will beat a path to what I call ‘the high hanging fruit’. We all know the fruit at the top is the best and juiciest, but it also the hardest to get to.

Executive sponsorship is essential. CFOs, supported by their CEOs, must lead the culture change that accompanies integrated planning efforts visibly, vocally and physically. They cannot afford to pay lip service to this, otherwise they will rank alongside those many companies who have tried and failed because top management was not fully engaged. It is a long road that will take patience and persistence and continued investment, probably over a few years. In the first 12 months, you can just about get the process up and running. But those who have done this successfully will tell you they had not realised the potential size of the prize until they got to the top of the tree. The fruit up there is indeed much juicier than the stuff down low that everyone else is picking.

Hugh Williams is the managing director of UK-based Hughenden Consulting and has 25 years experience advising global companies like BP and Baxi on managing working capital.

 

Guidance on taking over a new company

Guidance on taking over a new company

Often it’s easier and more convenient to take over an existing company rather than opening a new company. Reasons for this vary and the major ones are:

  • The company has a history – This should always be positive.
  • There is a bank account in existence. As opening a bank account can take up to 5 weeks and requires a number of bureaucratic steps this is a major advantage.
  • There may be an overdraft facility which is unused. This is a distinct advantage although the bank may reassess on a sale of the company
  • The company is registered with HMRC as a taxpayer. Again bureaucratic and time consuming steps are eliminated
  • The company is registered for PAYE and VAT with HMRC. Again time and effort is saved.
  • There are supplier terms in place. Suppliers may reassess on a taking over of the company.

There may be more reasons more unique to individual circumstances and these should be reviewed to ensure maximum benefit is gained.

Taking over a company has however some risks if the company traded at any time previously. Broadly but not exclusively they are:

  • Poor credit history, possibly with CCJ’s
  • Legal claims, potential or actual,  against the firm
  • Undisclosed/potential debts against the firm especially HMRC
  • Non-compliance with HR legislation, the Company Act and the various Tax Acts all giving a potential liability against the firm and/or directors
  • Disgruntled employees may create difficulties with the takeover.

If taking over a company where the history is not known and/or trading has or is taklng place a due diligence exercise is a must. These may not uncover all potential issues but will eliminate the obvious ones and reduce the risk. Where trading is taking place it’s best to get professional help with the due diligence.

Where a company is taken over from family many of these issues will become moot but some examination is still recommended.

For more information or help contact Richard Terhorst at 08450095360 or E-Mail Richard@rhtbusiness.com