Useful Tips

Business Finance Useful Tips

• If you have a personal mortgage, consider using your Director’s loan account to repay the mortgage. Subsequently you could then take out a residential mortgage and inject back into the business where you would now attract tax relief on the interest payments.

• Successful businesses have a clear focus and direction. They know who they are, what they do, where they are going, and how to get there. In the early stages of a company, these are often personified by the founder. But, as the business expands, the mission, vision and direction need to be clearly articulated and constantly communicated by the business owner to employees, customers, shareholders and the media. You must lead by example and accept that you are a strong role model your people will look to for leadership and direction. Staying true to the vision as set out in your business plan demands flexibility and focus to make it happen. The mission – the who and what – succinctly describes the business and its current focus.

• These days loans taken out by individuals to finance personal expenditure do not enjoy tax relief, but the official guidance of HM Revenue and Customs confirms that relief may be available where a landlord re-mortgages a rented property to release funds for personal needs. This could be to purchase a second home, to meet school fees or other major items of expenditure.

• Are you claiming tax relief for website expenditure? According to the Inland Revenue, building a website is not allowable as a trading expense, but updating and maintaining it is. If you approach this carefully in a way that circumvents the Revenue’s argument, you can then claim a tax deduction for pretty much all the expenditure.

• Spread your assets and use multiple lenders taking control away from a single source. Lenders will always want more business from you: if you give them everything at the start you’ve got nowhere further to go or negotiate on.

• If you get into any difficulty with your borrowing go to an IFA quickly. They will be able to restructure all existing finance in the best way.

• Don’t believe that business loan to values should operate at 75% LTV. Some banks will lend up to 100% for the right business.

• Although the 100% capital allowance for computers and the 50% allowance for fixtures and fittings have now gone, it is still possible to claim a 40% allowance in the first year on all these items if your business is small or medium. The definitions of these changed quite recently so do not forget to check these out, otherwise you may be claiming only 25% instead of the 40% your business is entitled to.

• Too few businesses take advantage of the VAT Annual Accounting Scheme which requires only one VAT return a year, requires periodic estimated interim VAT payments on account, depending on your turnover, grants an extra month, (i.e. up to two months after the end of your annual VAT accounting period) to complete your return and file it with a balancing tax payment.

• Remember to pay your spouse from your business in the most tax effective way so as not to lose out on their income tax allowance.

Be mindful that the High Court supported another Revenue attack on small company dividends. In the Arctic Systems case, Geoff and Diana Jones each owned one share in a company which delivered Mr Jones’ IT consultancy services.

He took a modest salary, so that most of the company’s income could be paid out as dividends. Relying on anti-avoidance legislation, HM Revenue and Customs argued that Mrs Jones’ dividends were taxable at her husband’s higher tax rate, and this has now been upheld by the High Court.

House of Lords ruled in favour of the taxpayer on 25 July 2007.

The decision highlights the need for all small companies to plan their remuneration and dividend strategies carefully. The judge however made it clear that the Revenue should not attack arrangements where the working partner is paid the going rate for the work done. It is possible to obtain extra personal allowances and double up the value of the saving from the lower income tax rate.

Provided that the remuneration is reasonable for the services provided, the payments should be allowed as a deduction to the business. An individual can earn up to £8,105 (as of 6th April 2012) without paying any income tax or £5720 for national insurance contributions (NICs). On the 15th of December 2005 the Court of Appeal decided unanimously in favour of the taxpayer.

This has been challenged. In July 2007 the House of Lords sided with the Jones’ and the previous ruling was overturned. You should take careful advice on this before deciding how you wish to pay your spouse, as the case is very different from most other settlements. see notes

• Business loans and Overdrafts may not be the only suitable finance products for your business, look at other options like invoice discounting etc.

• Interest rates and fees from lenders can be negotiable as there are not usually set lending products. Commercial lenders generally take a view on a case and set the rates accordingly. The more they can charge, the more profit for them!

• The small companies’ rate of taxation is spread between all the companies in a group. To maximise its availability you should consider winding up any semi-dormant companies or make them fully dormant. This can potentially reduce the corporation tax charge on profits elsewhere in the group from 30% to 19%. see notes

• If you do not understand all the areas of finance available when you expand or need to get out of trouble, speak to a professional who does and who is also independent. This may cost initially but a percentage point per year over 10-20 years is more valuable to you than assisting the share price of a bank.

• Review your costs down to the last penny and know where they are spent. If you don’t know where your profits are going to over the year, then find out. A good Accountant or Bookkeeper will be worth their weight in gold and should save more money than they cost.

• Each year review your staff’s job descriptions and roles. Are they working effectively or doubling up on work which is costing money?

• Contributions to your pension fund, which attract tax relief and relief from employers’ NICs, can be used to fund the purchase of business property. Rents for the use of the property will be a deductible expense for your business, but will not be taxed as income of the pension fund, which is tax-free. Gains on the disposal of the property will be free of tax.

• Remember to consider using a Sipp for property purchase. A Sipp is a pension scheme that allows you to buy commercial assets which in turn means that any growth on that asset is tax free.

• Valuing people and staff sufficiently as a key asset of the business is vital, so set up keyman cover to protect your business, not just them.

• Pay staff properly:

Set up a pension scheme that benefits the employees and the business making them feel valued. This increases morale and ultimately the company performance. Set it up under a salary sacrifice arrangement which will save the employee and employer national insurance on the contributions as opposed to how most schemes are set up which allow only for the income tax break.

• The company car is always a Revenue target and it may be more tax-efficient for some employees to buy their own car with the aid of loans or additional salary given by their employer.

To the extent that the car is used for business purposes, the employee can claim capital allowances for income tax and the employer can give tax-free business mileage reimbursement.

An employee may receive an interest-free or low interest loan of up to £5000 from his employer without being assessed to tax on the ‘benefit’ of the loan. If the loan exceeds £5000 even by £1 at any time in the year, he has a full tax charge; and even loans at a commercial rate of interest can sometimes be aggregated with free or low rate loans.

• Consider a savings-related share option scheme. It is possible for companies that have a revenue savings-related share option scheme to allow option prices to be discounted by up to 20% without adverse income tax consequences. This can substantially increase the value of shares that can be given to employees.

• Make sure that in the event of a death or split up, the legal aspects are covered (This includes wills and partnership agreements. Acrimonious bust ups are devastating and damaging for everyone involved in the business, employees included.)

• Ask a third party to raise and identify problems with your business. These could be clients or customers. Ask them what they would want to see you offer.

• Have an effective credit policy in place and ensure employees in the business understand and implement the credit policy. Review the debtors list regularly and make sure that the policy is being adhered to by your staff and customers.

• Paying dividends to director-shareholders will always be more tax-efficient than paying a bonus for companies which pay corporation tax at the lower or standard rates. Additionally, salary is cheaper than dividends, only if the company’s profit is taxable at the marginal rate of 32.75%. Also note that paying dividends may not be possible or feasible, and all factors should be considered. The use of a company may also be affected by the new personal service company rules.

• When starting a business, you broadly have the choice of creating an unincorporated business (i.e. sole trader or partnership) or a company.

Consider:
Each has various tax and commercial advantages and disadvantages; limited liability is often the major factor in a decision to incorporate, but, don’t make this decision lightly. It is also more complicated and costly in tax terms to disincorporate than to incorporate. Now that a distribution of profits of a company is subject to a minimum tax of 19% one of the main tax advantages of incorporating has disappeared.

• A company has 2, rather than 1 layer of taxation to consider. As a sole trader or partnership your profits will only be taxed once in your hands, and the maximum rate is presently 40%. Profits distributed by a company, not however, proper salaries, are subject to corporation tax and income tax, giving rise to an overall rate, for higher-rate taxpayers, of between 40% and nearly 50%.

Similarly, there is potentially double CGT, i.e. CGT on the shares, and the company’s CGT on its assets, though this can be mitigated in various ways.

• It is often better to own land or buildings yourself and let the company use them. Also consider a limited liability partnership (LLP)

• A company pays corporation tax at various rates between 0% and 30% on profits retained depending upon its size. Companies also offer the commercial benefits of limited liability, continuity and more flexible methods of raising finance, such as floating charges.

• Selling your business:
If you are going to realise a substantial profit on selling your business or shares you may want to consider becoming non-resident and avoid the capital gains (CGT) altogether.

Strict rules mean that careful planning is required but, briefly, it is necessary to remain overseas for a period of at least 5 tax years, coming back to the UK for an average of less than 90 days per tax year. The use of appropriate tax treaties can reduce this period of absence to little over a year. You will need to check that you do not become liable to tax on the gain in your new country of residence.

If there is no potential purchaser on the horizon, you can always get the company to buy the shares from you. In certain circumstances, this is treated as a dividend, giving you a tax credit against your income tax liability.

This can be more advantageous than making a capital gain, when CGT at 40% would be payable (although you may have taper relief available). It is possible to reduce the gain arising on the disposal of shares by paying a pre-sale dividend. This is tax-free in the hands of the selling company. In the hands of an individual, the effective rate of tax is 25%.

• If you do sell or simply want a tax efficient investment consider A Venture Capital Trust (VCT),

A VCT is like a large portfolio of EIS qualifying companies, but with different tax breaks. For an investment of up to 200,000 in any one tax-year, investors receive:

An income tax reduction in the tax year of investment of 30% of the investment provided the shares are held for at least five years.

Exemption from tax on any capital gains made on the VCT investment itself.

Tax free dividends that include both income derived from the underlying investments, and from capital gains realised inside the VCT portfolio.

In addition to the tax rebate, the key benefits of a VCT are its investment in a portfolio of companies, which reduces risk and the income stream from tax-free dividends that also include realised capital gains.

If you found our business finance useful tips of benefit to you, check out our business finance calculator, specifically designed to show you how much monthly payments could be on your commercial property.  Take a look at the business finance calculator here.