walji

Use a trust to pay for your grandchildren’s school fees and save tax

Wed, 29 Jan 2025 16:09:08 GMT

You can set up a trust fund to help pay children’s private school fees and use their own personal allowances. This is dependent on your personal circumstances, but where you have family owned companies spanning multiple generations, you can consider setting up a trust to facilitate payment of private school fees in a tax efficient way (and help with your inheritance tax planning too).

This will not only save you paying tax at rates of up to 45%, but can yield cash savings of over £6,500 per child, per year.

If this is something that you are interested in, then keep reading to find out if you are eligible to set up a private educational trust fund for your child.

What is a trust fund?

A trust fund is simply a way of holding money 'in trust' for the benefit of usually minor children. A trust fund can then be used to pay school fees and other things for the benefit of the trust's beneficiary(ies).

Educational trust fund

An educational trust fund is not a different type of trust - it's just a way of describing what the trust exists to do.

Given that trusts are often set up to fund school fees for children then they are often referred to as an educational trust fund, although they're not really any different from discretionary trusts.

A discretionary trust is where the Trustees have 'discretion' over how the income and capital of the trust is managed and used for the beneficiaries. This allows parents and grandparents to keep control of the underlying assets, but use the income generated from those assets for paying things like school fees.

Benefits

The main tax advantages of using a trust fund is that you can reduce your inheritance tax liability by gifting away surplus assets and save income tax in the family by using the children's own personal allowances.

If you are already assisting with payment of grandchildren’s school fees out of your own income or capital, then using a trust could be a more tax efficient way of paying the school fees.

So rather than you paying out of your taxed income or capital, you could set up a trust for the benefit of your grandchildren and settle some income generating assets within. When income is earned by the trust, that is then treated as the grandchildren’s income and therefore uses the grandchildren’s personal allowances - currently £12,570 a year.

If the source of the income they receive is dividends in a company, then they can get an additional £1,000 allowance too. And if the source of income is interest income, they could earn another £5,000 tax free on top too.

Children's private school fees are likely to be in the region of £15,000 a year at least, meaning that the majority of their fees could be paid by the trustees quite tax efficiently if you have these circumstances.

The trust income can also be used beyond paying school fees and can fund university fees when the child moves on.

Another advantage is that it also facilitate inheritance tax (IHT) planning for grandparents in a controlled way. Grandparents can gift capital into the trust tax free (up to their nil rate band of £325,000) and providing they survive 7 years then this capital will fall outside their estate for IHT purposes.

Disadvantages

There aren't many disadvantages apart from the fact that any income that goes into the trust can no longer be used by the original settlor's or trustees. Which basically means that you as the grandparents can't benefit from the funds or asset once they're in the trust.

That's not generally a problem though, as you can manage the amount of capital or value of the asset that gets put into the trust in the first place.

If you are, however, transferring an asset like property or cash then you would suffer an inheritance tax liability if the value of the transfer was over the inheritance tax tax free threshold of £325,000. This is known as lifetime inheritance tax and the tax paid rate is 20% over the nil rate band threshold.

How do I set up an educational trust fund?

In order to set up a trust fund in the most tax efficient way, grandparents need to identify the capital they are going to be transferring.For example this could be shares in a limited company, a property, cash or any other capital asset with an income source. It makes sense to transfer an income generating asset for maximum tax efficiency.

Let's take shares in a private limited company. These normally pay out income via dividends, so are a useful asset to transfer into a discretionary trust. The shares will however have a value if the company has been running for a few years.

Normally a transfer into trust would give rise to a capital gains tax charge, but there is a capital gains tax exemption available that you can apply for when the shares are in a trading company.

This means you can transfer shares in the company without paying any capital gains tax on the transfer - it is essentially deferred into the future.

As long as the shares are in a trading company then you should be able to avoid paying any inheritance tax as well on the transfer, which would otherwise be the case if you were transferring cash of property over the inheritance tax threshold of £325,000.

Who can set up an educational trust fund?

Anyone can set up an educational trust fund, however the tax treatment depends on who is making that initial capital transfer.

Where the capital transfer comes from a parent then there is anti-avoidance legislation that means the parent is taxed on the income, which means that there is not much benefit until the child reaches adult age i.e 18.

However if the capital transfer comes from someone other than a parent, then the income is treated as the child's and uses up their personal allowances. For example a grandparent using it to fund grandchildren's education.

Note: there is anti-avoidance legislation meaning that a trust cannot be set up indirectly by the parents for the benefit of their children - this would not result in any tax advantage and therefore the income would be taxed on the parents anyway. As such, always take professional advice to avoid falling foul of the legislation both in line with the letter and substance of the law.

FAQs

Can I pay private school fees through my company?

Just paying directly via your company would mean that you are taxed on the payments as if you had received salary of the same amount. This is therefore not really a tax efficient way or paying school fees as there is no corporation tax benefit.

If your child is working for your business in some way for example carrying out some admin duties, helping on the weekends, assisting your with your social media marketing then you could pay them a reasonable salary commensurate with duties performed. This salary would be tax deductible and form part of the child’s personal allowance. Care must be taken however to ensure that the salary paid is commensurate with duties undertaken and not just a way of extracting funds without any work performed.

Apply for a call and we can talk about your personal circumstances to see if you could be structured more tax efficiently.

What assets Cannot be placed in a trust?

There aren't many assets that cannot be placed into trust, but you probably wouldn't want to place any non income generating assets into trust as there wouldn't be much benefit in doing so.

Any assets that you require to fund your own personal expenses shouldn't be put into trust, as you can no longer benefit from the income once the asset is transferred into trust.

What type of trust is a bare trust?

A bare trust is where you hold the asset on trust for the child until they reach the age of 18. Once they do, they are absolutely entitled to the asset which may not be a good idea particularly if the asset is a property or company shares.

Conclusion

If you are a grandparent that is already contributing towards paying private school fees or would like to do so as part of their inheritance tax planning, then you can use a family trust - also known as a discretionary trust or educational trust to help pay for private school or university fees tax efficiently.

As well securing inheritance tax savings for grandparents, there are also income tax savings by transferring income generating assets into a trust where children are the beneficiaries. This happens by using the children’s personal allowances - given that everyone in the UK has a personal tax free allowance from birth.

If you are part of a multi-generation family company or have grandparents that are willing to gift capital in a controlled manner to facilitate payment of private school fees, then get in touch to see how you could do so tax efficiently. Just fill in the form below to see if you’d qualify for a call.

Worldwide Disclosure Facility: Your Guide to Offshore Tax Compliance

Tue, 03 Dec 2024 16:58:19 GMT

The Worldwide Disclosure Facility (WDF) is a program set up by HMRC to help people and businesses follow the rules for taxes on money from outside the UK. If you have income or money from other countries that you haven't told HMRC about before, this program gives you a chance to fix your tax situation and make sure you're following the law.

Key Points: Worldwide Disclosure Facility

Opportunity for UK taxpayers to tell HMRC about offshore issues they didn't report before
Covers tax years up to and including 2022-2023
It gives you 90 days to tell HMRC everything after you let them know you want to use the facility
Works for people living in the UK and those living elsewhere who need to pay UK taxes
It could mean that you pay less in fines compared to if HMRC found out on their own

What is the Worldwide Disclosure Facility?

The Worldwide Disclosure Facility is a way for people and companies to tell HMRC about money or things they own in other countries that they should have paid UK tax on but didn't. This includes money from houses in other countries, money from investments abroad, and gifts or inheritances from people in other countries that you didn't tell HMRC about before.

Who can use the Worldwide Disclosure Facility?

The WDF is for anyone who wants to disclose a UK tax liability wholly or partly related to an offshore issue. This includes unpaid or omitted tax related to the following:

Income arising from a source in a territory outside the UK
Assets situated or held in a territory outside the UK
Activities carried on wholly or mainly in a territory outside the UK
Funds connected to unpaid or omitted UK tax that you have transferred to a territory outside the UK

A common misconception that UK resident and non-domiciled taxpayers are unaware of is, that a UK tax liability arises on:

Rental income from property located outside the UK

If you’re not resident in the UK, you can still make a disclosure if you meet the eligibility criteria.

The WDF may not cover 22/23 as you are still within time limits to submit an amended tax return (deadline is 31 January 2025).

Why Use the Worldwide Disclosure Facility?

Using the WDF can help you avoid bigger fines and possible criminal investigation that could happen if HMRC found out about your overseas money on their own. It's a way to be honest about your taxes from other countries and get back on track with what HMRC requires. It's ok to have investments in other countries, but not telling HMRC about the money you make from them is against the law. The WDF gives you a chance to fix this mistake and show that you want to follow the tax rules.

How to Respond to HMRC Nudge Letter

HMRC identifies those who need to make a tax disclosure and sends them a nudge letter based on data they have obtained.

If you’ve received a nudge letter, HMRC has identified a potential issue in your UK tax affairs. Rather than ignoring this, it's best to seek advice from a tax professional to ensure compliance with your offshore tax affairs. We can assist you in finding irregularities in your offshore affairs before making a disclosure through the WDF.

It’s important to seek professional advice and take careful consideration before responding to a nudge letter, as making a false declaration can lead to serious consequences.

How Does the Disclosure Process Work?

The WDF process has several important steps:

Notify HMRC that you want to make a disclosure. This means letting them know you want to use the facility. To register, use the Digital Disclosure Service. You’ll need some key information such as your address, DOB, and National Insurance to notify and disclose.
On receiving your unique Disclosure Reference Number (DRN), you must make your disclosure within 90 days after getting the notification acknowledgement.
If your disclosure is prompted by a letter from HMRC, you’ll need to state this in the disclosure.
Depending on your reasons for not disclosing your tax liability, the penalties will vary. If you’re unsure on the self-assessing behaviour option that applies, seek professional advice.
Figure out how much tax, interest, and penalties you owe. You’ll need to disclose any unreported income or gains, as well as the associated tax, interest and penalties. You might need help from a professional for this part. Tell HMRC everything within 90 days of receiving the unique DRN from them. You need to include all the important information about your money and things you own in other countries.
Offer to pay the full amount you owe or agree to the HMRC terms to pay it over time, using your Payment Reference Number (PRN).

It's really important to be thorough, honest, and clear when you're telling HMRC everything. They can check the information you give them, and if you don't tell the truth or leave things out, you could get in big trouble. The 90-day window to tell them everything is strict, so start gathering all the information you need as soon as you decide to use the WDF.

What Penalties Might I Face?

If you’re not following offshore tax rules, HMRC takes this very seriously. However, if your disclosure is unprompted, you could reduce the penalties you are liable for. Your penalty amount is based on whether it was a mistake, if it was deliberate or not, and how long you didn’t follow the rules.

The Benefits of Disclosing through the WDF

Voluntarily sorting out your tax affairs can provide many benefits. HMRC prefers when you come forward rather than having to be tracked down by them. This can prove that you are responsible in your tax affairs. Also, you could potentially reduce the penalties by coming forward, and reduce the number of years assessed.

What Should I Look Out For?

When using the WDF, there are some important things to remember:

Make sure to tell HMRC about everything - if you leave things out, you could get bigger fines and HMRC might investigate you more.
Remember to include the interest you owe on unpaid tax when you're figuring out how much to pay.
Think about getting help from a professional, especially if your tax situation is complicated or involves many countries.
Be ready to show proof of everything to HMRC. This might include bank statements, investment records, and documents about properties you own.
Remember that HMRC can look into your finances from up to 20 years ago for serious cases.
Know that if you didn't follow the rules on purpose, you could be in really big trouble. Being honest when you use the WDF can help avoid this.

If you're not sure about anything when using the WDF, it's a good idea to ask a tax expert for help . They can guide you through the process and make sure you're doing everything right.

Conclusion

The Worldwide Disclosure Facility is an important tool for people and businesses who need to fix their offshore tax situation. While it might seem scary to tell HMRC about money or gains you didn't report before, using the WDF is usually much better than risking HMRC finding out on their own. It's worth knowing that many countries now share financial information automatically, so it's much more likely that HMRC will find out about offshore money that has yet to be reported.

It's important to know that telling HMRC everything can be complicated, especially if you have money in different countries. In these cases, it's a good idea to get help from a tax professional to make sure you're telling HMRC everything they need to know correctly.

At Walji, we can offer specialist advice on your tax affairs and help you with your disclosure. To apply for a callback, please fill in our contact form and we’ll be sure to get back to you.

The Let Property Campaign: A Landlord's Guide to Tax Compliance

Tue, 19 Nov 2024 10:04:25 GMT

As a landlord, it's important to keep up with your taxes. The Let Property Campaign (LPC) helps those who might have forgotten to report all their rental income. Let's look at what this means for you and how to make sure you're doing everything right.

Key Points

The Let Property Campaign is a programme for landlords to report missed rental income
It often has lower penalties than if HMRC finds out on their own
It's for different types of rentals, including UK and overseas properties
You have 90 days to figure out and pay taxes after telling HMRC
It's better to tell HMRC yourself to avoid bigger problems later

What is the Let Property Campaign?

The Let Property Campaign is a service by HM Revenue and Customs (HMRC) to encourage residential property landlords to straighten out their taxes. It helps landlords fix their taxes if they haven’t reported all their rental income beforehand. This programme gives landlords a way to come forward, report any unpaid taxes, and follow the tax rules properly.

If you haven't disclosed your rental income, you may have received a nudge letter from HMRC. This letter is to notify you to come forward through the Let Property Campaign to disclose your taxes, and ensure you don’t end up with bigger penalties or face criminal investigation.

Who is eligible for the Let Property Campaign?

The LPC is for many types of landlords, if you are:

Renting out one or more properties
Renting out holiday homes
Renting out rooms in their own home
Those who have inherited a property and are renting it out
UK residents renting out properties in other countries
Non-UK residents renting out UK properties

If you're one of these and haven't reported all your rental income, the LPC can help you fix your taxes. It's especially helpful if you didn't know you had to report everything or if you fell behind by accident.

The LPC is not for landlords who:

Have non-residential properties like shops, garages or lockups, etc.
Want to disclose income on behalf of a trust or company

How to make the Let Property Campaign Disclosure

1. Tell HMRC

First, you need to tell HMRC you want to report your income. You can do this online through the Digital Disclosure Service (DDS) . After you notify HMRC, you have 90 days to make your disclosure. This first step is important because it shows you want to cooperate.

2. Collect Information

Use this time to gather all your financial records about your rental income from your property. This includes:

Details about you and when you bought the property
Details about the property
The total rental income for each year (not declared to HMRC)
You don’t need to include income which you’ve told HMRC about (previously declared in a tax return)
Work out allowable expenses incurred on income (day-to-day money spent)
Deduct allowable expenses from income to determine taxable profit

Being thorough here will help make sure your report is correct and complete, which can prevent problems later. Read our blog post to learn more about expenses landlords can claim .

3. Calculate Taxes

Once you’ve worked out the additional rental income you need to figure out how much tax you owe. The rates of income tax that you’ll pay depend on how much you earn above the Personal Allowance.

4. Submit and Pay

Once you've calculated the amount of tax you owe, you need to make a formal offer for the full amount to HMRC. Essentially you need to complete the disclosure and provide details of the rental income not declared to HMRC. Once your offer is met with an acceptance letter, it will create a legally binding contract between you and HMRC.

You'll need to pay the taxes you owe, plus any interest and penalties before the 90-day deadline on your notification acknowledgement letter. If you can't pay it all at once, you need to speak to HMRC before submitting your disclosure or payment.

How many years are included for the disclosure in the LPC?

It depends. HMRC will ask the reason why you didn’t declare, whether it was deliberate or not. Depending on how many years you have not reported income from your property, this can range from four to 20 years.

Understanding Let Property Campaign Penalties

While the LPC has better terms than if HMRC investigates you, there are still penalties. The exact penalty will depend on things like:

How long you didn't report the income
Why you didn't report it
How helpful you are during the process
Whether you didn't report on purpose or by mistake

Penalties can be from 0% for honest mistakes to up to 100% of the tax owed for hiding income on purpose. But by coming forward through the LPC, you'll likely face lower penalties.

How HMRC finds unreported Income

HMRC has smart ways to find unreported rental income. Their system, called "Connect", gets information from many places, including land registry records, letting agencies, local councils, bank and credit card transactions etc.

This makes it more likely that unreported income will be found, showing why it's important to report yourself. HMRC keeps getting better at this, making it harder for landlords who don't report to stay hidden.

Staying on top of taxes in the future

After joining the Let Property Campaign, it's important to keep following tax rules. This includes:

Keeping good records of all rental income and expenses
Sending in Self Assessment tax returns on time
Staying informed about changes in tax laws for landlords
Regularly checking your tax situation to make sure you're still following the rules
Thinking about using property management software to help keep records

Download a free book (from our Partner Reza Hooda) to answer all your property tax questions.

Conclusion

The Let Property Campaign gives landlords a chance to fix their taxes and avoid big problems. By choosing to report unreported rental income yourself, you can get lower penalties and peace of mind.

Since tax laws can be tricky, especially for property owners, it's often a good idea to get professional advice. This helps make sure you're following current rules and are ready for future changes in property taxes.

At Walji, we can offer specialist advice on your property situation. To apply for a callback, please fill in our contact form and we’ll be sure to get back to you.

Can stamp duty be avoided?

Wed, 15 Feb 2023 11:58:14 GMT

Stamp duty land tax (SDLT) is owed on all UK property and land sales above a certain value. It's payable on both commercial and residential properties, whether bought with a mortgage or outright. The past few years have seen increases in stamp duty for businesses, which can prove very costly.

Under certain circumstances, you can legitimately avoid stamp duty. Stamp duty relief is sometimes available in the following scenarios:

you are a first-time buyer
you are an individual transferring property as a gift to a partner
you are transferring property from a partnership to a limited company

To avoid costly penalties, it's essential to understand the complexities of stamp duty regulations.

For landlords , property investors and companies, it may be possible to reduce stamp duty liability by choosing the right business structure and transferring property in the most tax-efficient way. This is where the advice of a good accountant, such as Walji Accountants , can be very valuable. If you have concerns regarding your stamp duty liability, then get in touch to request a strategic consultation.

Before we proceed, it's important to note that there is no such thing as "avoiding" stamp duty. HMRC impose hefty fines and interest on undisclosed property sales. But there are ways for businesses to legitimately reduce their SDLT liability.

In this blog post, we'll look at stamp duty rates for individuals and companies, some of the SDLT reliefs available, and discuss how best to transfer property to a company for tax-saving purposes.

For clarity, we'll concentrate on purchasing residential property, but be aware that SDLT on commercial or mixed-use property is charged differently.

*All figures quoted are correct as of February 2023*

How is stamp duty land tax applied?

Stamp Duty Land Tax (SDLT) is calculated on the money that exchanges hands from a property purchase, known as the "chargeable consideration" by tax professionals. This is the price paid for the property (not the market value), and can include other costs, such as fixtures, fittings, and VAT.

How do you pay stamp duty?

If you are using the services of a professional, such as a solicitor, they will usually file a return to HMRC on your behalf. If not, it is your responsibility to inform HMRC and pay stamp duty. Your accountant can assist you with this to avoid common mistakes.

Can you legitimately avoid stamp duty?

It's understandable that many individuals and business owners wish to avoid paying stamp duty, and, as with all tax law, exemptions do apply under certain circumstances.

HMRC are naturally very strict on who is eligible for stamp duty relief, so it is very important that you understand the complexities of the law. Always ask an accountant for help if you are unsure of the rules, as you could incur costly interest and penalties should you make an error.

Stamp duty land tax rates for individuals

Stamp duty is due on the purchase of residential properties worth £250,000 or more. The rates increase as the price of the property increases. While it's not possible to "avoid" stamp duty, relief is available to first-time buyers.

As a first-time buyer, you are eligible for stamp duty relief on a property purchase up to £495,000. You pay 5% on property between £495,000 and £695,000. The standard rate of stamp duty applies to properties above £695,000.

Find out the current residential stamp duty rates here.

Additional properties

If you purchase a second property, you must pay a stamp duty surcharge of 3%. This increases if you buy additional property, up to 15% for properties exceeding £1.5m. It is known as the "higher rate" of stamp duty.

When buying a new property intended as your main residence, you may be subject to the 3% stamp duty surcharge if the sale of your previous main residence has yet to complete, as you are technically the owner of two properties.

However, it is usually possible to get a stamp duty refund within a certain time period.

For more information about the current higher rates of stamp duty you can find them here.

Stamp duty for companies

Limited companies must pay the higher rate of stamp duty on all residential property purchases exceeding £40,000 (regardless of whether it is a first property).

For properties exceeding £500,000 in value, there is a flat rate of 15%, which supersedes the higher rate if all of the conditions are met. This is a measure designed by the government to reverse the growth of the buy-to-let market and increase housing stock for individuals.

Do you pay stamp duty when transferring property to a company?

For many buy-to-let landlords, property developers and investors, it makes sense to purchase property through a partnership or limited company to reduce their income tax and Capital Gains Tax liability.

But as an individual property owner looking to register as a company, it's very important to consider your stamp duty bill. When you register as a limited company, you become a separate legal entity, so a property transfer between you and your company would trigger a charge to stamp duty.

Given the 3% surcharge and 15% flat rate of SDLT , the stamp duty costs can be a stumbling block if trying to transfer a significant portfolio.

Can you avoid stamp duty when transferring property?

As in all tax matters, there are SDLT reliefs available to companies.

It’s possible to avoid stamp duty completely on the transfer of your properties to a company if:

you run your property business in partnership with, for example, your spouse, other family members or third parties, and
you are all actively engaged in the business to some extent.

This is due to provisions in the legislation that apply only to partnerships incorporating a new limited company with the same shareholding. Essentially this provision reduces the stamp duty payable if the shareholdings in the new company mirror the partnership split.

For example, if you have run an active partnership with your spouse in a 50:50 ratio and the new company is also structured in a 50:50 equity split, then no stamp duty is due to be paid.

If the new shareholding in the company is not exactly the same, but both partners have some shareholding at least, then the stamp duty calculation will still produce a saving compared to the headline amount due.

Three factors are important here to demonstrate a bona fide partnership arrangement:

you have an established partnership that has been actively trading in property letting
that partnership can be demonstrated through paperwork such as a partnership agreement and
the partnership is registered with HMRC and submits annual partnership tax returns.

What if I own the properties in my sole name rather than a partnership?

If your property portfolio is solely in your name, then unfortunately, you do not qualify for SDLT relief on transfers from a partnership to a company.

There may be other reliefs that could help mitigate the amount of stamp duty payable, which would still make it worthwhile to move your property portfolio to a company. It is wise to consult with your accountant to find any legitimate way to reduce your SDLT liability in these circumstances.

Alternatively, you may consider establishing a partnership with a view to future SDLT relief. In this case, a partnership with your spouse would make the most sense to avoid paying Capital Gains Tax (CGT) on selling your share in the portfolio.

Get property tax advice from Walji Accountants today

As accountants, the Walji team naturally has a deep understanding of stamp duty legislation and other property tax. Far from just keeping you compliant, we go a step further.

We can offer valuable guidance on the most valuable business structure for your property ventures and help you to make plans to reduce your tax liability. We will be your trusted partner and actively seek ways to make your property business more profitable. To apply for a callback, please fill in our contact form and we'll be sure to get back to you.

Learn more about being in the property business here:

Download our free accounting resources

What is the best business structure for property investors?

Wed, 21 Dec 2022 13:59:18 GMT

An investment in residential property is still a worthwhile business venture, despite the changes to tax legislation in recent years. The property market is ever shifting and evolving, but one thing is constant - in order to be successful in property investment, you need to decide on the best ownership structure.

Those wishing to invest in property can do so either as an individual or through a limited liability company. The latter is a more popular option since the recent change to tax laws. Each structure has its own tax implications and pros and cons. Which one is right depends on your business goals.

The most common question we are asked by property investors is 'do I take the limited company route or buy in my own name?' The answer, as with most tax matters, is it depends! The starting point is to set a clear objective for your property investment activities. We've put together this informative article to guide you on which business structures are most beneficial in different circumstances.

If you are looking for an experienced chartered tax advisor to support your property investment business , then Walji can help. We provide specialist accounting advice and services to individual investors and property companies to help them get the most out of their investment and to achieve their business goals. Please contact us to apply for a call.

Which business structure should I choose for property investment?

Your decision should be based around several things, most importantly, your business objectives.

You could be planning to:

build a portfolio of properties from which to generate a passive income
invest with a view to add value to a property that you then intend to sell to earn a profit that you will reinvest in other property
invest your life savings in property to give you a pension for your retirement.

Whatever the objective, it's important to have this clarity at the outset so that the company structure you choose is tailored to your needs and yields the best results.

Before we move on to the pros and cons of property investment through a limited liability company, let us examine the recent changes to tax legislation that has led more investors to go down the company structure route.

How have recent tax changes affected property developers?

There has been three main changes to the tax treatment of rental income in recent years, that adversely affected buy-to-let property owners. These changes have made owning property through a company structure a more worthwhile option for investors.

Introduction of 3% stamp-duty surcharge
Abolition of 10% wear and tear allowance
Removal of tax relief for mortgage interest

Introduction of 3% stamp duty surcharge

In April 2016 the government introduced a 3% surcharge on any purchase of a second property by an individual as a reaction to the country’s housing crisis. Whether this has been successful is a debate for another day!

The surcharge applies to anyone who has an interest in a property in the UK. This means that spouses who jointly own a property are deemed to have an interest in that asset and, therefore, either party are subject to the 3% surcharge when buying a second property.

Does the 3% surcharge apply to companies?

As a limited company is considered to have legal status in its own right, it’s not unreasonable to think that a company should be exempt from stamp duty for the first property it buys.

Sadly, tax legislation is not always that straightforward.Companies are subject to the 3% surcharge from their first property investment regardless of the property ownership position of the company's shareholders.

Abolition of 10% wear and tear allowance

Previously, there was a flat 10% tax allowance on rental of a furnished property, meaning that that landlords could claim a fixed 10% of gross rents against their rental profits, despite having spent money on refurbishment or not. The impact was substantial, especially for higher rate taxpayers.

For example, consider a portfolio generating rental income of £100,000 and profits after expenses of £80,000. The wear and tear allowance would have given an additional £8,000 expense to be offset against the rental profit. For a higher rate taxpayer this would be worth 40% of £8,000.

On that basis the annual tax bill of a higher-rate taxpayer would have increased by £3,200 on the same amount of rental profit. That essentially reduces the gross rental yield earned from the portfolio by 3.2 percentage points. That has a dramatic impact on the return on investment.

The ability therefore to retain profits in the company and only pay tax at the lower corporate rates (currently 19% - but going up to 25% in 2023) is still one of the most compelling reasons to hold a property through a limited company.

Removal of tax relief for mortgage interest

Previously, landlords in the higher rate tax bracket with property in their own name could claim mortgage interest as a taxable expense. Since this allowance has been scrapped, landlords with a leveraged property portfolio have experienced a significant hike in income tax payable.

It also means that the expected return on investment or yield on the property also drops.

This should be taken into account when undertaking the appraisal for a new property purchase via leverage. This presents a compelling reason to switch towards ownership of property via a limited company (unless, of course, you purchase property without the need for finance).

What are the benefits of holding investment property in a limited company?

There are four main benefits to holding property in a company:

Ability to deduct mortgage interest in full
Rental profits taxed at lower corporation tax rates (currently 19%, but going up to 25% - albeit with a reduction for smaller companies with less than £250k profits)
Flexible distribution of profits to shareholders
Retention of profits for re-investment

The main advantage is the ability of companies still to deduct mortgage interest in full against its rental profits, compared to the restriction for individuals holding property directly. So for those landlords who have high debt-servicing costs or who are looking to expand their property portfolio through refinance and leverage, the company structure is more favourable.

The other advantage of the company ownership route is the ability for the company to retain its profits. As the company is a separate legal entity, it pays tax on its own profits which are then available for distribution to the owners/shareholders. The shareholders can choose for their profits to stay in the company, meaning that the tax suffered on those profits is limited to the lower corporation tax rates compared to higher income tax rates.

The benefit of this is that the company then has extra cash funds available to reinvest in other properties to expand the portfolio further. This is highly advantageous to the landlord looking to grow the portfolio and minimise the amount of cash that is lost through tax.

By contrast individuals holding property personally would pay tax at up to 45% whether or not they need use of the rental income for reinvestment. So whilst holding property in a company is useful for those looking to expand their portfolio, it may not suit those individuals who need an income from their properties. This is a further consideration when determining whether the limited company route is right for you.

Downsides of holding property through a company

One of the main reasons why property was not typically held through a company before these changes was the potential double taxation that arises on sale of a property in the company and having access to the sale proceeds.

As a company is its own legal entity, it pays corporation tax on profits and capital gains tax from disposals of assets. The company would be liable for corporation tax on the increase in value of the property from the time it was bought to the time it was sold. Thereafter, if you wanted to withdraw that cash from the company for personal use, you would need to extract those funds via a dividend or salary etc.

Finance for buy to let properties

In the past it has been more difficult to obtain finance for buy to let properties via a company. Lenders have preferred landlords to buy in their own name, as the landlord is effectively personally liable for any default.

However, given the tax changes that have taken place and more and more landlords making the shift to holding properties via a company, lenders have had to adapt their credit policy and products to remain active and competitive. As such, there is no real difference now in the buy to let products available for individuals and companies.

Contact Walji for expert property investment advice

If you are still unsure about what company structure is best for your property investment business, then Walji can help. You can book a strategic consultation which allows you access to our property tax expertise to answer any questions you have on your current portfolio and tax implications thereon.

Click here to choose a convenient time and book.

Summary

The introduction of punitive tax changes has made the proposition of buying properties through a limited company more favourable. Previously, the limited company route was not that popular and was mainly the preserve of larger property investors, mainly due to the double taxation charge on taking property out of the portfolio and inflexible buy to let mortgage products.

However, with the changes, especially the removal of the wear and tear allowance and the phasing out of mortgage-interest relief, the limited company route has certainly become more appealing.

In summary, the limited company route is without doubt the way to go for property investors who:

want to grow a portfolio
plan to retain a profit within the company in order to buy further properties
do not necessarily need all of the income and profit that the portfolio generates

For those who still need income from properties to live on, then it may be worth doing some extra calculations to see if a limited company would be the most efficient route for you.

Bookkeeping tips for entrepreneurs

support@targetedseo.co.uk — Fri, 14 Oct 2022 11:35:41 GMT

Being a business owner is an exciting venture, but it comes with many challenges and obstacles. To avoid financial pitfalls and give yourself the best chance of success, you must master bookkeeping.

As an entrepreneur, good bookkeeping is essential to maintain an accurate view of your company finances. It enables you to manage your cash flow, set budgets, plan your tax returns, make more accurate business decisions and plan ahead for growth.

Granted, managing financial records is not the most intriguing aspect of running your own business. However, mastering good bookkeeping will ultimately save you time, hassle and money - and help you reach your business goals faster.

Read on for Walji's bookkeeping tips for entrepreneurs. If you are struggling with any aspect of managing your finances, we can help. To apply for a consultation, please fill in our contact form and our specialist accountants for entrepreneurs will be in touch.

What are the basics of bookkeeping?

At its most basic level, bookkeeping is the practice of keeping track of a businesses' financial transactions, i.e. how much money goes in and how much money goes out.

This includes:

Income - e.g. from sales revenue, investments, sale of assets, interest, rent
Outgoings - e.g. expenses, buying stock, rent, overheads, salaries, bank charges, marketing costs

The days of pen and paper are gone and at the very least, this should be recorded in a spreadsheet.

However, it is best to use specialist accounts software, as this will give you greater control and help you meet your obligations under Making Tax Digital.

Our top 5 bookkeeping tips for entrepreneurs

Stay on track with your entrepreneurial finances with our tips.

#1 Set up a business bank account

For the sake of simplicity, it is good practice to keep your business finances and personal finances separate.

This is as simple as setting up a separate bank account and using a business credit card for every financial transaction. This in itself is a basic accounting system.

Even if you lose track of your transactions, they will be much easier to find if they are all on one business account statement, rather than trawling through your personal finances.

#2 Be disciplined about recording business expenses

You should make it a habit to keep an up-to-date record of all your business expenses, i.e. purchases that are made specifically for the business.

It's important to capture every single one of your expenses, or you will miss out on tax deductions.

If you stay on top of recording your expenses, you will thank yourself when tax time rolls around, as you won't need to track down receipts or trawl through bank statements to find what you've spent.

Also, you may be required to show evidence of legitimate business expenses to HMRC, so it pays to have an accurate record.

Paper copies of transactions are still an acceptable way of record keeping, however, in light of digitising of the tax process, we would highly recommend keeping your records stored digitally.

If you ever receive a paper invoice or receipt you can take a photo of it on your phone and send it to your Dropbox for quick and easy storage. This will result in fewer headaches from having to keep the paper version and remembering where you put it!

#3 Find the right accounting software for entrepreneurs

Using specialist accounting software instead of a spreadsheet to keep track of all your business expenses and income can make life much easier.

Cloud accounting software allows you to access your finances wherever you are, on any device, so it's much easier to stay on top of bookkeeping.

There is an abundance of accounting software out there, such as Xero and Quickbooks. It's worth doing a bit of research to determine which is best for your needs.

Just make sure your chosen software complies with Making Tax Digital. If you're unsure, then consult a professional accountant, such as Walji.

#4 Produce financial statements

If you use accounting software and adopt a robust bookkeeping process, then it is easier to produce financial statements such as balance sheet and profit/loss report.

These types of reports will provide valuable insight to help you run your business more effectively.

For example, accounting software has add-ons such as cash flow reporting, which can help you to keep on top of payment deadlines.

#5 Be disciplined with your bookkeeping

Entrepreneurs are naturally driven people who throw all of their time into making their business a success.

We understand that's all too easy to avoid time-consuming tasks like bookkeeping and we come across a lot of entrepreneurs that put it off for as long as possible.

It's not uncommon for some to wait until the entire year has finished before they open up the shoebox of invoices and receipts! This is a surefire way to make the financial year end very stressful and confusing.

A little and often approach is far more beneficial. We recommend spending a little bit of time on bookkeeping every couple of weeks, or every month to benefit you in the long run.

Not only will your tax returns become a lot easier, you will you be more financially aware of how your business is performing, which will help you make better decisions on spending.

FAQs

What is the difference between an accountant and a bookkeeper?

All accountants can be bookkeepers but not all bookkeepers are accountants! A bookkeeper can adequately record and organise financial transactions, but has no formal accountancy training.

An accounting firm, such as Walji, can manage your bookkeeping as well as providing financial analysis, business support, tax and VAT services, payroll and much more.

What can a bookkeeper do for my business?

Getting organised and staying on top of your bookkeeping can be a timely and complex ordeal. For some entrepreneurs, the time and effort it takes to stay on top of bookkeeping can really hinder businesses growth.

Using the services of an experienced bookkeeper can save you a lot of time and money so that you can dedicate more effort towards your running your business.

In addition, a bookkeeper will keep you in line with tax laws to avoid costly penalties and protect the financial health of your business.

There is very little input and effort required on your part - it can be as simple as taking a picture of financial records, such as invoices, and emailing it to your bookkeeper for them to deal with.

Contact Walji for bookkeeping advice and services

Hopefully, these bookkeeping tips will inspire you to become as good a bookkeeper as you are an entrepreneur.

If you require help with bookkeeping or any other aspect of your accounts, then Walji can help.

We are a professional, experienced team of chartered accountants that help businesses and entrepreneurs keep more of what they earn. We also offer valuable business consultancy services to help get your venture off the ground and keep it growing.

Please fill in our contact form to get in touch!

Can I put private school fees through my business?

Thu, 08 Sep 2022 15:27:12 GMT

It's natural that we want the best for our children and many parents choose private, independent schools so they can benefit from their superb facilities, resources and learning programmes.

Whilst private school fees are not a tax deductible expense for Corporation Tax purposes, you can structure the shareholding of your family company such that private school fees are funded from profits and use up the children's tax free allowances.

Such privileges do not come cheap, and private schools in the UK average at around £15,000 per year, that's almost £200,000 per child for the course of their primary and secondary education - and that's before university fees.

The good news is that for multi-generation business owners there are legitimate ways in which to reduce the costs of private school fees to ease the financial burden.

For a family business where you have grandparents as shareholders, this type of profit extraction is more tax efficient way to fund grandchildren’s education. Walji assist family business owners to identify many tax efficiencies such as this.

If you would like to find out what we can do to help you become more tax efficient, please complete the form below to apply for a free, 20-minute consultation on your particular circumstances.

Are private school fees tax deductible?

There is no tax relief on private school fees, but there are ways to reduce the cost private education using a family owned business where grandparents are already involved.

Chances are that you and grandparents are currently funding your children's private school education from dividends that you draw from your company, on which you pay a generous amount of income tax.

Example 1 - higher tax rate

Let's say grandparents are higher rate taxpayers, with an income less than £150,000. They have three grandchildren in private schools at a cost of £15,000 per annum each, so £45,000 per annum in total. In order to assist parents pay the school fees, they would need to withdraw £72,000 (assuming they are assisting via their earned income and not capital). This would be taxed at 33.75%, leaving them with the £45,000 net to pay the fees. That's a £27,000 per year that could be saved using a trust structure.

Example 2 - additional tax rate

Grandparents are additional rate taxpayers with earnings over £150,000, with three grandchildren in private education at a cost of £15,000 per annum each, so £45,000 per annum in total. The tax on dividends is 39%, so in order to use profits to pay the school fees, they would need to withdraw dividends of £75,000 and pay tax of £30,000, to be left with the £45,000 required. By implementing family trust planning, they could save up to £30,000 per year by using each grandchild's personal allowances.

How to use a trust to save tax on private education fees

Children in the UK have the same personal tax allowance as adults, currently £12,570 per year. So any income they receive will be tax free up to that point.

So it is an entirely legitimate approach for grandparents to place any income generating assets such as company shares into a trust for the benefit of their grandchildren. In fact, by doing this they are also taking steps to minimise their inheritance tax liability by removing valuable assets from the grandparents estate.

Anti-avoidance legislation treats any income a child receives from a parent's assets as that of belonging to the parent, while the child is under 18. However, if the gift of shares to the trust comes from a family member, not the parents, then this does not apply. So the trust must be set up by someone other than their parents.

For example, if a grandparent, uncle or aunt made the gift of shares in a private company to a trust for the benefit of their grandchildren, nieces or nephews, then the children would be taxed on the income - not the grandparents/uncle or aunt.

Using this method, the child is able to receive dividends tax free within their personal allowance, assuming they don't have any other income in their name (which they're unlikely to).

You can learn more about setting up an educational trust fund here.

How many children can I put through a trust?

There is no limit to how many children can profit from a trust. Typically the settlor, i.e. the person who sets up the trust such as a grandparent, would name the beneficiaries or class of beneficiaries.

This means that any current grandchild or future grandchild can profit from the trust. Trusts are very flexible, allowing for grandparents to name a class of beneficiaries i.e all grandchildren and potential grandchildren that can benefit - all at the Trustees discretion.

Management of the trust

Typically, the management of the trust would take place by the Trustees. This is normally the settlor plus usually the parents. So, as the parents, you would be in control of how the trust earnings are spent and manage the distribution from the trust account. In reality this means you would be the signatory on the bank account and be in control of how the earnings are spent - ensuring that the income is spent on the beneficiaries and no benefit is taken by the settlors or Trustees.

As long as the income is spent on the beneficiaries, then it can be used for any purpose that is for their benefit, such as private school fees. Other allowable benefits include private tuition, healthcare, presents, gifts, extra curricular activities, school trips - the list goes on!

What are "fees in advance schemes"?

By paying for your children's school fees in advance, as little as one term ahead, you can reduce the overall cost - as usually the school offers a discount to paying in advance. A lot of private schools have charitable status, which allows them to use the advance fees to make low risk investments, the returns on which are tax free. The parents and the school then share the benefit, thus reducing the fees slightly.

Conclusion

If you are involved in a family business spanning multiple generations and grandparents are assisting or would like to assist in paying private school fees for their grandchildren, then a family trust can achieve this aim in a tax efficient way. To find out whether this is possible for you, answer a few questions in the form below to see if your circumstances would fit making this happen.

Guide to Making Tax Digital (MTD) for Landlords 2024

Mon, 06 Jun 2022 11:46:43 GMT

As businesses and individuals develop and use more modern processes, so too must the UK's tax system become more efficient and streamlined.

The Making Tax Digital programme goes live in April 2024 and is designed to bring tax administration up to date.

The Making Tax Digital (MTD) for income tax programme is part of the Government’s 10-year strategy to digitise the UK tax administration system, to improve efficiency and reduce errors common in traditional methods of tax preparation.

Making Tax Digital for income tax will benefit landlords and property investors in many ways. It will enable them to keep their business records more accurately and submit their quarterly updates and self assessment tax return with ease.

Of course, any transition is not without a degree of complexity, and there are many questions surrounding MTD.

At Walji & Co we are well-versed in the MTD, having helped our clients to transition through MTD for VAT returns in the past two years. Our accountants for property investors are here to help, if you have questions about exemptions, registration, software and penalties under the new system.

Read on for our helpful guide and book a call to discuss your specific requirements further.

What is Making Tax Digital for landlords?

Under the new scheme, eligible landlords will be required by law to keep digital income and expenditure records (invoices/receipts) and to use MTD compliant software to submit quarterly returns to HMRC, along with an end of year report.

Do landlords have to register for MTD?

Some businesses are already part of a live pilot for MTD for income tax self assessment. When the system becomes live from the tax year beginning 6th April 2024, all landlords will be legally required to operate through MTD if their gross property income exceeds £10,000 for the tax year.

Why was Making Tax Digital for landlords delayed till 2024?

The Government recognises that businesses are struggling to get back on their feet after recovering from the recent pandemic. Therefore, Making Tax Digital for landlords has been delayed by a year to compensate for this.

How to prepare for MTD as a landlord

The first step to preparing for MTD is deciding which method to use to keep electronic records of your rental income and expenditure; either by transitioning to MTD compatible software or using bridging software to transfer data from an organised spreadsheet.

MTD compatible software will present your figures in an acceptable format in which to submit to HMRC. It will also calculate your tax liability, allowing you to budget more efficiently in preparation for your final declaration and paying your tax bill.

What software package is required for MTD for income tax?

For the transition to MTD, landlords will be legally required to keep digital records of income and expenditure.

For many, this will require an investment in new software, although for some small businesses, HMRC have ensured that free software products are available.

There are many different brands of compatible software, which your accountant can help you to navigate. The long list includes Xero, the world's leading cloud accounting system.

Xero allows you to record your income and expenditure digitally, on any device, in any location, so is a particularly good choice for landlords.

The added benefit of using a software like Xero is that it allows you to submit quarterly return submissions, making your tax affairs far more convenient.

What if I've invested in multiple properties?

It doesn't matter how many properties you have invested in, the only figure which HMRC are concerned with is how much your total gross income is across all properties.

However, certain suitable software packages are more equipped to deal with multiple properties than others and could provide you with additional benefits in terms of tracking and assigning income and expenses to certain properties.

FAQs

Who is exempt from Making Tax Digital?

Businesses that are already exempt from engaging with HMRC through other mandatory electronic channels will also be exempt from having to meet MTD requirements.

If a business cannot go digital, then the Government will not force them to do so, however, you must contact HMRC to apply for an exemption.

What happens if I don't register for MTD?

Failure to comply with MTD without an approved exemption will earn you points against the MTD penalty system. Taxpayers will accrue points for failing to comply which will eventually lead to fines at certain levels.

The process to register should be straightforward but you won't be able to use your existing spreadsheet anymore! Unless of course you get some bridging software that allows you to get your business or property income from your spreadsheet to HMRC using an application programming interface (API).

Unfortunately keeping electronic records is not optional anymore!

Does MTD apply to flat rate scheme?

The flat rate scheme is a scheme for VAT registered businesses. Most landlords will not be VAT registered as rental income from residential properties is exempt for tax purposes.

As such, the flat rate scheme is not applicable to you if you have residential portfolio.

What if I own overseas property?

If you are resident in the UK and own property overseas, MTD for income tax self assessment applies in the same way, with the same threshold of £10,000 per tax year in rental income.

Why choose Walji & Co as your property investor accountant

Here at Walji & Co, not only do we have many years of experience handling multiple property investment businesses tax affairs, we are also very familiar with Making Tax Digital having spent over two years operating under HMRC's MTD for VAT transition.

We deal with landlords across the UK who have property portfolios ranging from 5 to 100 properties. Our founders are also property investors and have a sizeable portfolio between them.

Not only that but our managing Partner Reza Hooda has written a 132 page book called ' All Your Property Tax Questions: answered ', available on Amazon , and answers the most common questions asked by property investors and developers. So not only do we know the theory, we are also in the trenches too!

We deal with advanced tax planning for landlords such as incorporating the portfolio to a limited company. The key to this is demonstrating that you run a property business.

We have handled multiple incorporations and can help you to structure this process tax efficiently whilst reducing the risk of enquiry from HMRC.

Conclusion

Income tax rules are complex. The tax system in the UK is the most complex tax system in the world, second only to India. If you've only got a couple of properties and are more of an armchair investor, then you could consider doing your own self assessment tax return.

However, if your rental income exceeds £10,000 then Making Tax Digital (MTD for income tax), will mean that you'll need to keep digital records and submit quarterly updates to HMRC via digital tools, i.e software.

This will become a legal requirement from the accounting period starting 6th April 2024.

It's therefore worth your while getting a property specialist accountant to guide you through the process, as the consequences and penalties for non-compliance are significant.

Walji & Co offer a paid strategic consultation for you to get bespoke advice on your current position as a landlord, to see that you are structured in the most tax efficient way and doing what you can to make sure you pay the least amount of tax possible.

Can I buy property through a pension? What is a self help scheme?

Wed, 08 Jan 2020 15:16:52 GMT

If you already own or are looking to buy commercial property then you should consider it.

Residential property cannot be held in a pension scheme so if that's all your investing in then the rest of this article will be irrelevant.

How to use your property to buy a pension?

Most people when they think about 'pensions', the big insurance companies and the pensions scandals come to mind.

People don't feel that they are control of their pensions. They are at the mercy of the big pensions investment and the markets as to whether they'll be left with much of a pension in retirement or not.
There is another type of pension though. One that you can control.

It's called a SSAS (Small Self Administered Scheme).

How to set up a Small Self Administered Pension Scheme?

Typically used by owner managed business owners who can set up their own pension investments sponsored by their trading company.

The SSAS is set up as a Trust in its legal form. The Trustees can be just the Directors of the company i.e no independent Trustee from a pension company need be involved.

Entrepreneurs and owner managed business owners like that as it keeps them in control of the underlying assets (of course, it is sensible to keep advisers on hand to avoid falling foul of pensions and tax legislation).

What is a SSAS Pension? What are the advantages of the SSAS?

The SSAS is like any other pension and therefore the same tax advantages apply. This means a company can potentially make pension contributions tax relief up to £40,000 per annum on behalf of Directors which are tax deductible.

The SSAS does not pay any tax on the income it receives. Nor does it pay capital gains tax on any gains it makes e.g property gains.

How is a SSAS typically used?

SSAS pensions can invest in any commercial property. However, a common use of a SSAS as part of overall sensible tax efficient arrangements is where the SSAS purchases the premises from which the owner manager's company trades. The property can then be leased back to the company.

This achieves tax efficient investing from two angles :

rent paid to the pension is tax deductible in the company (saving 19%)
rent received by the pension is tax free

Furthermore, tax efficiency can be greatly enhanced when structuring the purchase of the property.

Tax efficient structuring

Remember, any contributions made by the company are tax deductible - potentially up to £40,000 per annum per Director.

If a Director has not used his / her allowances in the last three years, they can be carried forward too to make a potential Capital gains tax allowance of £160,000 each.

If the company makes contributions into a SSAS to fund the purchase of a property then effectively there is a 19% discount being achieved on the purchase cost

(19% coming from the tax man in terms of corporation tax deduction). If a company or individual purchases property, this tax benefit does not apply.

Power tip on Tax saving...

If the property is already in the company then the same strategy can be utilised to get the property into the SSAS.

Not only will there be massive corporation tax savings but it will also take the property out of the company and into a 'protected' environment - i.e away from the jaws of potential creditors. We have helped several clients restructure their property holdings in this manner over the years.

The SSAS works well as a self-managed pension environment for the Directors. They are in control of the underlying investments i.e the rent generated from the property which comes from the trading business that they run.

Are tax savings accounts worth it?

Yes, the SSAS is a pension investment after all which means that access to the pot cannot be obtained until age 55. However post 55 the first 25% of the pension's value can be drawn tax free and thereafter the remaining income is subject to one's marginal rate of tax.

Typically the pension would kick in for an owner manager once they've exited or sold the business and no longer have income in the form of dividends from the company for example.

Summary

If you need the income from your commercial property investment then a SSAS is not suitable. However, if you have a wider portfolio of assets and own the property from which your company trades or looking to acquire one, then consider structuring the purchase using a SSAS pension for both tax and commercial benefits.

Claim Tax - Can you reclaim on VAT property purchases?

Thu, 02 Jan 2020 15:22:47 GMT

The default position is that the activity of renting out a building is considered an 'exempt supply' for VAT purposes. This means that VAT doesn't have to be charged on rents but conversely, VAT cannot be reclaimed on expenses incurred.

Who can claim tax exempt?

As far as residential lettings are concerned, they are always considered exempt from VAT and you will never see VAT added to residential rents.

That means you can also never reclaim VAT on expenses incurred in conducting your property rental 'business'.

When does VAT become an issue for tax exemption?

With commercial property however you have the option to 'disapply the exemption to tax'. This is also known as 'opting to tax' the property.

When this is done it means that the supplies i.e rents charged from the property become subject to VAT i.e VAT is charged on the rents.

Given that 'taxable supplies' are now being made, you can therefore claim VAT back on relevant expenses.

Why would you 'opt to tax' a commercial property?

Well given that you can claim VAT back on expenses, it can be quite beneficial. On the flipside if your tenant is VAT registered then there is no loss to them as they can reclaim the VAT paid on rents from HMRC.

However if you have (or could have) a tenant that cannot reclaim VAT i.e a smaller business that isn't registered or a business that cannot register for VAT e.g anyone carrying out exempt healthcare services e.g Dentists then for those businesses it would be an actual cost and make your property less appealing.

What about buying or selling a property with VAT?

If the property has been opted to tax, the seller would need to charge VAT on the purchase. The buyer can recover the VAT if they are VAT registered and going to be using the property in their business.

How to claim back VAT on property purchase?

It does however pose a cash flow problem to raise the VAT amount however, most banks can offer a bridging loan to cover this as the VAT paid on purchase can be recovered from HMRC in the next VAT return.

When VAT is added to the purchase price it does also mean that more stamp duty is payable as the stamp duty is worked out on the VAT inclusive cost.

How to avoid paying VAT when buying a commercial property with an existing tenant

If you are purchasing a commercial property which is opted to tax as an investment i.e there is a tenant within, then you can structure the purchase to avoid paying any VAT.

This is done via the Transfer of Going Concern VAT (TOGC) provisions. A purchase of a commercial property with a tenant is seen as a purchase of a 'rental business' from a VAT perspective and is therefore treated as being 'outside the scope of VAT'.

Providing the buyer is also registered for VAT and chooses to opt to tax the property too, a joint election can be made for the purchase to be treated as a TOGC and then no VAT need be charged.

Not only does this save having to raise the cash for the VAT element but it also saves an actual amount of stamp duty too.

Can I avoid the 3% stamp duty surcharge?

Mon, 23 Dec 2019 15:40:55 GMT

You might be asking yourself, how much stamp duty? A purchase of a second residential property is now subject to a 3% stamp duty surcharge. That is the case whether you buy in your own name OR even via a company you own.

Stamp duty for second home - Is there any way round this?

Unfortunately not for single buy to let investments. However, there are some property type purchases and transactions that don't attract the 3% surcharge.

In the main these are listed below :

Commercial property
Mixed use property

Whilst the first is probably obvious to most, commercial property is subject to 'non-residential' rates of stamp duty and does not suffer from the 3% surcharge.

The non-residential rates are lower than the rates applying to residential property - for example going up to a maximum of 5% rather than 15% for residential.

The summary of rates are shown below :

Residential property - Stamp duty second home calculator

Commercial (non-residential) property

A £300,000 residential property would attract stamp duty of £14,000 whilst a commercial property of the same value would attract stamp duty of only £4,500. Clearly the stamp duty regime favours investment in commercial property over residential.

So what else can be treated as non-residential? - Stamp duty tax on property

Something perhaps less well known is that mixed use properties i.e say commercial on the ground floor e.g. retail unit and flats above are treated as 'non-residential' properties. As such they attract stamp duty at the lower commercial rates.

Whilst stamp duty tax on property alone should not be the driver of investing in mixed use properties but it is worth knowing as part of an overall investment strategy.

With the permitted development planning rules, many investors/developers have taken advantage of buying office blocks above retail units and converting the offices to flats.

Mixed use properties do therefore find their way to the market and can offer attractive yields.

What is Multiple Dwellings Relief?

Actually there is something called Multiple Dwellings Relief (MDR). This is a handy relief where you are buying more than than one property as part of a linked transaction.

For example, you are buying a building which contains 4 x 1 bedroom flats for £500,000. The default SDLT position would give rise to stamp duty of £30,000 .

However, if you took advantage of Multiple Dwellings Relief then your stamp duty can be worked out by reference to the deemed average value of each flat i.e £500,000 / 4 units = £125,000.

There is no stamp duty on property values of up to £125,000 however a minimum of 1% must apply when you claim the relief and the 3% surcharge still applies too.

That said, the stamp duty after claiming MDR would be just £20,000 - a saving of £10,000.

Non residential rates of stamp duty

If you are buying more than 6 properties as part of the same transaction then you can actually qualify for the non residential rates of stamp duty which as we saw earlier are a LOT less.

In this case, you still have the option of claiming MDR (as you are buying more than one property as part of the transaction) so you can work out what gives you the better result and elect to pay the lower amount.

So, although no easy way to get round the 3% surcharge the above has hopefully provided some potential alternatives to lower your stamp duty if it lines up with your investment strategy.

If you have any other questions such as the ones listed below, don't hesitate to get in touch !

Hope that was useful :-)

Reza

Should I buy a property through a company?

Wed, 18 Dec 2019 10:06:58 GMT

The last few years we have witnessed an unprecedented wave of legislation against buy to let landlords.

First there was the 3% rise in stamp duty for second or more properties. Then there was the removal of tax relief on interest payments for higher rate taxpayers.

If that wasn't enough, the wear and tear allowance worth 10% of rents on furnished was also abolished.

Tax bills for landlords buying property in their own name will undoubtedly have risen substantially - and keep rising until 2020/21 when the impact of the removal of interest relief fully kicks in.

How to buy multiple properties

The question normally posed is, should I buy property as an investment through a company to keep my tax bills down?

Answer as with most things in tax is, it depends!

Firstly you need to be clear on what your objectives in property :

Are you buying property to hold as a long term investment?
Will you be borrowing a loan for property investment?
Are you buying properties with multiple houses?
Will you be borrowing to invest?
Are you buying property to convert / develop and sell on with a view to repeating?
Are you doing a bit of both?

Once you're clear on your objectives then you can properly determine which ownership structure would work best for you tax wise.

The options for ownership range from personal to partnership to limited company to limited liability partnership (LLP) and even a family trust.

Buying to hold long term property as an investment

If you are looking to build to a long term property portfolio with multiple properties then it is likely that the company route will be the way to go.

The advantages of holding property via a company rather than personally are as follows :

Full tax relief on interest paid on any loans to purchase properties
Profits subject to lower rate of corporation tax currently 19% - falling to 17% by 2020 (as opposed to up to 45% in personal ownership)
More flexibility around distributing profits through company shareholding structure
Limited liability protection

The disadvantages are :

Double taxation on sale of property - the company pays corporation tax on any profit on the sale and then you need to pay income tax to extract the monies personally (if you are building and reinvesting profits into additional properties then this is less of an issue)

Buying to convert / develop then sell? What to look for when buying a property

If you are looking into buying property as an investment to develop and then sell at a profit, then a company offers more advantages than not.

Some of these are as follows :

Lower rate of tax i.e 19% (falling to 17%) on profits. Chances are the profit is likely to be substantial if this is a development project
Ability to retain profits in the company to reinvest into the next development
De-risking yourself against potential claims - higher risk when dealing with projects, build contracts etc

Other issues with company property investment

Historically lenders have created all sorts of obstacles for purchase through a limited company.

However since the new legislation was introduced, purchase of properties via a company has become more commonplace and lenders have adapted accordingly. It is now a lot easier to get mortgages through a company than it used to be.

What about existing properties? Should I transfer them into the company? A topic for a future blog ... ;-)

In conclusion

Get your objectives clear first then you can take advice on which structure would be best for you going forward.

Hope that's been useful.
Reza

What expenses can I claim on my buy to let properties?

Mon, 18 Nov 2019 09:56:46 GMT

In a nutshell, any expenses that are wholly and exclusively incurred for running your property business, as it were, are deductible against your rental income.

The obvious ones you are probably claiming already - such as mortgage interest, maintenance / repair bills and agency management fees.

What expenses are under-claimed?

The type of expenses that are often under-claimed or are not claimed at all are :

Travel expenses
Computer equipment and office expenses
Use of home as office
Other professional fees

Let's look at each of the above in turn.

Travel expenses

Travel expenses are often under claimed. Inevitably you will be required to travel from property to property at various points during the year in order to perhaps to check on tenants or even to check on repairs, general condition of the property etc.

You will also be making trips to see your bank manager (in connection with financing), solicitor (for sales and acquisitions) and accountant (tax return and advisory chats) throughout the course of year.

You may also attend some conferences, courses and even visit DIY centres etc all for the purpose of maintaining and improving your property business.

You can claim your travel expenses of attending to all of the above where the reason for incurring the travel is directly related to management of your property business.

If using public transport e.g train, planes then those expenses are easy to log and claim. If using your car however, you can use the HMRC approved rates for mileage which allow you to claim 45p per mile up to 10,000 miles and 25p thereafter.

So long as you keep a mileage log (which is very easy these days through some smart apps that have been developed such as MileiQ or Tripcatcher ), you can put a claim in for each mile at 45p against your rental profits.

As an example, if you did on average around 5,000 miles per year attending to matters of your property business, that would result in a claim of £2,250 against your rental income - which in cash terms would be worth a saving of £900 if you were a higher rate tax payer .

Computer equipment and office expenses

No doubt you use a computer / mobile phone to undertake some or all of your property investment activities. As such, you should be claiming for a proportion of the capital and ongoing costs of such equipment and services.

If you use your devices mainly to run your property business, then you can potentially claim for the whole cost of buying and any associated ongoing monthly costs - as incidental private use is acceptable.

Use of home as office

No doubt with the way of the world these days, some element of managing your properties is undertaken from your own home - be it using a room in your home as an office for some of the time or storage of any documents etc, or even holding any meetings with the joint holder of your property across the kitchen table! ;-)

It is possible therefore to apportion some of the running costs of your home (that you have already personally paid for) and offset this against your rental profits.

This can be done by adding up all your home bills, mortgage interest, council tax etc and then dividing by the time and space that you use for business purposes.

Other Professional costs

Don't forget to include the costs of any professionals used in the management of your property interests e.g solicitors, accountants, property consultants, property courses etc.

Bottom line, ask yourself whether the expenditure you incur is directly related to your property activity and if the answer is yes then you can most likely claim it.

Hope that helps - happy tax saving!

Reza

Should I transfer my properties to a Ltd Company?

Wed, 13 Nov 2019 09:49:44 GMT

If you own buy to let properties, chances are you've heard that it might be beneficial to transfer them to a limited company.

When is this appropriate to form a limited company from properties?

One of the main reasons why ownership of buy to let properties is more tax efficient via a company these days is due to the introduction of the mortgage interest relief restriction by HMRC.

This means that you no longer receive a full deduction for the interest paid on any mortgage against your tax relief. It is mid way through being phased in and is scheduled to completed be in force by 2020/21.

In essence, if you own properties in your own name which are mortgaged and you are a higher rate taxpayer, you will pay more tax on your rental profits.

If you are considering buying property and deciding on which vehicle to use for the purchase then read my earlier article " Should I buy property through a company? ".

For existing properties, there are many factors to consider which an article like this cannot fully do justice however the main things to think about are discussed below.

The default position is that any transfer of properties from one person or entity to another gives rise to :

Stamp duty land tax (plus 3% surcharge)
Capital gains tax due on the difference between the current market value and what you paid for it

Even if there is no money changing hands i.e you want to transfer the properties to a company you control, the tax rules require that the transaction is undertaken at market value.

This is because you are treated as connected to any company that you control for tax purposes.

That being the case, any transfer done at market value for properties held for some time is likely to give rise to capital gains tax and of course stamp duty.

Capital gains tax rates for residential property go up to 28% for higher rate taxpayers which can be a sizeable amount to have to stomach when you are not actually receiving any cash from a third party.

So can anything be done to transfer the properties tax efficiently?

As always with tax, it depends on your circumstances and also of course an informed tax adviser :-)

There is a way of transferring properties to a limited company WITHOUT paying capital gains tax AND stamp duty.

The way of achieving the above is to utilise available tax reliefs that apply to trading businesses. Problem is, renting property has always been seen by HMRC as investment activity rather than trading activity .

How can renting property be seen as a trading business then?

The definition of a business is quite broad - the term has been used in the tax legislation to constitute trading activity however when the definition is discussed in court, the general meaning of the word has relevance.

As such, in front of a judge, the activity of actively managing a portfolio of properties by perhaps conducting viewings, dealing with tenancy agreements, managing repairs and maintenance issues, employing staff to assist in managing the portfolio etc all help to determine whether a business is being run.

Clearly there is more likelihood of you being seen as running a business where you have multiple properties rather than just one or two passive buy to let investments. There is no exact number beyond which you would be deemed to be running a business - instead it depends on the substance and the active role you play in managing your portfolio.

It boils down to a question of fact whether you are deemed to be running a rental property business as opposed to passively holding property for an investment return.

So what is the advantage?

Well recently we helped a property owning family to transfer their portfolio that they had built up over two decades to a limited company saving them over £4.5 million in capital gains tax and stamp duty and £80,000 in income tax on an annual basis.

For the stamp duty saving to work, the rental business must be currently run in a partnership (as opposed to sole ownership).

But clearly, there are substantial savings to be had both initially and on an ongoing basis.

If you think this could apply to you then it is worth seeking advice to review your state of affairs and consider whether it would be a viable solution for you to implement.

I offer Strategic Consultations to landlords for a tax review of their affairs including whether or not the above would work so if this is of interest feel free to get in touch .

Hope that was useful.

Reza.

What is an SPV?

Fri, 01 Nov 2019 15:58:21 GMT

If you're in the property world either looking to invest in a project or involved in developing properties for a profit, then you've probably come across the term 'SPV'.

What does SPV mean?

SPV stands for 'Special Purpose Vehicle'. When used in the context of a property deal it essentially is a posh name for a Limited company!

The term SPV is generally used to reflect an understanding that a project will be run through a separate legal entity set up for that particular project only.

Why use an SPV?

SPV's are commonly used for property development projects where an investor or investors may be involved. Typically a property developer or a property speculator would source a property which could be developed for a healthy profit. They would then look for potential investors / lenders to become involved in the project to spread the risk and reward.

The deal is structured through an SPV for the following reasons :

Investors money is ring-fenced for the project
Security / charges by a lender are limited to the assets held by the SPV
SPV can facilitate a desired profit share between the parties involved
Tax efficiency

Ring-fencing

Property development can be a risky activity particularly if sites are bought on a speculative basis i.e without any planning permission.

Lenders or investors getting involved would want security over the assets of the SPV whilst the developer would want to minimise the risk to their existing personal or business assets.

An SPV allows for the property deal to be run through a separate legal entity completely thereby restricting risk and reward to the activity of the SPV only.

Profit sharing

It is common for there to be differing risk and reward sharing ratios between the parties involved in an SPV.

Given that an SPV is essentially a limited company, this gives flexibility around how profits can be shared among the shareholders.

It may be that the investor is putting in all the money in return for a 50% share of profit on eventual sale after all costs.

This can be worded into a shareholders agreement and separate classes of shares can be set up to facilitate this commercial arrangement between the parties.

A shareholders agreement can go into as much detail as required to determine 'who gets what' depending on what's left at the end of the project.

For example, a staged profit share can be built in to give the investor a fixed initial return for his risk capital prior to a balance being shared out between investor and developer .

So what are the tax benefits?

Property development is seen as a trade by HMRC. As such it is possible to qualify for Entrepreneur's Relief providing other conditions can be met (two year holding period for shares amongst others).

This means that a gain made on the sale of shares of the SPV could be taxed at just 10%.

However, it is unlikely that a buyer purchases the shares of an SPV. What normally happens is that the property/properties are bought by a buyer(s).

That means the proceeds of sale come into the SPV and are subject to corporation tax on the increase in value from purchase.

The SPV then has a pile of cash in it which the shareholders could then access tax efficiently by putting the SPV into a voluntary liquidation (rather than take a dividend taxed at 38%).

The cash received by the shareholders by way of a liquidation would then be treated as a capital receipt and potentially be eligible for ER i.e paying only 10% tax.

Contrast this with personal ownership where income tax rates are 45% and capital gains tax rates on residential property can be up to 28%.

If you're involved in property development projects and require some help in structuring deals tax efficiently, feel free to get in touch .

Hope that was helpful :-)
Reza

People are clueless about price

Mon, 07 Oct 2019 16:02:28 GMT

People, including your clients, are clueless about price.

They are not even sure if the price you have given them is reasonable or not.

This isn’t a mere claim, science actually proves this.

How are people clueless about price?

Research in a branch of science called psycho-physics, has shown that the area in our brain responsible for making monetary judgments, is the same as the area that makes sensory judgments.

Therefore, the human brain makes judgments based on colour, taste and smell in the same way that it makes judgments about numbers and prices.

In essence, psycho-physics means that humans are sensitive to differences, rather than absolutes.

Some Examples

A classic example would be that despite the presence of CMYK and RGB scales, if someone was presented with two shades of one color, let’s say red, they would most likely not be able to tell what exact shade it is, but they would be able to tell which one is lighter or darker.

Similarly, if someone was asked to state the weight of two given boxes, they would perhaps be unable to estimate the exact weight of each box, but would easily tell which box is heavier than the other.

Correspondingly, when we look at prices, we are sensitive to differences, rather than absolutes.

Relation to Pricing

Not just our customers, all of us, when presented with a price, tend to look for comparisons and contrasts to determine whether that given price is reasonable or not.

For instance, if you had to get some painting work done for your house, you will ask a few painters for their quote and it is highly likely that your decision will be based on the most reasonable option available.

The same applies to your customers.

Therefore, as business owners, we need to show our customers that the price we are charging them is reasonable and represents good value for money. We need to give them several packages and contrasts so that they can make a comparison and believe that the amount they are going to pay us, is going to be worth it.

So, as a business owner, are you doing the same?

How Much Should Your Accountant Be Charging You?

Mon, 07 Oct 2019 15:18:37 GMT

Should it be based upon on a percentage of your turnover? Or the amount of time spent on your affairs? Or should it be in line with what their competitors are charging their clients?

The answer is: It depends.

It depends on the role that your accountant plays as this varies substantially from one accountant to another.

What is the role of an accountant?

At one end of the spectrum, you will have those accountants that see you once a year.

You will go to their office to drop off your records, they will do your accounts and will let you know what your tax bill is, and you will then see them again next year.

At the other end of the spectrum, you will have those accountants who work with you throughout the course of the entire year. They are essentially your trusted business adviser.

They will assist you in managing your finance function, they will give you ideas on how to grow your business and profits, they will act as a soundboard for any of your questions and will proactively come up with ideas to help you save on tax.

It is crystal clear that these two types of accountants are world apart and therefore so should be their charges.

So how much should your accountant charge you?

Going back to the first three questions asked, your accountant should definitely not charge you on the basis of the amount of time they spend on your affairs.

It’s totally unfair because if your accountant is unorganised and is spending more than required time on your affairs simply because of their inefficiency and is making you pay for that extra time, then it is definitely not justified.

Therefore, a more efficient method that your accountant can implement, is to base their charges on the amount of value they bring to you.

The value could be quantified by the amount of tax that they saved you in the year and subsequent years or by the amount of extra profit they’ve helped you generate through their advisory services or by how much time and money they have saved you by fully managing your finance function.

Thereby saving you the cost of recruiting, of training, of managing qualified finance professionals to do the same which might have cost you between £50,000 - £100,000.

Bottom line is the price you pay has to be less than the value you receive.

The onus is upon your accountant to communicate and demonstrate the value they are generating, and then you can decide whether their stated price is reasonable or not.

How do you price your services?

Mon, 07 Oct 2019 12:42:32 GMT

Pricing a service is a lot more difficult than pricing a product.

Most business owners use a variation of cost plus pricing.

What is Cost-Based Pricing?

Cost-based pricing is the oldest and most common approach to pricing services. In this method, all the various costs are added up: direct labor costs, material costs, the overhead costs, and then an arbitrary markup for profit is added, which then becomes the price that's charged to the customer.

As much as it ensures marginal profits, this pricing method has a few drawbacks. For instance, it completely disregards the demand side of the equation and only looks at the supply side of the equation, hence it only considers the cost you incur to deliver that particular product or service to your customer.

Disregarding, to the demand side of the equation essentially results in not knowing what your customer wants, and what they are willing and able to pay for your service.

An indirect consequence of that is that you become internal focused around your costs and your delivery and less around the customer. Whereas, when you are customer focused, you know what value means to your customer and you will be able to quote a price that represents value for money.

Is there any alternative to cost-based pricing?

Value-based pricing is an alternative that places the customer's perceived value above everything else. However, it is incredibly difficult to achieve because value is highly subjective and varies from person to person. As they say, value is in the hearts and minds of the customer.

Where do I start?

There’s a couple of things you can do to start moving along this journey. The first is to your customers, certainty and choice. Certainty in what they’re going to pay, and choice in terms of options available to them, depending on what they value.

Secondly, you need to invest in your pricing function.

Currently, investments in sales and marketing functions are made, to increase the profits of businesses. However, investing in your pricing function is equally important, if not more, to increase the profitability of your business.

Getting your pricing right can literally transform the profits of your business, and will make your customers love you for giving them great value for money.

It's All A Big Lie

Wed, 21 Aug 2019 13:56:23 GMT

When I tell business owners they need to put their prices up they usually say, “You just don’t understand. My customers are price sensitive!”

There is a perception that most people are price sensitive. It’s one of the big pricing myths.

What is the difference between price sensitive and value sensitive?

There certainly are price sensitive people in society, but it’s much less than you probably think. Estimates by behavioural economists and price psychologists put it at between 14 – 20%. These are people for whom price is the sole determinant of whether to buy or not.

For example, the retired gentleman who eagerly awaits his free Sunday paper so he can cut out and collect the vouchers for a few pence off groceries at the local supermarket. Those people who shop in discount stores like Poundland where everything is £1. They are price sensitive .

And if they are your customer segment, then I agree; it is much harder to put your prices up.

However, the reality is most people are not price sensitive. They are value sensitive.

When we buy anything, we compare the benefit we get from that product or service and the cost to acquire it (the price).

If the benefit is greater than the price we make a profit on the deal. For most people, the size of the gap is more important than the price.

Let’s look at a couple of examples

Where do you buy your coffee from?
An increasing number of people buy their coffee from chains such as Starbucks, Costa Coffee and Peets. They happily pay £2 - £4 for a coffee. Are they crazy? You can get coffee at a fraction of the price from cheaper independent coffee shops, and even less if you buy instant coffee in a jar from the supermarket .

Of course, they’re not crazy.

I’m not crazy when I buy a Venti Latte from Starbucks. Yes, I pay a premium price. I pay that because there are things about Starbucks I value. I like the taste. I like the consistency. I like the predictability. I like the fact I can sit in Starbucks to work and get access to Wi-Fi.

I can get access (at certain tables) to a power supply. I can have a business meeting there. All this adds up to a great deal of value. The benefit to me of getting my coffee from Starbucks far outweighs the price I pay.

I’m value sensitive. Anyone who buys their coffee from Starbucks, or an equivalent coffee chain, by definition, cannot be price sensitive. A price sensitive person would not buy from Starbucks because there are cheaper ways of getting their coffee fix.

Starbucks don’t care because they are not looking to serve that segment of society who are price sensitive.

Do you own an Apple product, such as an iPhone, iPad, iPod or MacBook?

If so, once again, by definition, you cannot be price sensitive. A price sensitive person would not buy an iPhone because you can get a free basic phone as part of a low-price mobile phone contract for a few pounds per month. There are cheaper tablet devices, cheaper MP3 players and cheaper computers .

If you have customers who buy Apple products, or get their coffee from chains like Starbucks, they are value sensitive and not price sensitive.

That doesn’t mean price isn’t important. Price is always important. But it’s only one of the elements of the value equation. There are many other factors determining whether we buy or not.

Business owners are unaware of price failure

The reality is, most businesses that compete on price fail because (a) they don’t understand the maths, i.e. how many extra customers you need to win to compensate for lower prices, and (b) in the absence of appropriate pricing knowledge, price strategies and pricing systems they end up in a price war which few people win.

And once again, let’s consider Eddie’s business.

Imagine Eddie wants to grow his business. He wants more customers. He decides that by discounting his prices and using promotions so his average price is 10% lower, he will attract new customers and grow his market share. He thinks he’ll grow his customer base by 10%.

When he crunches the numbers, he will find this:

Oh dear! That’s not good. He’s just crashed his profit margins from 58% to 53.3%. And he’s killed his profit. He’s now making a loss.

In fact, for Eddie to be no worse off financially, he would actually have to win 20.83% more customers to compensate for the 10% price cut. That’s a lot of extra business Eddie is hoping to win.

What Is The Right Pricing Strategy

Mon, 12 Aug 2019 13:46:58 GMT

There are really only two pricing strategies :

Low-cost leadership
High-price differentiation

Everything else just falls somewhere in the middle.

The pricing strategies

In fact, most small businesses don’t have a pricing strategy. They often use what I call, emotional pricing; reacting to gut feel and emotion rather than the facts.

Reacting to what the competition is doing. Pricing based on guesswork, or simply pricing the way it’s always been done in the past.

Low-cost leadership

This is a strategy where you make a conscious choice to focus on low prices and undercut the competition. Your goal is to dominate your market with a low price. This can be an effective strategy and we see it executed in businesses such as Richer Sounds, Dell, Ryanair, IKEA, Aldi and Lidl.

The trouble is, you need the right set of circumstances for it to work.

It is very, very rare for this to be a sensible choice. To do this you must have something unique in your cost structure that means that you have lower costs preventing your competition copying your strategy.

So, let’s consider the alternative.

High value differentiation

If you don’t have scale or capital to dominate your market, you are much more likely to be successful by focussing on a high-margin product or service offering the customer added value. The key is to focus on differentiation and offering more value. Very often it makes sense to operate in an appropriate niche.

Think about Eddie’s business.

Perhaps his current pricing structure has been arrived at by copying his competitors. If instead he realises he has a particular area of expertise which is particularly valuable to some of his customers and he decides to pursue this as a niche, he adds some extra value by repackaging his services and puts his prices up by 25%. He wants to be positioned as the best videographer and now wants to be much more expensive than his competitors.

Eddie analyses his current customer base. He crunches the numbers. He realises from talking to his customers that one category who make up 75% of his sales will value the direction he is going in and the extra value he will add. And 25% are likely to leave.

Yes, that’s extreme, and the thought of losing 25% of customers is usually enough to cause a small business owner to have a breakdown.

But let’s at least see what this might mean for Eddie’s profit :

That could double his profit and some! Surely worth exploring further.

But again, there’s a problem I hear. “I sell a commodity product and it can’t be differentiated” or “My service is a commodity and it’s the same as everyone else”.

You can differentiate anything

Here’s an important definition:

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services.

The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

Very often business owners think that definition describes their product or service and they fall into the commodity trap.

In other words, they believe what they sell is a commodity and therefore must compete on price. However, a product (or service) is only a commodity if you think it’s a commodity and you treat it like that.

Ultimately, with creative thinking, anything can be differentiated, and therefore sold at a higher price.

Take lettuce for example.

You can buy a whole lettuce for a certain price. How do you differentiate it? It’s just a lettuce.

We know customers want convenience. And many years ago, someone came up with the idea to cut up the lettuce, wash it and put it in a bag. It’s still the same lettuce. But people willingly pay significantly higher prices (over 100% higher) per kg of lettuce.

What about water?

Much of the earth is made up of water. It comes out of the kitchen tap and costs almost nothing. Surely, it’s a commodity.

Not if you differentiate it by putting it in a bottle, then you can sell it for much, much higher prices.

What about air?

Oxygen is the most abundant element on earth, so surely you can’t differentiate it and charge a price for it, let alone a higher price.

And yet companies like oxygenbars.com sell Personal Oxygen Dispensers for $29.99 each. It’s a thriving market.

The ultimate commodity

Arguably the ultimate commodity is stocks and shares. After all, a share in Disney is traded on stock exchanges around the world at the same price.

How can you differentiate the ultimate commodity, when at any point in time it’s the same price around the world?

The website GiveAShare.com does exactly that. You can buy a share in companies such as Disney, McDonalds and Harley Davidson for typically DOUBLE the price listed on a stock exchange. How?

Very simple. They differentiate it by putting it in a frame. You can choose the type of frame. Then you can add an engraved plaque. They’ve turned the product into something different; a gift. That opens up a new market for people who want to buy shares in iconic companies as a gift for a loved one.

If you can differentiate lettuce, water, air and shares, you can differentiate what you do.

So how can you make your product or service different? How can you make it better? How can you make it more convenient? How can you change the way you package your product to make it different? Later in this book we’ll look at how you can do this in more detail.

When you differentiate your product from the competition, customers will pay you higher prices.

Are you convinced?

If not, we’ll look at one of the biggest pricing myths in the next chapter.

The Dangers Of Discounting

Mon, 05 Aug 2019 13:34:43 GMT

What cost takes up the biggest share of the annual sales of almost every business (and it doesn’t appear in your annual financial statements)?

How do price discounts affect revenue and profit?

Annual financial statements for any company report sales net of discounts and promotions. That means the cost of those discounts and promotions is often not measured and forgotten.

We saw how reducing average prices by 10% for Eddie could be disastrous. Here’s a more high-profile case…

A salutary lesson

1931 was the start of a 77-year period where General Motors dominated the auto industry. They led the world in car sales for 77 consecutive years until 2008 when they fell to second place.

A few years earlier, in the Spring of 2005, business didn’t look good for General Motors.

Then the marketing teams at General Motors hit upon a revolutionary idea. They wouldn’t just offer the usual discounts or cashback incentives seen in the auto industry. They would offer their vehicles at the deeper discount normally reserved for its employees.

This was launched with much publicity on 1 June 2005 and the promotion continued for 4 months. Rather than the usual quantification of the discount, it declared, “GM’s employee price is what a dealer actually pays for a vehicle”.

Sales rocketed in June 2005 to over 40% of the sales of June 2004. July 2005 was almost 20% up on the previous July. This was such a significant increase in sales the marketing team were applauding themselves for this stroke of genius.

Sales then fell sharply over the next few months and General Motors eventually posted a loss of $10.5 billion.

Just 4 years later, in June 2009, this giant of the auto industry that dominated for 77 straight years, filed for bankruptcy. The discounting didn’t increase sales; it simply gave customers a reason to bring forward the purchase of their next car.

Just like Eddie in the previous example, they destroyed their margins and killed off profitability.

Discounts are crazy!

You should never crash and burn on price by simply discounting. When you discount you undervalue yourself and you train your customers to haggle. Instead, maintain the integrity of your prices and be prepared to walk away. Discount regularly and customers become trained to wait for the next discount.

Reducing, or even eliminating, discounts can make a very significant difference to profits.

What if your customers only choose you on price?

Unless you really are only serving the price sensitive segment of the market, if your customers choose you on price it’s because you haven’t given them any other reason to choose you. You haven’t made your products or services sufficiently different or better.

Customers see you as the same as everyone else, with the only thing that differs being the price – so they’ll choose the cheapest price. And that’s your fault, because you haven’t given them any reason to do anything other than choose the cheapest.

What’s more, if customers choose you on price, then they’ll probably also leave you on price. In other words, if they choose you solely because you are the cheapest, then as soon as another competitor offering an even cheaper price comes along you’ll lose them as customers.

There’s a double whammy from competing on price. You make lower margins. And you have less customer loyalty.

Of course, there may be occasions when you want to run promotions and offer discounts. So, let’s look at the right way to do that next.

Discounting The Right Way

Wed, 31 Jul 2019 13:27:33 GMT

One of the biggest problems is discounts being given by employees and sales people indiscriminately. Very often they are given with little or no senior management involvement or authorisation. There needs to be better systems, training and communication.

Why do you need to discount the right way?

If you have employees and sales people in your business, make sure you educate them about the profitability levels of different products. If employees and sales people are to have the ability to use discretion to give discounts there needs to be guidance.

For example, you might decide that discretionary use of discounts is only appropriate when :

they are used to up-sell or upgrade customers to a more profitable product,
part of negotiations to get the customer to say “Yes” only after all other attempts have failed, and
to win sales away from your competitors.

Discounts should not be given when they are not asked for or expected by the customer.

Significant improvements to profit can usually be achieved by tightening up your discount authorisation procedures.

A better way to profit from volume discounts

Discounts offered to incentivise customers to buy more are popular, and can be very effective.

There are essentially two types of volume discounts :

Flat rate discounts (sometimes referred to as full volume discounts) are where the discount is applied to the entire purchase, and
Stepped discounts (sometimes referred to as incremental discounts) are where the discount only applies to the additional volume.

Consider this example for a product priced at £100 :

If a customer buys 100 units they get a 10% discount under both types, reducing the price from £100 to £90.

If they buy 200 units, under the flat rate discount they receive 20% off the entire purchase bringing the price down to £80. And if they buy 300 units, the discounted price becomes just £70.

However, with a stepped discount, if the customer buys 200 units they pay £90 for the first 100 units and £80 for the second 100 units, which is an average price of £85. And if they change their mind and increase their purchase to 300 units, the 3rd lot of 100 is priced at £70 bringing the average price they pay for the 300 units down to £80.

Let’s consider the impact on sales and profits if a customer buys 300 units.

Under the flat rate discount the 300 units are all sold at a discount of 30% bringing the price down to £70 and total sales are therefore £21,000. With a stepped discount the average price is £80 and so total sales is £24,000. The £3,000 difference in total sales may seem small.

However, you should consider the impact on profit. Let’s assume that the variable costs are £60 per unit. If someone purchases 300 units the variable costs are £18,000 resulting in a total profit of £3,000. But if we use the stepped discount profit doubles to £6,000.

What looks like a small difference in the discount structure, in this instance, actually doubles profits. You should choose stepped discounts whenever possible. They encourage people to buy more and often work out cheaper.

Quick summary

Many businesses struggle and ultimately fail because their pricing is wrong. Price is the most powerful lever in the profit equation.

Most times, pursuing a high-price discrimination strategy is preferable to low-cost leadership. This is, in part, because most people in society are value sensitive, and not price sensitive.

We’ve looked at the potentially calamitous impact on profit of indiscriminate discounting and that you should either stop discounting or discount strategically.

In short, you should consider raising prices, rather than reducing.

In the next chapter, we’ll explore the issue of raising prices.

How To Put Your Prices Up The Right Way

Wed, 24 Jul 2019 13:14:41 GMT

When you look at the most successful businesses in any sector, whilst there may be one or two that are successful using a low-price strategy, the majority are premium high-priced businesses, such as Apple, Starbucks and Disney.

Despite that, and even if you acknowledge that most of your customers are really value sensitive as opposed to price sensitive, you might be thinking, “If I put my prices up I’ll lose customers!”

Not necessarily.

Why the concept of incremental irrelevance will instantly increase profits

Think of one of your favourite products. Perhaps it’s your iPhone, or your favourite bottle of wine. How much does it cost?

Before reading on, stop and think about this.

Write down one of your favourite products.

Next write down its current price (or at least your best guess).

Finally, write down what the price would be if it increased by 1%.

For example, if one of your favourite products is your iPhone and it currently costs £689.00, then a 1% increase in price would make the new price £695.89. Or perhaps you were thinking about your favourite bottle of wine. And if it is currently £7.49, a 1% increase in price would raise it to £7.57 .

What are the numbers for your favourite product.

Don’t continue reading until you’ve done that.

Here’s the important question. Ask yourself, if tomorrow the price rises by 1% to the new price you’ve written down, would you still buy your favourite product? Or would you switch?

The answer for the vast majority of people is likely to be “No”. It certainly is when I’ve done this in seminars and workshops.

Why is that?

When a product or service is valuable and of high quality you won’t switch for a tiny 1% increase in price. 1% is such a tiny change in price. It’s likely to be less than inflation. It’s irrelevant.

Think about your product or service. Is it good quality? Do your customers like it? If so, chances are they wouldn’t switch either if you put your prices up by 1%.

So, if that’s the case, why not put your prices up by 1% immediately.

Putting your prices up by 1% is likely to have no impact on your customers buying choices. And yet the impact can be significant.

Let’s take Eddie for example. If Eddie decides to put his prices up by 1% on average, his net profit increases by 25.8% from £33,000 to £41,500:

What would be the impact on your business from a tiny 1% increase in average price? Probably a worthwhile amount.

What if you increase your price by just 2%?

If you could do that, and not lose any customers, the impact on your profit is much bigger still. Eddie could potentially increase his profit to £49,000.

What about 3%, or even 5%. How much can you increase your average price before you start to see a reduction in sales quantity or number of customers?

You will never know unless you test.

Of course, there’s a limit isn’t there? If you put your prices up by 20% you definitely will lose sales volume.

Or will you?

Raising prices doesn’t always mean you lose market share

People often use price as a short cut in assessing quality. A high price is an indicator of quality. Sometimes, raising the price impacts on the customer’s perception of quality.

Since most people are value sensitive rather than price sensitive, an increase in the perception of quality, brought about by a price rise, can result in an increase in sales volume. That’s why you see premium companies like Starbucks and Apple with high market share.

Customers use the price as an indicator of the product’s quality. Sometimes this is referred to as the prestige phenomenon.

If you can achieve this, the impact on profit is considerable. Let’s consider Eddie’s videography business again. Eddie decides to re-design his logo, website, packaging and promotional material to suggest higher quality. He reinforces this with a 10% price rise.

He is now an attractive option to those higher quality customers who previously dismissed him as cheap and cheerful. As a result, he grows his customers by 10%. This is what his profit would look like:

That’s a huge increase in Eddie’s profit.

When Your Competitors Are Cheaper

Fri, 12 Jul 2019 10:27:37 GMT

Pricing is always complicated with the presence of competitors. You have to consider the quantitative effect on your sales arising from any change your competitor might make to its pricing, and how a competitor will respond when you change your pricing.

When should you lower prices?

If your competitors are cheaper than you there are two things you can do. One of the two is smart and the other is usually stupid.

The stupid thing is to try to compete with them on price – by cutting your prices and perhaps even starting a price war. Unless of course, this is your pricing strategy. But as discussed already, it is very rare that this is an appropriate strategy for an accountancy practice.

The smart thing to do is not to even try to compete on price and pursue a pricing strategy of having a highly differentiated service that adds value, so that you can charge a premium price.

If you choose the smart route – not to compete on price - then you will need to master one of two key skills… and preferably both of them :

You will need to prevent your customers worrying about your higher prices.
And you need to become much better at justifying your higher prices – in other words, much better at handling price objections.

Strategies for beating the price crashers

The guiding principle is simple… if two competing products are the SAME then customers will choose the cheapest. But if one of the products is different and better, then customers will pay more for it.

Always remember, the right customers will gladly pay more when they understand that they are getting more.

The general rule is :

Most people don’t really buy on price
They say they do… but that is only a ploy to get you to reduce your prices
Don’t fall for it!

Of course, there are some people who are price sensitive. You may even have some amongst your customer base.

Here are some of the characteristics of genuine price buyers; they :

Do all the complaining,
Take up lots of your time,
Tell others how little they have paid,
Leave when they get a cheaper offer, and
Forget to pay you.

The key advice is: avoid them wherever possible.

A Strategy For Getting Higher Average Prices

Tue, 09 Jul 2019 10:16:28 GMT

Let’s start with one of the most profound principles in the field of pricing. And that principle is, different customers value things differently.

We all value things differently. We all have a different perception of the value of any product or service. So, we all have a different maximum amount we are willing to pay for a particular product or service.

Economists call this the buyer’s reservation price. And your goal is to set your price as close as possible to each buyer’s reservation price.

“So what?” you might be thinking.

What is single price?

Well, this seemingly tiny observation has a profound implication. You see, it means that if you currently have a single price, that price is wrong!

Having only a single price causes you to lose out in two different ways. For some customers that price is too high – so they don’t buy, and you lose them as a customer.

And for other customers that price is too low – so you end up charging them less (and earning less profit) than they are willing to pay. Which means you lose again.

What is consumer surplus?

Economists call the amount by which you lose in this second scenario the “Consumer surplus” – and it is shown by the shaded area on the supply and demand diagram you can see below.

One of the keys to dramatically improving your profits is to claw back some of this ‘consumer surplus’ by charging different customers different prices. But how?

Well, the good news is that there are many ways of charging different customers different prices, and we’ll look at some of them in this chapter.

But first let’s look at some numbers to illustrate the power of this concept.

Example :

Imagine that one of the services Eddie offers is to film a promotional video to be used in a Facebook Ad. Eddie normally charges £1,000 for this service and his variable costs are £420. There are three potential customers: A, B and C.

Customer A is willing to pay £2,000,
Customer B is willing to pay £1,500, and
Customer C is willing to pay £1,000.

With Eddie’s current single price at £1,000, then all three potential customers will gladly pay him that amount. So, he’ll make total sales of £3,000 and total profits of £1,740:

Of course, Eddie could set his single price at £1,500, so Customer C won’t buy. But the other two will gladly pay you £1,500 each. Again, he’ll make total sales of £3,000 again, but this time his total profits are £2160:

There is a third option for Eddie. He could set a single price at £2,000, which only Customer A will buy. Then his total sales will be £2000 and his total profits will be £1580:

For Eddie, a single price of £1,500 is the best price. This price generates more profit than either £1,000 or £2,000 for his video shoot. I call this the Magic Price; the price at which you make the most profit. We’ll come back to the concept of Magic Price later.

This will increase your profits substantially

Unfortunately, if Eddie sets his price for doing filming a Facebook Ad at £1,500, even though it’s the Magic Price, he is leaving money on the table. We know that: Customer A is willing to pay £2,000, Customer B is willing to pay £1,500 and Customer C is willing to pay £1,000.

So, if instead of charging those three customers all the same prices, we charge them the full price they are willing to pay (their buyer’s reservation price), then Eddie’s total profits will increase significantly:

If Eddie simply sticks to his old price of £1,000 per customer his profit is £1,740. If he changes his price to the Magic Price of £1,500 his profit increases by 24.1% to £2,160. But if he can find a way to charge each customer the maximum price they are willing to pay, his profit increases by 86.2% to £3,240.

If these 3 potential customers are representative of Eddie’s customer base, i.e. a third of them would willingly pay an extra 50% and another third were willing to pay double, so that he is able to increase his average prices by 50%, then his profit will change as follows:

That’s an extraordinary increase in profit. And yes, it’s extreme (finding a way to charge every single customer their buyer’s reservation price is not simple). I’ve also kept the numbers as simple as possible and yet, the real world is much more complicated.

But those complications do nothing to alter the fact that if you can find a way to charge different customers different prices – so that they each pay the maximum price they are willing to pay – then you will always make more profit than you do by using any single price, even if that single price is your Magic Price.

Charging different customers different prices will increase your profits… and probably by a lot!

Why you root everything back in numbers

We started off this eBook by looking at the 9 drivers of profit and the importance of understanding the business model. Hopefully you can now see why price is the most powerful driver of profit.

You must understand the numbers behind your business and the business model. And with pricing, you should always test and measure to see what works, and what doesn’t.

Do I need an in house Finance Team?

Mon, 18 Mar 2019 15:50:37 GMT

There comes a point in the stage and growth of a business where you think you might need to recruit additional finance staff. Or does there?

Technology has massively changed the way financials and accounting are now maintained. Dedicated roles of accounts payable, credit control, sales ledger clerk etc now face extinction due to software being able to largely do the same thing.

What can a finance team do?

However, the plethora of skill sets required to navigate and properly handle a growing business' financials has grown substantially.

Ideally SME's could do with :

an in house bookkeeper/finance assistant (who understands cloud technology)
a financial controller for management reporting and cash flow forecasting
a finance director for overall financial strategy and helping the business grow.

In reality a small business is unlikely to have the budget to bring on board such a team as part of a full internal finance function. A finance assistant cost is around £20k-£25k, a financial controller around £45k-£50k+ and a finance director can be anywhere from £70k upwards.

Given that the above full internal finance function is largely affordable for most small businesses, they tend to get by with the people they have trying to deliver whatever service is in their capacity.

By and large however, there will always be gaps in what an ambitious business owner needs from a finance function and what they actually get from an in house team they can afford.

This means that the business owner can be left frustrated in getting their business where they want it to be and achieving their ultimate goals.

Not to mention having to get involved personally in the nitty gritty of the finances over and above the million and one tasks required to run a business.

Life should not be so hard for business owners. As an entrepreneur you set up your business to give you the life that you want whilst doing something that you really enjoy and are passionate about.

The dream certainly didn't include wading through receipts and trying to make sense of a cash flow forecast!

So what's the alternative?

The rise of cloud accounting software such as Xero and QBO has facilitated the ability of dynamic finance professionals (such as accountants) to work much closer together with business owners to help them manage their full finance function.

How is this happening?

Collaboration - Cloud accounting software means much more collaboration than ever before. The accounts can be seen in real time by the accountant and business owner. No need to save backups, send the data, stop working whilst the accountant is working on it, restore data etc etc (yawn!).
Automation - a lot of the data entry can be mitigated through the use of OCR apps. That means that invoices and receipts can be scanned and sent for review and posting to the accountant. No need even to hold onto to the paper anymore as copies can be maintained within your accounting software.
Open banking - the new open banking rules means that the banks have allowed third parties (highly secure of course) to access account data on a read only basis. This means your transactions can flow directly from your bank to the software without having to manually input bank statements.
Real time intervention - your trusted adviser can get in touch with you if someone isn't quite going right. Alerts can be set up to monitor cash flow, debtor balances, ratios to judge whether your going to have a problem with settling your liabilities in the future etc so that you can take action in real time. No point in your accountant telling you what's gone wrong months after your year end when discussing year end accounts!
Access to high level finance services - most growing businesses could really do with finance director (even on a part time basis) but the reality is they can't afford them. Now, your accountant has the ability to step into that role and tailor a service that fits your business and budget. Services such as cash flow forecasting, management reporting, KPi tracking, business planning can be provided from the same place as where the numbers are managed.
Procuring finance - technology has also revolutionised the small business finance sector. Disruptors in the sector have given the banking giants a run for their money by coming up with products and services that are flexible, accessible and work for the small business looking to grow. Your trusted advisor should be at the centre of your growth plans and advising you on all the relevant options out there from invoice finance, secured finance, debt factoring, bridging etc. Having real time numbers and the ability to forecast and build 'what if scenarios' based on certain eventualities is essential in the decision making process.

Many dynamic and forward thinking accountants are now offering full finance function services to business owners facilitated by all of the above. We are one of those. :-) Get in touch with us today !

So if you're an ambitious business owner with exciting growth plans then ensure you have the right professionals alongside you to help you get to where you want to be.

All the best,

Reza

The most powerful lever in the profit equation

Tue, 25 Sep 2018 09:20:56 GMT

You can’t manage profit. Profit is simply an end result. It’s the end result of a series of processes.

It’s the business model.

Numbers drive that business model. When you fully understand your business model and how the numbers work you will be able manage and improve the drivers of profit.

Every business is different and will have its own unique business model and profit drivers. Nevertheless, for most businesses there is a generic model. This model has 9 drivers, so let’s explore that.

A model of your business

Profit is the end result of deducting costs from sales.

It looks like this :

PROFIT = SALES – COSTS

But that’s far too simplistic. We have to understand both sales and costs in more detail.

What drives costs?

Costs are made up of fixed costs and variable costs . It’s important to differentiate between the two because they have a very different impact on your business model.

Variable costs – sometimes referred to as direct costs – change in proportion to changes in sales. Typical examples are direct labour and the cost of raw materials.

Fixed costs, as the name suggests, don’t change (at least, not in the short term). Typical examples are premises costs, sales force salaries and administrative staff salaries.

Fixed costs are usually fixed in the short term, but over the longer term can vary. Whilst a 10% increase in sales is unlikely to have any impact, a doubling of the business may lead to the need to hire more administrative staff or larger premises.

Other forms of cost exist, such as stepped costs , which are a form of fixed costs that jump in steps as business activity and sales increase.

For example, if you manufacture widgets and you increase your sales by 10% your variable costs also increase by 10% .

Your fixed costs probably won’t change with a small change in sales.

If your sales of widgets increase by a larger amount, say 50%, your direct costs would increase by 50%. Some of your fixed costs such as premises costs may continue to be unchanged.

But to generate that increase in sales of 50% the cost of your sales force is likely to rise (possibly by as much as 50%, or even more). Those costs will not vary directly with sales, but they will increase in steps.

Whilst you should be aware of different costs and how they react to changes in sales and business activities, splitting costs between variable and fixed will usually suffice. So, we’ll keep things simple.

So, our formula now becomes :

PROFIT = SALES – VARIABLE COSTS – FIXED COSTS

Have you spotted something about this formula?

This is how accountants set out your end of year financial statements. Go and check them out.

Here again is Eddie’s financial statement (I’ve just added the terms used in the above formula for clarity).

You’ll see that accountants simply add in a line for gross profit which simply means sales less variable costs (and often this is expressed as a ratio too, often referred to as gross margin):.

Whilst this analysis of a business provides some useful insights – measuring trends in these numbers over time and analysing changes in gross margins – it doesn’t go anywhere near far enough.

Let me explain why…

You could improve profit by focusing on fixed costs. The trouble is there is only so much fixed cost you can remove from a business before it has a seriously detrimental impact.

You almost certainly can’t halve your fixed costs without radically redesigning the whole business model. It’s quite hard to reduce fixed costs by 10% without harming the business in some way.

Whilst you should be mindful of costs at all times, improving this profit driver will only result in a relatively small improvement in profit.

It’s the same with variable costs.

Realistically, if you focus on reducing your fixed and variable costs you would probably achieve a 5% improvement in both, and for Eddie that would increase his profits from £33,000 to £73,850. Certainly worthwhile, but not game-changing .

Unfortunately, this is where the advice from many accounting professionals stops. When asking for advice on how to improve profits, most focus on the cost drivers. The real power lies tucked away in the drivers of sales.

What drives sales?

The famous marketer, Jay Abraham, championed the idea of “Three ways to grow a business” which describes a powerful way of looking at how sales are made up.

He describes it like this :

SALES = NUMBER OF CUSTOMERS x AVERAGE AMOUNT OF EACH TRANSACTION x AVERAGE NUMBER OF TRANSACTIONS IN A YEAR

Let’s simplify the terminology into this :

SALES = CUSTOMERS x SPEND x TRANSACTIONS

From a marketing perspective, this is very powerful. Most business owners wanting to grow their business focus solely on the first component; winning more customers. And whilst there is nothing wrong with that, it limits what is possible.

For example, let’s imagine Eddie (who we first introduced in last week's article) wants to grow his business by 10%.

He could carry out some marketing activities to win 10% more customers. If he does that, his sales and profits would look like this.

Winning 10% more customers

I’m assuming here that fixed costs will not change. However, there are likely to be some additional costs in respect of the marketing, such as advertising or hiring a marketing consultant.

Consequently, the impact on bottom-line profit is likely to be a little less.

He could of course achieve exactly the same result if instead he puts some systems in place to increase the amount of money his existing customers spend with him each time they do business by 10%.

Increasing the average amount of each transaction has the same impact on sales.

Alternatively, Eddie could implement some strategies for getting his existing customers to buy more often each year by 10%, i.e. increase the average number of transactions in a year.

A 10% improvement in any one of these three drivers will increase sales by 10%.

However, marketers teach us that working on the second of those sales drivers is much easier because you already have an existing relationship with your customers. It’s much easier to sell more to an existing customer who knows you, than to acquire a new customer.

The power of synergy

What would happen if Eddie put in place some strategies and systems to increase each of those three sales drivers?

What if he acquired 10% more customers, and got his customers to spend more each time by 10% and by 10% more frequently?

What would be the overall impact on sales?

Not 10%. Much better than that.

And not 30% either.

It’s actually 33.1%.

What happens is each of the drivers interacts with each other and we get synergy. For this reason, you grow your business faster if you make small improvements in all the drivers, rather than focusing on just one thing, like winning new customers.

Putting this together

We now have 5 drivers of profit in our business model :

PROFIT = (CUSTOMERS x SPEND x TRANSACTIONS) – VARIABLE COSTS – FIXED COSTS

This is a much more useful model of a business. But we can take this a step further.

What determines the number of customers you have?

If you want to increase the profits of your business you could focus your attention on the first sales driver, number of customers. But what determines the number of customers?

We can break this driver into 3 separate components :

CUSTOMERS = CUSTOMERS LAST YEAR + (NUMBER OF SALES LEADS x SALES CONVERSION RATE) – CUSTOMER DEFECTION RATE

In other words, there are 3 things that drive the change in the number of customers :

1. Getting more sales leads (which is MARKETING)

2. Converting more of those sales leads into customers (which is SALES)

3. Reducing the number of customers that leave (which is CUSTOMER SERVICE)

Once again, we can model this mathematically and identify how a change in each of these drivers impacts on profit. A good accounting professional will be able to do this for you.

Why is the price driver different?

The second of Jay Abraham’s 3 ways to grow a business is the average amount of each transaction. In other words, what can you do to get customers to spend more money with you every time they do business with you?

This is very powerful.

But to build our mathematical business model we need to break this down into two separate components.

Essentially there are two ways of getting customers to spend more :

1. Buy more from you each time (for example, by creating some up-selling systems), and

2. Changing the price.

It’s important to consider these two separately because they each have a different impact on costs. Buying more of your products or services means variable, or direct, costs also go up.

Changing price has no impact on costs.

This is one of the reasons why, mathematically, price is the most powerful lever in the profit equation. To illustrate, let’s go back to Eddie.

Remember, if Eddie wants to grow his business by 10% he could get his existing customers to buy more from him every time they do business.

For example, when he agrees the price for doing a film shoot he might then offer some enhancements such as creating a blooper reel, doing a multi camera shoot or something else that enhances the service and increases the order by 10% .

This is the impact doing this would have on Eddie’s profit :

Customers buying 10% more

Notice that these additional sales will increase the variable costs by 10% too.

However, he could instead increase the amount his customers spend by increasing the price.

If he does this by increasing average prices by 10%, and assuming no resulting loss of customers, his profit will now look like this :

Increasing price by 10% without losing customers

Changing price does not impact on the cost structure. The impact on profit is much greater than increasing sales in other ways.

The latter increases Eddie’s profit by 249.4% to £82,300 which is a great result. But even more impressive is the 357.6% increase to £118,000 by changing average prices.Not only is the potential impact on profit much greater, it is also faster. In other words, to grow sales using any of the 3 sales drivers takes time.

To grow a business by 10% with a focus on winning new customers can easily take a year or more (unless you are a new business Start Up). In contrast, you can change your pricing structure tomorrow.

But there is a big problem

If you put your average prices up by 10% you will lose business. Possibly as much as 10% of customers. And possibly much more.

At least, that’s the common reaction.

However, the reality is likely to be very different. In most cases, the number of customers you lose from a price rise is much less than expected. Sometimes it’s even no loss of customers. And sometimes it results in an increase in new customers.

Of course, you may well be sceptical. And there is nothing wrong with healthy scepticism.

Very often, the number of customers you can afford to lose and maintain profits is higher than you might think.

For example, if Eddie increases his prices by 10% and loses 10% of his customers, his bottom-line profit will still increase by £27,200 .

Why is that?

With a 10% increase in price and a 10% loss of customers, sales don’t change much (they would actually reduce by just 1%). Much more importantly, with 10% less customers to serve, those variable costs also reduce by 10%.

In fact, Eddie can afford to lose 14.71% of his customers and his profit won’t change. And that would still be a great result. Making the same profit but with 14.71% less customers, Eddie can work less hard for the same money.

Not only that. Think about which customers leave when you put your prices up. Is it those loyal customers who love what you do, are a joy to work with, give you the most – and most interesting – work and always pay you on time?

No. Those are the customers who will stay with you. The ones you lose are the ones who always moan and complain about your price. They are the ones who pay you late. In short, the customers you hate dealing with.

In contrast, when you cut prices you attract price shoppers. And the problem with price shoppers is, they have no loyalty. They are the first to leave you when someone else cheaper comes along. Here’s a simple rule:

Reducing your prices attracts the worst customers

Putting your prices up improves the quality of your customer base

I’ve shared with you some numbers for Eddie’s business. Every business is different. Your business is different. The results you would get depend upon your cost structure.

Nevertheless, you can build a mathematical model to describe your business. When you do this, you can see the impact on your profit from making changes to any of these 8 profit drivers.

If you don’t know how to build that mathematical model, speak to a specialist (like us :-) who can do this for you. Get in touch today !

That just leaves one more driver.

The 9th driver

The final driver is a little different, but no less important.

The first 8 drivers can be built into a complex mathematical model; a model that predicts what happens to profit when you manage and change any of the drivers.

The final driver is to systemise everything. To create systems for improving each of the drivers of profits, e.g. customer service systems, selling systems, referral systems, pricing systems.

Quick summary of the 9 drivers of profit

Here are the 9 profit drivers (and the function of a business they fall within) :

1. Getting more sales leads ( Marketing )

2. Converting sales leads into customers ( Sales )

3. Getting customers to spend more ( Marketing )

4. Getting customers to spend more often ( Marketing )

5. Getting customers to remain customers for longer ( Customer Service )

6. Pricing for maximum profit ( Pricing/Marketing )

7. Variable costs ( Operational )

8. Fixed costs ( Operational )

9. Systemise everything ( Operational )

Which profit driver should you focus on?

You should work on all of them simultaneously. But if you were to pick one you should always start with price .

Firstly, it is the most powerful lever in the profit equation, i.e. it has the biggest mathematical impact on profit. Secondly, it can have an immediate impact on profit.

You must also understand how each of the drivers impacts on other elements of the profit equation. Most businesses focus on getting more sales leads and winning more customers.

However, if the price is wrong (or by giving discounts to attract new customers) very often this can have a negative impact on profit.

I often come across business owners who are working way too hard, getting very stressed and not making enough money. They think the solution is to win new business.

However, the real problem is usually the wrong pricing. If your prices are too low, winning new customers simply compounds the problem… you just find yourself working harder and harder.

This is why pricing is so important. Get your pricing right and you’ll see your profits rising significantly. Get it wrong and it’s a fast way to go out of business .

You must understand the numbers.

This is why you always start with the numbers before creating your pricing strategy.

Appreciate it's been a long post but hopefully has been valuable!

Would love to hear you pricing stories, feel free to share.

Very best

Reza

Why do businesses fail?

Wed, 19 Sep 2018 09:27:26 GMT

There are many reasons why businesses struggle, and in some cases, ultimately fail. It happens for both Start Up businesses and established businesses. Here are some of the common causes.

Why do start-ups fail?

According to research more than half of new businesses don’t survive beyond 5 years.

Here are some of the reasons for such high failure rates :

An inability to build a profitable business model with proven revenue streams,
Failure to create and communicate value propositions in a clear, concise and compelling way,
No real differentiation in the market, which means competing on price,
Emotional pricing – a lack of understanding of pricing strategy; reacting to gut feel and emotion rather than the facts,
Not really in touch with customers and a lack of understanding of the market,
Lack of business and strategic planning,
Rapid expansion leading to ‘over-trading’ and running out of cash,
A lack of systems, and
Poor sales and marketing processes.

It doesn’t get any easier after 5 years… just a new set of problems.

Why do established businesses fail?

Businesses that have been established for 5 or more years have typically gone through an initial high growth phase, but then they start to stagnate.

Some of the common problems we find include :

Constant cash flow issues due to the demands of high overheads and working capital needs,
Slow growth – or even declining sales,
Downward pressure on price and margins,
The business owner working too hard, and
Consistently falling short of profit targets.

Very often the biggest reason and the root cause of business problems is they don't understand the numbers and the business model.

They don't understand the impact and importance price has. And it's not their fault... there is simply not enough opportunity to learn the necessary skills.

Let me introduce you to Eddie

Eddie runs a small business. He’s a videographer and creates professional videos for corporate customers. His business has annual sales of £850,000.

It grew fast in the early days, but growth is slowing down. He hires in additional help as required on large projects, such as video editors, script writers, make-up artists and actors.

His annual financial statements show that these costs – accountants call them variable or direct costs because they vary with sales – amount to 42% of sales.

In addition, Eddie has fixed costs, such as the rent and rates on his studio and office, telephone bills and what he pays to his bookkeeper and other professionals. These total £460,000 which leaves him with a profit of £33,000.

Not much for all the crazy hours Eddie works! But then again, that’s not uncommon for business owners.

If you want to increase the profit of your business you must understand the numbers . For that reason, I am going to come back to Eddie in this series of blogs to show you the impact price can have on profit.

Let’s summarise Eddie’s business :

In the next blog, " The most powerful lever in the profit equation "-we’re going to explore how Eddie can improve his profits and make more money.

If you can't wait until then, download a free copy of my book ' The Entrepreneur's Guide to Transforming Profits through Price ' at the link below where you can read Eddie's story and journey in full !

Should my accountant be helping me to grow my business?

Wed, 22 Aug 2018 13:15:57 GMT

Running a business can be a lonely experience. You have people to manage, customers to keep happy, bills to pay and mouths to feed. And the buck always stops with you.

Having someone to lean on, to help you navigate through the rough seas that business can bring, to act as a sounding board and to just be there when you need them, can work wonders.

This someone needs to be someone you can trust. Someone who understands your business. Someone who appreciates the challenges and pain you go through.

Someone who understands your personal goals and aspirations. And someone who has the experience to help you get there.

This someone could be your accountant ...

What can my accountant help my business with?

Your accountant has a wealth of experience in business - they advise and support hundreds of other businesses on a day to day basis.

Your accountant has a grounding in numbers from which they can monitor the financial health or pulse of your business.
Your accountant has the acumen to advise you what you need to do accelerate the growth of your business - whether that be through organic or acquisitive growth.
Your accountant has the connections and network to ensure you get the best access to funding options, legal support or specialist advice you may need. And above all your accountant can relate because they are in business themselves.

Question is, is your accountant the go to person to help you grow your business? Perhaps you weren't aware of the extent your accountant could help you? Perhaps your accountant didn't inform you of the breadth of services and support they can offer to you?

It's not too late. Have the conversation and kick-start your relationship to supercharge your growth.

And if your accountant is not open to helping you grow and content just to do your year end accounts (and see you once a year to talk about numbers which are 9 months out of date - i.e pointless exercise), then maybe look for another one.

So contact us today by applying for a call !

Why do I have to make a tax payment in July?

Mon, 30 Jul 2018 13:21:04 GMT

There's always a confusion around the July tax 'payment on account' for income tax under the self assessment regime.

If you are business owner, chances are you're under the self assessment regime and have to submit a tax return every year.

One of the advantages of being self-employed or a company director is that you do not have to pay income tax monthly under PAYE like normal employees.

Given that you are in control of how you pay yourself - mainly via dividends - you can also control to some extent your tax payments.

How do tax payments work?

Your income is worked out for the tax year which runs from 6 April to 5 April the following year. You are then required to pay your tax liability in full by the 31 January following the end of the tax year.

This would mean that HMRC do not get your tax money until 9 months after the year in which you received the income. Clearly that would not be palatable for the Exchequer and therefore HMRC try and collect some of the tax due via estimated payments on account.

These payments on account are required to be made on 31 January within the tax year and 31 July following the tax year end.

How do I know how much tax to pay during the year when tax return hasn't been prepared yet?

Exactly. This is what makes payments on account so confusing to many! The payments on account are worked out at 50% of your previous year's liability and spread across the two payments in January and July.

If you eventually owe more than this then you make a balancing payment on 31 January following the end of the tax year to cover it. If you owe less, you get a refund.

Let's take an example :

In 2016/17 Jack's tax liability due was £20,000 - keeping it simple. Let's assume that this was his first year as self employed/Director and therefore he paid the whole amount on 31 January 2018 once his tax return was submitted .

Jack's payment on account towards the next 2017/18 tax year - also due on 31 January 2018 - would be £10,000 (50% of £20,000).

The same amount would be payable on 31 July 2018. Now, let's say Jack's actual tax liability for 2017/18 eventually turned out to be only £10,000 once his tax return was completed. He would therefore be due a refund for the overpayment of £10,000.

The next payment on account for 2018/19 would be based on 50% of the 2017/18 actual liability and therefore be £5,000 due on 31 January 2019.

Still sound complicated?

The best thing you can do is get your tax return prepared and submitted before the 31 July following the end of the tax year.

This means that your actual tax liability for the previous tax year is calculated and therefore if your income has fallen from one year to the next, you can reduce your 31 July payment on account accordingly - or even claim a refund from HMRC if the POA made in January covered your tax in full.

If you know your income may fall in the following year - for example you may have taken an exceptional dividend one year - get in touch with an accountant to make a claim to reduce the payment on account - as otherwise it will always be based on 50% of the previous year's liability.

Good planning helps you keep more of what you earn!

What's the best way to run my car through the business?

Thu, 19 Jul 2018 13:28:49 GMT

This is a question we get asked a lot here. The answer as with most things in tax is, it depends!

It depends on what kind of car you have for a start. The tax rules these days are based on the CO2 emissions of the car i.e the higher the CO2 emissions, the greater the potential tax charge .

By contrast, there are tax incentives available for cleaner electric and hybrid cars such as being able to write off 100% of the cost of the car against profits if Co2 emissions are less than 75g/km e.g Tesla etc.

Four main ways of running your car through the business

Company owns the car

This route has become less favourable in recent times due to the changes in tax rules linked to CO2 emissions. If your company owns the car, you pay a 'benefit in kind' tax based on a %age which is linked to the car's CO2 emissions.

For example, if you drive a Range Rover the CO2 emissions of the car are over 185g/km meaning that you would pay tax based on receiving a benefit equal to 37% of the car's list price every year .

By contrast, if you drive a hybrid or electric car the benefit can be reduced to 13% of the car's list price.

However, the company can potentially write off 100% of the car's value where the CO2 emissions are less than 50g/km so when looking at it on a holistic basis, it can beneficial for your company to buy the car if you're looking at an electric model.

Otherwise, more often than not, it won't make sense to pay the hefty benefit in kind tax bill every year given that it is always based on the car's list price when new and does not decrease over time even though the value of the car will.

Charge mileage

You own and pay for your own car privately (through drawings from your company) and charge the company for any business miles that you do.

HMRC allows you to charge 45p per mile up top 10,000 miles and 25p mile after that which you can take out tax free.

There are very useful apps out there which track every journey in the background and when you get a moment you just swipe one way or other to tag it as personal or business.

Lease the car

This is becoming more and more common with manufacturers offering better deals to essentially 'rent' a car for a fixed period.

It also means that you don't carry the risk of owning a car and therefore don't have to worry about depreciation, mechanical faults etc. If the company leases the car then you still suffer a benefit in kind as per route 1 above.

In addition the company can only claim 85% of the lease cost if the Co2 emissions are over 130g/km. With leases VAT is chargeable on the rental however 50% of the VAT can be claimed back if you are registered.

Run the car through a partnership / LLP

This is probably the most tax efficient to run a car as you can offset the capital or lease costs WITHOUT suffering a benefit in kind tax charge.

If you are running some of your trade or business through a partnership or LLP then you can claim a %age of all your car costs against your business profits. Typically this could be up to 80%-85% of car running costs including lease costs, fuel, insurance, servicing etc against your profits.

Clearly you need to have some business substance to operate a trading partnership and justify the proportion of car costs claimed but it does - more often than not - give the best result of the four options described.

Have you thought about whether you are running your cars most tax efficiently ?

How can I use my children's tax allowances to reduce my tax bill?

Thu, 12 Jul 2018 13:32:55 GMT

It's that time of the year when the kids are about to break up for the holidays - which means that the bank of mum and dad is set for an assault yet again!

Whether it is activities during the school holidays, childcare, tuition fees and related university living costs or private school fees needing to be paid, there is a way to make the paying of these a little less painful.

What is the child's tax allowance?

You see, the tax-free earning allowance (currently £11,500) applies to everyone from birth.

This means you if you can find a way to use your children's allowances to fund their own expenses - rather than paying out of your taxed income - you could save up to 45% of whatever amount you can get into your child's name.

This is based on the highest rate of tax you would pay on your income. If you mainly take your drawings via dividends then your saving would be 38% - being the top rate of tax on dividends.

The allowance got even better when the tax free dividend allowance was introduced - currently £2,000. So you potentially have £13,500 of tax free income you can extract PER CHILD. So how do you do this?

The answer is the discretionary trust.

Get some advice to help you route some of your company shares to a trust set up for the benefit of your children.

There is some anti-avoidance legislation which you need to watch out for but there are work-arounds if your circumstances fit.

Generally this planning applies mainly for business owners but if you are employed and have your own parents who might be looking to pass some of their surplus assets to you at some point, then you could potentially benefit too.

Once the shares are in the Trust then whenever the company votes a dividend (or rent is received if the Trust owns a property), the trust receives its proportion - which can be treated as income for the children.

And this is money you can legitimately use for tuition fees , school holiday activities, private school fees, clothing, extra-curricular activities, presents, etc etc - basically anything for the children's benefit.

Rather than you spending on the children from your post-tax drawings, you are effectively using your children’s allowances to fund their own (never-ending) expenses!

It’s not an aggressive tax scheme either.

The concept of a trust set up to hold capital is a long established and respected one. And with income tax savings of at least £4,387 per child per year (and rising), you’d be crazy not to look into it.

To find out more about this tax saving strategy feel free to get in touch to arrange a strategic consultation .

Remember – making strategic use of your family’s personal allowances helps you to keep more of what you earn. Happy tax saving!

Top 5 ways to super-charge your business

Thu, 05 Jul 2018 13:40:17 GMT

Running a business can be highly rewarding but it can also be highly stressful. Whilst most business owners enjoy the freedom and flexibility of being your own boss, it also means that that you are in charge of everything and when something goes wrong, it is ultimately your problem to fix it.

Way to super-charge your business

Below are five areas to focus on to super charge your business, make it more enjoyable and ultimately reap the rewards that you hoped for when you first started in business...

1. Systems, systems, systems

As Michael Gerber set out in his best-selling book 'The E-Myth', systems are key to getting your business to run without having your input required in each and every matter.

The key for the entrepreneur is to work ON the business rather than IN it. That means focusing on implementing systems such as written processes and checklists and then delegating and giving autonomy to team members to deliver upon agreed objectives.

Giving more responsibility and trusting your employees to deliver the required outputs actually works to incentivise your people and provide job satisfaction.

2. Understand and track your key numbers

Information is power. Without real time management information to hand you will struggle to know whether your business is giving you the return on investment you require.

One of my favourite quotes is ' Anything that is watched and measured, improves '. It is plastered across our wall in reception and also on the home page of our new website! And it is so true.

Pick 3 numbers (performance indicators) that you can track and monitor. Make a point to measure and watch these numbers strictly on a regular basis. See how they improve!

Examples of meaningful numbers for your business could be: your weekly sales revenue, your daily website traffic, the %age of your wages against sales, your conversion rates, your gross profit margin etc etc. Whatever metrics you choose, be disciplined in watching and measuring them.

If it's not going the way it should it will prompt you into taking corrective action. If it is, it will give you comfort that what you are doing is working and to perhaps do more of it !

3. Engage your accountant as your business adviser

Your accountant is not just there to do your year end accounts and tax returns. Accountants have a wealth of experience when it comes to business given their professional training and the experience of working with so many business owners.

Your accountant will be able to help you implement systems, improve your business processes and help you tackle the challenges and problems you come across in business - just ask!

Through software such as Xero and Quickbooks online, your accountant can have access to your financial results in real time thereby enabling him/her to spot any issues and advise on corrective action in good time.

4. Exceed your customers expectations

Don't just say you do, actually do so. Your customers are your best source of new business. Every experience is talked about these days.

Be it online of offline. Before coming to you your customer will have already made up 70% of their mind from what they have heard or seen about online. Review sites are a plenty. As customers, we look to 'social proof' to shortcut our decision making.

By going the extra mile for your existing customers, you will increase your potential of winning new customers.

5. Review your prices and how you present them

There are 9 drivers of profit. And out of all those drivers, price is the most misunderstood and overlooked; and yet it is the most powerful. Most business owners price their products and services based on gut feel or what the competition are doing.

Problem is, the competition are doing exactly the same! Pricing should be based upon the principles of price psychology and how customers behave when presented with buying decisions.

When you understand and master price psychology, you will make more sales and at higher prices, your profit will grow and you will have more cash in the bank.

For more information on how to transform your profits, download a free e-book .

Hope that's been helpful! Running your own business is great, let's enjoy it more!

What else can I put through the business?

Mon, 02 Jul 2018 13:47:30 GMT

If you're a business owner, no doubt you have asked yourself - and maybe your accountant - this question.

The correct answer is - anything that is 'wholly and exclusively' for the purposes of your business can be 'put through' and therefore qualify as a tax deduction.

What other business expenses can you claim?

The obvious ones you are probably already capturing, however there's a few outlined below which you may not be fully claiming.

Your home expenses

As business owners we have a hard time switching off. That means there will inevitably be time in the week when work is done at home - be it checking and responding to emails, working on the books, taking calls, storing records etc etc.

You therefore should be able to claim a proportion of your home running costs i.e utility bills, council tax, mortgage interest, broadband etc against your company's profits.

What's more this amount can be taken tax free from your company as you will already have borne the cost personally so there's a double saving.

Travel

There are so many travel expenses that go unclaimed mainly due to the effort of not being able to keep proper records. The taxman offers a very generous 45p a mile as reimbursement (tax free!) for using your own car for business purposes.

Although home to work is excluded, any other travel e.g visiting suppliers, going to the post office, visiting your accountant (!) etc would all be allowable.

Try using an app such as MileiQ which automatically tracks all your journeys in the background and you then just have to swipe whether its business or personal. That way it's easy to keep records and make sure you don't miss out on tax free cash.

Business class discount

There is nothing that says you can only claim the cost of a business trip if you fly economy!

When looking at the upgrade cost of flying business, factor in a discount of up to 40% as that is the amount of tax relief you could get which may justify the cost.

No doubt the additional work done on the journey will make it worthwhile.

Subsistence

Where you are travelling on a business trip and away for more than 15 hours from home you can claim a subsistence allowance of £25 per day based on HMRC's approved rates.

For shorter business journeys involving at least 5 hours away an amount of £5 without receipts can be claimed. These are all tax free and add up.

Payments to your own pension

If you're like most business owners and take your drawings via a small salary and the rest as dividends you will be limited as to how much you can put into your own pension. This is restricted to your salaried earnings i.e dividends are excluded.

However, your company can pay into a pension for you and so long as this is less than £40,000 per year, it is not restricted to how much salary you take.

The above are clearly not an exhaustive list but a few of the most common ones that we see business owners sometimes miss out upon.

Have you fully claimed your entitlement to reduce your tax bills as much as possible?

If nothing else, make sure you ask this question of your accountant next time you sit down to go through your accounts and tax return! Happy tax saving!

How to invest tax-efficiently in a new business

Thu, 01 Feb 2018 14:56:13 GMT

A friend has an idea for a small business startup and wants you to help fund it. You’re interested, but is it more tax efficient to do it through your company or use your own cash?

What is tax efficiency?

Putting money into a new company is nearly always risky, but doing it tax efficiently can mean that at least you’ll get something out of the deal if things go wrong.

The trouble is, you need to decide what form your investment will take from the start, but because of the way the rules work this might not turn out to be the most tax efficient.

Therefore, before you commit you should weigh up the pros and cons of each method.

Personal investment - shares

If you use your own money to buy shares in the new company, the main pros and cons are:

Pros: you might be liable to capital gains tax if you make a gain when you sell the shares. If the company fails and you lose money, you can usually claim a tax deduction for the loss against your other income or capital gains.

The company can pay you dividends, which is usually the most tax efficient type of income.

Cons: dividends can only be paid to you where the company makes profits. If the company doesn’t make money you won’t receive any income.

Even where the business can pay dividends it can’t claim a tax deduction for them.

Personal investment - loan

You could just lend the money to the company, in which case the plus and minus points are:

Pros: you can charge interest on a loan, meaning you receive income regardless of whether the company is making a profit. Interest is taxable at the highest rate you pay, up to 45%.

But if the total interest you receive from all sources is no more than £1,000 (if you’re a basic rate taxpayer) or £500 (if you pay tax at the higher rate - but not the additional rate) it’s chargeable at 0%. The new company can claim a tax deduction for the interest it pays you.

Cons: if the company fails, the loss you make can be set against your capital gains only, not your income. If you don’t have any capital gains, you’ll never get a tax deduction for the loss.

Company investment - shares

If you use your company’s cash to buy shares in the new company, the two main pros are:

if dividends are paid they are tax exempt for the receiving company
if your company owns 10% or more of the shares in the new company, any gain it makes when it sells the shares is also tax exempt.

Company investment - loan

Alternatively, where your business lends money to the new company, the main advantages are:

if the new company fails, the loss your company makes can be deducted from its trading profits chargeable to corporation tax (CT), i.e. unlike a personal loan it doesn’t have to make capital gains to get relief for the loss
it can charge interest on a loan and only pay tax at CT rates, currently just 19%.

Conclusion

Investing via your company gives more advantages than doing so personally. But you must still choose between buying shares or making a loan to the new company.

Tip: You can get the best of both worlds by initially investing in the form of a loan from your company, but with an option to convert this to shares within, say, five years. That way you’ll get tax advantages while the new company is in the risky early years and others when the company is established. Happy tax saving!

How to maximise VAT recovery on motoring costs

Fri, 05 Jan 2018 15:02:59 GMT

It’s not well known, but employers can reclaim VAT on more than just the fuel element of the mileage allowances paid to their workers. What’s involved?

What are the mileage allowance rates?

For a long time, companies have been allowed to pay employees flat rate tax-free mileage allowances for business travel: 45p for the first 10,000 miles and 25p thereafter.

Since April 2013 partnerships and self-employed individuals can claim similar flat rate tax deductions. HMRC would have you believe this simplifies your bookkeeping.

We don’t agree.

What records are records needed?

HMRC says that where you claim the mileage allowance you only need to keep a record of where you travelled on business and the distance - no more keeping petrol receipts, service bills, etc.

Three cheers for HMRC!

What it fails to mention are the consequences of this on your VAT bill. Without invoices or other evidence of VAT you’ve paid, you aren’t allowed to reclaim it.

Tip. You should ignore HMRC’s advice and continue to keep records of motoring expenses, service bills, car washes, etc. so that you can reclaim the VAT on these. Companies should also ask their directors and employees to do the same.

Can I really claim back VAT?

Reclaiming VAT on actual motor expenses while getting a deduction against your profits for the full flat rate allowance sounds like having your cake and eating it.

After all, where you claim tax deductions from your profit for actual motor expenses you reduce your claim by any VAT you reclaim.

However, the good news is that HMRC’s guidance says the simplified (flat rate) deduction “does not affect existing VAT rules and practices” . So you can eat your cake with HMRC’s blessing.

What can be claimed?

The rules are generous for partners and self-employed individuals; not only can you reclaim VAT on the cost of fuel used for business, but also 100% of the VAT on repairs, servicing, etc. No scaling down is required if you use your car for personal journeys.

What can companies claim?

The VAT position is a little trickier for companies. Motor expenses, such as fuel, repairs, etc., will usually be supplied to and paid for by the director or employee who owns the car. And, as you probably know, VAT can only be reclaimed by the person to whom the supply was made.

Tip 1. Special rules mean employers reclaim VAT on the part of a mileage allowance paid to directors or employees that relates to their fuel costs.

For example, if over the course of a year a director claims a mileage allowance for 10,000 business miles at 45p per mile, of which the company estimates 16p per mile relates to fuel, it can reclaim the VAT on that, i.e. £267.

Tip 2. While Tip 1 might not be news to you, it might surprise you to know that employers can reclaim the business proportion of VAT a director or employee incurs on other car expenses, e.g. servicing and repairs. HMRC likes to keep this tax-saving tip close to its chest. But once again its own guidance manuals give the game away.

Whilst these savings may seem small, when accumulated over a period of time they can be substantial.

Do two directorships mean double the National Insurance?

Thu, 30 Nov 2017 15:10:08 GMT

If you’re a serial entrepreneur you might have two or more directorships, each of which pay a salary. This sometimes results in excessive NI charges.

Is there a legitimate way to dodge this?

National Insurance - the hidden tax

It’s easy to think about NI contributions as a minor cost, but nothing could be further from the truth. For example, in 2017/18 someone with a salary of £25,000 will pay tax of £3,000 while the total NI bill for them and their employer will be £4,344.

In reality, NI is simply a tax on earnings, and like other taxes is easy to over or under pay.

Overpayments of National Insurance

NI overpayments occur for many reasons. Often it’s paid on income when it isn’t due, e.g. on certain employment-related perks. HMRC isn’t usually to blame in these situations, it’s more a case of employers not understanding the tricky rules.

On the other hand, HMRC could help by simplifying the way NI is calculated, particularly how the upper NI limit is applied.

Standalone calculations

NI is worked out for each employment and self-employment on a standalone basis. This means that if you have two jobs, say a directorship with two companies, you could pay the maximum NI on each.

That would be about £4,400 too much per year. The position is similar where you are both employed and have a self-employed job.

No NI return form

The trouble is that, unlike tax, there’s no annual return form to report income on which you’ve paid NI. It’s down to you or HMRC to spot an overpayment.

While HMRC has improved its procedures in recent years, we know that overpayments continue to slip through the net.

Spotting an overpayment

Where in a tax year you’ve had two or more jobs at the same time on which you’ve paid NI and your total earnings exceed the NI upper limit (which is £866 per week for 2017/18), it’s inevitable that you will have overpaid NI.

Note: In some situations, e.g. for director’s earnings and profit from self-employment, HMRC looks at the annual equivalent of the upper limit, i.e. £45,000 for 2017/18. NI upper limits for earlier years are on HMRC’s website.

How to reclaim overpaid National Insurance

If you’ve overpaid NI because you’ve had two or more jobs, there’s no time limit for claiming a refund. But for other types of overpayment, e.g. where you’ve paid NI on income for which it wasn’t due, the time limit is six years.

To receive a refund you need to send a letter to HMRC’s NI office which must include certain information.

Tip. To avoid overpaying in the first place you can use a procedure known as NI deferment. It’s simple to apply for, but must be done within strict time limits which vary depending on which type (class) of NI you want to defer.

The effect of deferment is that HMRC will suspend NI contributions on one or more of your jobs and after the end of the tax year work out anything you owe, in effect deferring when you have to pay it. Happy tax saving!

When is the right time to make a tax-efficient gift?

Thu, 23 Nov 2017 15:15:34 GMT

Most tax exemptions are capped for each tax year, but the inheritance tax gifts-out-of-income exemption is different.

How can you make the most of it?

Inheritance tax exemptions

Compared to income tax and capital gains tax, inheritance tax (IHT) has a rather meagre annual exemption of just £3,000. This is the maximum you can give away without eating into your nil rate band.

Perhaps that’s why some people turn to complex IHT saving schemes, but if you go down that path, you should consider an IHT exemption that’s often overlooked.

Income exemption

A gift out of income is completely exempt from IHT no matter how much you give away, whereas gifts of capital, to the extent they total more than £3,000 per tax year, potentially increase the IHT bill on your estate.

However, deciding whether a gift is one of income or capital isn’t straightforward.

Surplus income condition

A gift only counts as IHT exempt where it comes from income left over after you’ve paid your normal living costs, e.g. food bills, domestic costs, etc.

However, it’s no use reducing these costs so you can make IHT-exempt gifts of income, HMRC won’t accept this.

You can’t, for example, give away your entire salary to pay for university fees and then dig into your savings to provide for yourself.

A pattern of gifts

There’s also another condition to the exemption. Generally speaking, a one-off gift out of your income won’t qualify.

The exemption only applies to gifts where they are made habitually. There’s no definition of this in law, but it’s accepted that a series of gifts made over three years is enough to create an habitual pattern.

What are the time limits

The good news is that the gifts-out-of-income exemption isn’t tied to the tax year. Gifts made after the end of a tax year can still qualify.

HMRC will usually look at a rolling period of two years. However, you can’t save income indefinitely.

Trap. Unspent income that accumulates, e.g. sits idly in your bank account, becomes capital after a couple of years. If you give it away HMRC won’t accept the gifts-out-of-income exemption applies.

Tip. It’s important to keep good records of gifts you make and let the executors of your will know where these are as, in the event of your death, they might be needed to prove the exemption applies.

Getting the exemption sooner

While normally a pattern of gifts must exist before the exemption applies you can shortcut this simply by showing that it’s your intention to make regular gifts.

Tip. Send a letter to those you will make gifts to saying that you intend to give them some or all of your excess income each year. Alternatively, agree to pay a regular expense of theirs, for example their child’s school fees or take out a saving plan that requires regular investment, such as an insurance bond.

Start planning early with IHT, you will save yourself and your family thousands and a great deal of heartache by doing so! Happy tax saving!

How a change of date can reduce your company’s tax bill

Tue, 14 Nov 2017 15:22:29 GMT

Varying profits can play havoc with cash flow, especially when it’s time to pay corporation tax. Changing your company’s accounting date can help, but when are you allowed to do it?

What is the company law?

When you form a company Companies House automatically sets the date to which the first accounts must be drawn up.

Specifically, it’s one year from the end of the month in which the company was registered, e.g. if the company was formed on 12 March 2017, the first accounting period will run to 31 March 2018. However, this doesn’t always fit in with the tax rules.

Company law tax rules

Unlike an unincorporated business, the maximum period on which tax is calculated for a company is twelve months. But that doesn’t mean to say that a company’s accounting period always has to be exactly a year.

Subject to certain conditions, you can shorten it as much as you want. However, unless you can meet tougher conditions you can only extend an accounting date once every five years.

Tip: Varying the length of an accounting period can push back the corporation tax (CT) payment date. This might be particularly useful for new companies which get off to a slow start.

For example: ABC Ltd’s profits for its first year to 31 March 2017 are £100,000, but interim accounts for the first nine months show a profit of just £10,000. In the year to 31 March 2018 it’s profits are £180,000. If ABC sticks with the original accounting date it will have to pay tax on £100,000 by 1 January 2018.

However, if it shortens its first accounting period to end on 31 December 2016, its first CT bill will be based on profits of just £10,000, although it will be payable three months earlier, i.e. 1 October 2017. In effect, the CT due on the higher profit won’t be payable until 1 October 2018. That gives ABC a useful cash-flow advantage.

Tax saving

To put the position into sharper focus the tables below show ABC’s CT payments with and without a change of accounting date.

We’ve assumed that profit for the second accounting period averages £15,000 per month.

Without a change of accounting date

Year to CT: due date: CT payable

31 March 2017 due on 1 Jan 2018 £20,000

31 March 2018 due on 1 Jan 2019 £34,200

With a change of accounting date

Year to CT due date CT payable

31 December 2016 due on 1 Oct 2017 £2,000

31 December 2017 due on 1 Oct 2018 £42,750

Tip 1. Ultimately, a company will pay CT on the same amount of profits no matter how many times it shortens or lengthens its accounting periods. The advantage is improved cash flow.

Tip 2. After a company’s first trading period the rule of thumb is that where profit is falling you should extend the accounting period, and vice versa where profit is rising.

Procedure. Under company law there’s a set procedure for changing accounting dates. However, HMRC doesn’t need to be told until you submit your company’s CT return.

Cash is king. The above tip can help you hold onto and reinvest much needed cash rather than sit in HMRC coffers.

Do bear in mind that extending the year end can only be done once every 5 years so use this tip wisely. Happy tax saving!

How to keep capital and protect your estate from inheritance tax

Tue, 07 Nov 2017 15:31:00 GMT

As your estate grows so does the potential inheritance tax bill. What steps can you take to minimise tax while keeping hold of your underlying wealth?

Use Inheritance as effective gifts

The simplest way for someone to reduce their estate for IHT purposes is for them to pass their wealth to their beneficiaries by making gifts during their lifetime.

However, the maximum that an individual can give away to others entirely exempt from IHT is £3,000 per year. While there are a few other special exemptions, e.g. gifts to those getting married, you can’t be sure the opportunity to use them will arise.

Trap: Where an individual makes gifts totalling more than £3,000 in value per year, the excess will be liable to IHT if they die within seven years.

Keeping the capital

HMRC has a number of anti-avoidance rules to stop you giving away your wealth, but being able to recall it if the need arises. However, there are legitimate ways around these.

For example, the insurance industry has created several investment products to do the job. The drawback with these is that like all marketed investments there’s a middleman and a cost involved which will eat into your capital.

Insurance loan schemes

One type of IHT-efficient insurance product, so-called loan schemes, involve lending money to a trust which invests it in a bond. Beneficiaries are entitled to the income from it, but the capital is repaid over a period of 20 years.

Rather than pay the insurance company for managing this type of scheme you can create your own loan scheme. Not only does this save on insurance company charges, it’s more flexible.

Your own loan scheme

An IHT-effective loan scheme is relatively straightforward to set up. It only requires your parents to lend money, interest free and repayable on demand, to one or more of their chosen beneficiaries.

The loan by itself doesn’t reduce the value of their estate, because while their cash goes out it’s ultimately repayable to them and so has equal value. The IHT saving comes in two parts.

Part one - freezing the estate

The cash lent reduces savings and thus the income it generates. If the money hadn’t been lent, any interest etc. It produced would add to the value of the estate. In effect the value of the loan is frozen. Any growth in value goes to the beneficiaries who can invest it how they wish and take the resulting income.

Part two - writing off the loan

Over time it may be decided that not all of the loan needs to be repaid. £3,000 per year can be written off IHT free using the annual exemption. This will reduce the amount repayable and therefore the value of the estate.

Tip: It’s advisable to get a solicitor to draw up the loan agreements to ensure they achieve their purpose. If part of a loan is written off, it must be done by formal deed.

As the old adage goes; there is nothing certain in life apart from death and taxes. The first you can do nothing about, the second you can. Take time to plan your affairs to help your beneficiaries get more from your estate than the tax man. Happy tax saving!

Legitimate ways to dodge a self-assessment penalty

Fri, 27 Oct 2017 14:39:03 GMT

Submitting your self-assessment tax return late automatically triggers a penalty. But if you don’t have all the data you need to complete the return by the deadline how can you avoid being fined?

SA statistics

According to HMRC, every year around 40% of personal self-assessment returns are submitted in the last month before the deadline.

Starting to prepare your return at the eleventh hour is OK, but it does mean that if you then find you haven’t got all the data you’re in risk of missing the deadline, which will mean a fine of £100 (just for starters) unless you can convince HMRC you have a reasonable excuse.

Unfortunately, the get-out clause that allowed you to escape the penalty by paying the tax you owed by the deadline was scrapped several years ago.

Missing information

Research shows that one of the main reasons people miss the deadline is because they can’t find all the information they need to complete their self-assessment (SA) return. But actually there’s no reason for this to cause a problem.

Whether it’s a matter of not being able to lay your hands on a document containing the details of income or expenditure or not having records at all, there’s a solution.

Process now, check later

HMRC operates the SA system on a “process now, check later” basis. This means it will crunch the numbers you declare, estimated or not, and if necessary check them for correctness later.

So if you’re short of a figure or two for your form, don’t panic, there are two options: declare an estimated or provisional figure.

When to use an estimate

If you won’t ever be able to find the exact figure to report, e.g. you paid an odd job man in cash for work on your rental property but didn’t keep a record, simply use your best judgement to estimate the figure to report.

Trap: HMRC gives confusing advice on whether you should tell it that you have used an estimated figure by ticking a special box on the tax return. Our advice is only do this where you expect to amend the estimate later.

Tip: Keep a record of how you arrived at your estimate; this will help you if HMRC enquires into your tax return.

For example, say you estimate the figure for gift aid payments you made. When working out the estimate keep a list of the charities you recall donating to and the amounts. Don’t just put in a round sum and hope for the best.

When to use a provisional figure

Where you estimate a figure because you don’t have the paperwork etc. at the time you complete your return, but expect to have it later, you should tick the provisional or estimated figure box. Once again, keep a record of how you arrived at the provisional figure. This might simply be your best guess; nevertheless write your reasoning down and keep it with your tax records.

Tip: When you decide whether or not your provisional figure was correct you must notify HMRC. If you don’t it won’t know whether to accept the figure as final and this might lead to an enquiry into your tax return.

We’d obviously encourage you to get your tax return done well before the deadline (especially if we’re doing it!) but if circumstances don’t permit there is the above you can take advantage of and avoid a penalty.

Using pool cars | How to avoid basic tax errors

Fri, 20 Oct 2017 14:52:46 GMT

Pooled company cars are tax and NI free for the employees who drive them. However, HMRC closely scrutinises any claim for pool car treatment. What key conditions should you impose on the use of a car to keep on the right side of HMRC?

Is a pool car a perk?

Pooled company cars are often seen as a potential tax and NI-free benefit in kind, but with tricky qualifying conditions. We think that’s the wrong way to look at them.

The reason they aren’t taxable is because they must not provide the user with any personal benefit. The qualifying conditions are tough to ensure that a tax and NI bill occurs where a benefit arises.

The real trick is keeping in line with these so you don’t get hit for tax and NI in a situation where you actually gain very little personal benefit from using the car.

What are company pool car conditions?

Any company car used by a director or employee is potentially a taxable perk, even if it’s only used for business, and several tribunal decisions have gone HMRC’s way to prove the point. Company car drivers can rely on the pooled car get-out only where the vehicle is not available for private journeys and all the following conditions are met.

The car:

must be available and used by more than one employee
must not usually be driven by one employee to the exclusion of any other
is not used for private journeys unless they are incidental to the business use (see below)
is not normally kept overnight at or near to a director’s or employee’s home.

When is it not available?

The first step to ensuring that pooled car users aren’t clobbered with a tax charge is to set a company policy that the vehicle isn’t to be used for personal journeys. This can be set out in a separate document or as part of your company’s staff handbook.

In practice, HMRC accepts some personal benefit can be obtained from using a pooled car without triggering a tax charge in two situations.

Home start

The first situation where personal travel in a pool car is permitted without triggering a tax charge is where a director or employee takes it home overnight solely so they can get an early start for a business journey the next day.

Incidental benefit

Also, directors and employees won’t be taxed for obtaining a personal advantage from using a company pool car where the use is incidental to the business travel.

For example, a sales rep is visiting a customer and, without driving the car further, takes the opportunity to do some sightseeing or shopping in the local area.

Trap. Don’t confuse incidental with minimal personal use. Strictly, the latter results in a tax charge. For example, had the rep clocked up a few more miles to do his sightseeing that would not count as incidental and so a tax benefit could arise.

In practice, HMRC would probably overlook occasional minor breaches of this rule mainly, we suspect, because it’s almost impossible for it to prove that personal travel took place.

Tip. Don’t give HMRC a reason to suspect that a car was used for private mileage. Ensure drivers keep a log of every mile driven in the car on business and that it tallies with the odometer in the vehicle.

Having systems in place to document journeys in real time can help you to build up your defence any time HMRC may come knocking...

When does a house become a residence?

Tue, 10 Oct 2017 14:57:06 GMT

HMRC doesn’t consider all homes to qualify for capital gains tax private residence relief. If you move into in a property which you previously let, what steps can you take to increase your chances of qualifying for relief?

What is private residence relief?

A property that has, even for a short while, been your only or main private residence (home) during the time you’ve owned it, qualifies for a period of exemption from capital gains tax (CGT).

This is known as private residence relief (PRR). PRR applies to the time you lived in the property and the final 18 months (36 months for property sold by 5 April 2014) of ownership regardless of whether or not you occupied it during that time.

At Walji & Co we have accountants for property investors , who can help you maximise your gains in property.

Tribunal hearing

There are certainly past court and tribunal rulings that will back you up if HMRC challenges you. The trouble is each case has slightly different circumstances which might give HMRC sufficient wriggle room to deny your PRR claim. However, a tribunal decision in early 2014, Iles & Another v HMRC (IA v HMRC) while going against taxpayers, offers some useful pointers.

Quality not quantity

HMRC looks at the quality of occupation not the quantity - when you lived in a property was it your intention to occupy it as a permanent home? If it was then even if you occupied it for one day PRR would apply for that day and the last 18 months of ownership. On the other hand, if you moved into a property as a stop gap while looking for a new permanent home HMRC would have a good case to deny relief. In another case the tribunal ruled PRR wasn’t due despite a taxpayer living in a property for eight months. The deciding factor was that the taxpayer told HMRC that his occupation was temporary.

Tip. Never indicate to HMRC that you’re occupying a home temporarily. HMRC might get the wrong end of the stick and refuse a claim for PRR without taking account of all the facts.

Only one home

In IA’s case they owned a house which they lived in as the family home as well as a property they had always let out. For financial reasons they wanted to sell both properties. Their main home sold quickly, but they had no buyers for the other property and so they moved into it for 25 days while looking at properties to replace their main home. When they sold the let property IA claimed PRR for the final 36 months of ownership.

Temporary home is not a residence

The tribunal decided that even though the rental property was the only home available to IA it wasn’t truly their residence. It was in effect no more than equivalent to a hotel room because IA had no intention to set up home there.

A real home

The ruling in IA v HMRC doesn’t mean that temporary occupation of a property can’t qualify for PRR. But to qualify you must move into your short-term home lock, stock and barrel.

Tip. Notifying all the relevant authorities (including HMRC) of your move, even if occupation is for a short time, and doing everything you would normally do when you move home will make it difficult for HMRC to argue that a short-term residency doesn’t qualify for PRR.

Remember a little bit of advanced planning can save you thousands in tax so well worth doing!

Do you still need a bookkeeper?

Thu, 05 Oct 2017 15:08:55 GMT

Recent studies by Oxford University and Deloitte (2015) suggest that about 96% of what bookkeepers currently do will, in the not-too-distant future, become automated.

It's been suggested by some that bookkeepers will soon become redundant.

Actually, we don't think that's true, but let's look at what is happening...

The death of the bookkeeper

Technology is moving at a rapid rate and this is impacting on the financial professions in a big way. Data processing, the process of entering your sales invoices, your purchases and posting your bank transactions, is becoming automated.

Did you know you can now photograph your cash receipts with your smart phone, have the details automatically posted to the correct place in your financial accounting system and then throw away (responsibly I hope) the useless bit of paper.

This saves a ton of time. It also improves the accuracy of your financial records because the technology learns over time where to post your transactions. This means your reports are more meaningful and you make better business decisions. And it means you can access your critical business information at any time from any device.

Every quarter you can file your sales tax returns at the touch of a button.

So do you really need a bookkeeper anymore?

What does this really mean for you?

The technology is called cloud accounting. It is a much better way to control your business finances. It gives you 24/7 access to up-to-date financial information and reports and it saves you a very significant amount of time.

Research shows a full-time employed bookkeeper for a business costs £22,000. Plus, of course, there are all the other employment costs and hassles.

And even if you don't employ a full-time bookkeeper, you either have the cost of someone doing your books for you, or the value of your time doing it.

The bottom line in this

A cloud accounting system will save you serious amounts of time (many people estimate it more than halves the amount of time spent keeping the business financial transactions correctly documented). And does it mean the death of the bookkeeper? Perhaps.

For those bookkeepers who don't want to change. For those bookkeepers who only want to record the transactions, technology will soon replace them.

But some bookkeepers and accountants see this as a big opportunity. The opportunity to use their skills with numbers and help business owners at a deeper level. Helping improve their profits and cash flow.

Home-to-work travel | When is the cost deductible?

Thu, 31 Aug 2017 15:16:38 GMT

As a rule, the cost of travelling to and from your home to a place of work isn’t tax deductible. But where do you stand if your home is also your workplace?

The benchmark

The Upper Tribunal decision in Samadian vs HMRC (on appeal from the First-tier Tribunal) is an important benchmark in respect of travel expenses between home and a place of work.

Case recap

Samadian (S) is an employed NHS doctor who also does private (self-employed) work. He has a home office, which both tribunals accepted was a base of operations for his self-employed business. He has two other bases located in private hospitals. The disputed tax deductions related to the cost of travel to and from three bases of operation.

The ruling

Ordinarily, the cost of travel between various workplaces, in the course of employed or self-employed work, is tax deductible. Indeed, the tribunal allowed S’s claim for travel between his bases located in the private hospitals. However, it refused a deduction where the travel started and ended at S’s home. It considered that those journeys fell foul of a fundamental tax rule.

Wholly and exclusively

The Upper Tribunal’s reasoning for refusing a deduction was that while S’s house was a base of operations for his business, it was also his family home and so any journey between the other bases and it had two purposes: personal and business. The rules say that an expense that isn’t “wholly and exclusively” for business isn’t a tax deductible.

Note. The tribunal allowed deductions for travel between S’s and a patient’s home, because unlike trips between his bases of operation, there was no frequent or regular pattern to these. The tribunal thought this important, and it’s this part of the judgment that might cause trouble.

Trap. While the judgment relates to expenses for a self-employed business, the wholly and exclusively rule also applies to an employed worker’s travel. HMRC might eventually cotton on to this and start to challenge claims for travel by employees to customers they visit frequently or regularly. For now we think you’re safe, but it’s a different story for anyone self-employed who has a base of operation at home.

HMRC Challenge

HMRC attacks claims for expenses by those with regular patterns of travel.

For example, a freelance bookkeeper whose office is at home, but who travels to the same clients frequently to carry out work might now be refused a tax deduction.

Tip: If you’re self-employed and make regular trips to the same places to carry out your work, try to combine those journeys with an irregular business element.

For example, make a diversion to pick up office supplies or deliver a business letter. This would make the whole journey tax deductible.

Take care to review your travel expense arrangements to ensure you are protected in case HMRC question the expenses you have put through.

The BIG problems with most small business financial accounting systems

Mon, 26 Jun 2017 15:24:16 GMT

Old-fashioned accounting systems are seriously flawed. And that can have dire consequences for small businesses.

Until recently there were essentially 3 common types of accounting system :

A manual system of books and records, like those big cash books.
An Excel or other spreadsheet-based system
Desktop accounting systems such as Sage Line 50

And they're all flawed.

For example, with a manual system it simply takes too long to write up the transactions. And your time is too valuable for that. So whilst cheap, it's a false economy.

And spreadsheets aren't much better. Yes, they automatically add up columns of numbers, but it still takes way too long to enter the information

And did you know...

Accountants hate manual and spreadsheet books and records. It takes them more time too and you end up with bigger accountancy fees.

More sophisticated business owners do things better...

Basically, manual and spreadsheet systems don't cut it. And for that reason, most proper businesses use a desktop accounting system to record their financial transactions. And whilst that is a much better way of doing things, they are still flawed.

But they're all flawed.

4 big problems with manual, spreadsheet and desktop systems

Staying legal - Your financial data is critical. If you lose it you risk fines and penalties from the tax authorities for not keeping proper accounting records. So what happens if you lose that information? Whilst theft and fire might seem remote, they are possible. Perhaps more likely, if you have a desktop based system, is hard drive failure.
Wasted time - Data processing, i.e. entering your invoices, purchases, bank transactions and so on, is time consuming. It's the reason why there is a bookkeeping industry. What if you could save hours of time every single week?
Hidden costs - With all 3 of those common accounting systems there are hidden costs from the value of your time, maintaining back-up routines, software upgrades, additional accountancy fees to solve problems and much more.
Staying in business - Running out of cash is the number 1 cause of business failure. The solution is to have access to all your important numbers 24/7. With old-fashioned accounting systems you have to wait until everything is up to date and for the time taken to create useful management reports. That takes time.

So what is the solution?

The world is moving to the cloud. You saw that with banking (now everyone uses online banking). It's now happening with accounting systems. Over the last 12 months we have seen a big shift to cloud accounting systems.

Businesses are making this shift because there are so many advantages of a cloud accounting system. So don't wait until you are forced to do it, get ahead by getting in touch , and start to benefit ASAP.

Do you still need an accountant?

Tue, 06 Jun 2017 15:32:41 GMT

Recent studies by Oxford University and Deloitte (2015) suggest that about 96% of what accounting firms do will, in the not-too-distant future, become automated.

96%!

Surely that means the accountant is soon to be redundant.

Cloud accounting software

In recent years advances in technology are automating much of the data processing. Your bank transactions (income and expenses) can now be automatically entered into your financial records with greater accuracy. Invoices can now be scanned (or photographed with your smartphone) and put in the right place.

Not only does this save you a significant amount of time, it's accurate.

Every quarter you can file your sales tax returns at the touch of a button.

So do you really need an accountant any more?

What does this really mean for you?

The technology is called cloud accounting. It is a much better way to control your business finances. It gives you 24/7 access to up-to-date financial information and reports and it saves you a very significant amount of time.

But will it really make the accountant redundant?

Probably not.

Certainly a cloud accounting system will make your life much easier. it also makes the accountants life much easier too. And that means you can expect slightly reduced accountancy fees when you operate your business on a cloud accounting system.

What it really means is accountants need to change. They will no longer be paid for just adding up the numbers. Technology will do that.

Instead they need to spend more time, using their skills with numbers, working closer with business and helping them to interpret and improve their numbers.

Some accountants will make that change. Some won't. Either way, it's a good thing for business owners.

To see how you can bring about efficiencies in your accounting and obtain value added advice to grow your business, feel free to get in touch .

The #1 reason businesses fail | How you can avoid it

Mon, 05 Jun 2017 15:42:53 GMT

Don't you just hate the old cliché, cash is king. I do.

But the fact is, running out of cash is the number one reason businesses fail. Despite the fact that very often they are profitable. But profit and cash are not the same thing.

So how do you protect yourself?

There are really two critical things you need to get right:

Keeping your finger on the pulse of your business ,
Collecting money fast.

So let's look at each of those and how we can use modern technology to our advantage.

Be prepared with forecasts

Better financial information helps you to make better business decisions. But it's more important than that. We've seen many businesses fail through lack of financial information. Very often businesses run out of cash. They thought they had a profitable business, but suddenly they can't meet the payroll at the end of the month.

Having the right numbers at your fingertips will give you an early warning system if things are not going so well.

What you need is an accounting system that gives you 24/7 access to up-to-date financial information and reports. And that's where cloud-based software comes in. With a modern cloud accounting system you can access your financial data in real time from any device with an internet connection.

Quicker cash collection

A modern cloud accounting system gives you fast, simple, customised sales invoicing that will make your life simpler. And the facility for emailing of invoices, with the option to attach a statement at the same time makes it easy to manage your sales and get paid quicker.

Even better, it allows you to embody payment methods into your invoicing. For example, click and pay to drive quick collection of your debts. It makes it so much easier for you to get paid, reducing bad debts and slow payers and putting more cash in your bank account.

You can also chase debtors whilst you're on the go.

If you want to minimise the risk of running out of cash, moving to a cloud accounting system is an important step to take.

Take action to improve your cash flow monitoring and get in touch today .

Don't you just hate “doing the books”?

Thu, 01 Jun 2017 15:56:18 GMT

Every business owner hates bookkeeping and paperwork.

Unfortunately it has to be done. And it has to be done in a prescribed format... otherwise the Tax Man will be on your back.

It's also difficult. That's why there are bookkeeping exams. That's why there are professional institutes like the Institute of Certified Bookkeepers.

I guess you'd much rather be out there making money from your business than doing the books. And because everyone hates bookkeeping, most people end up doing it in the evenings or weekends. Yet, shouldn't evenings and weekends be spent playing with the kids, spending time with your friends and loved ones, or out on the golf course?

Outsourcing bookeeping

A far better option is to employ a bookkeeper to get the job done properly. Unfortunately full time qualified bookkeepers typically cost £22,000, together with all the other associated costs and hassles of employing someone.

But that option is too expensive for most small businesses.

The solution is here

Technology has come to our rescue. It's called cloud accounting .

Just like banking has changed forever (it's easier to transfer money in minutes, check your bank balance at any time rather than waiting for that monthly statement to arrive in the post and generally keep on top of your finances), cloud accounting has changed accounting systems.

The old-fashioned way of bookkeeping using manual ledgers, spreadsheets and desktop accounting systems will soon be a thing of the past.

Just like online banking, a modern cloud accounting system will save you a significant amount of time by automating many of the data entry processes that used to take up so much of your precious time and giving you instant access to your numbers. And that's just two of the many benefits.

To find out how cloud accounting can benefit you and your business get in touch .

Do you have a pulse on your business in real time?

Tue, 30 May 2017 16:04:06 GMT

Every successful business has its finger on the pulse.

You need to know the key numbers. Not the numbers in last year’s accounts; they’re out of date. Redundant.

You need today’s numbers.

And that’s where your cloud accounting system comes in. If you don’t have a cloud accounting system this blog will explain the benefits and how to get started.

The 4 types of accounting system

The Manual System

A manual system is cheap; you only have to buy a book. But that’s a false economy. Manual systems simply take too long. And your time is too valuable. It also takes the accountant more time to produce accounts so you end up with bigger accountancy fees. Manual systems also do not provide that all-important management information for making great business decisions.

The Spreadsheet

Excel and other spreadsheet-based systems are also cheap. And whilst you can automate some processes (e.g. adding up columns), they take time to set up, you need advanced Excel skills to produce management reports and you can waste hours changing the spreadsheet as your business grows and evolves.

The Desktop system

Then there is the old-fashioned desktop system. Whilst these are far better than manual and spreadsheet-based accounting systems they come with a host of hidden costs. Yes, the software can be relatively cheap. But there is a huge hidden cost of customisation, implementation, maintaining your hardware to meet the demands of changing software, dealing with (often costly and compulsory) software upgrades, security, scheduling back up routines and restoring data when things go wrong.

The Cloud Accounting System

In contrast a modern cloud accounting system gives you the following benefits:

It saves you a very significant amount of time
Gives you 24/7 access to up-to-date financial information and reports (you can use cloud-based software from any device with an internet connection)
You can sleep at night knowing your sensitive financial data is always secure and backed-up automatically
No system downtime because all software upgrades are automatically installed. This worry-free maintenance saves you time and hassle
It reduces your accountancy fees because it makes it easier for your accountant to produce end of year accounts, and
Since your accountant can access your data 24/7 you get more value from an accountant – they will help you run and grow your business rather than just adding up the numbers.

In short, a cloud accounting system will make your life so much easier and give you the critical numbers for your business in real time.

Setting up accounting systems

Your first problem is deciding which cloud accounting system to adopt for your business. There are a myriad of different systems. They are all different. Some are better than others. Some suit different types of business. And getting the wrong solutions will cause you a big headache. Assessing all of the options is time-consuming.

Then, once you’ve settled on the best system for you and your business you have to set it up.

Unless you’re familiar with setting up accounting systems this typically takes a full day or more. Not only do you have to enter all the key details of your business (accounting year end date, VAT registration number and so on) you also need to set up you chart of accounts (that’s the specific types of sales, income, expenses, assets and liabilities unique to your business). And once that’s done you need to transfer any opening balances.

Whilst you can do that yourself, your time is precious and valuable. So we recommend you talk to your accountant. Every good accountant will be able to set up your cloud accounting software.

We specialise in cloud accounting, so if your accountant doesn’t offer this service we can help. And you don’t even need to be in the same part of the UK… we can set it up online for you. Get in touch to see how we can help you monitor how your business is performing in real time.

Time is fast running out for UK businesses...

Tue, 11 Apr 2017 18:09:08 GMT

Don’t you just love the UK Government? UK businesses are just getting over the huge cost and upheaval from the Automatic Enrolment regime and now we have another one to deal with. You’ll love this.

They call it ‘Making Tax Digital’.

What is Making Tax Digital?

Of course we don’t yet know exactly how it works, because as you know, the Government does have a habit of changing its mind (just look at the introduction of Automatic Enrolment).

Anyway, here is the essence of what they are saying:

It is likely to apply to businesses with annual turnover above £10,000 (which is most businesses in the UK),
Although there may be a few limited exemptions, businesses will have to use digital tools (such as QuickBooks Online or Xero for their accounting system),
Businesses will send summary data to HM Revenue & Customs about their business each quarter (and this is why they will need to go digital),
HM Revenue & Customs has confirmed they will not be providing their own bookkeeping/accounting software. This means you will have to sort out your own cloud accounting solution,
It is planned to start in April 2018, which isn’t far away!

That’s a very quick overview. If you want more detail HM Revenue & Customs has published its consultation document. You can read about it here on the Governments website (although it doesn’t make very exciting reading!).

So what does this mean for you?

Very simply it means you will probably need to move your financial accounting system onto a cloud accounting system, such as QuickBooks Online or Xero .

If you’re not sure what a cloud accounting system is think of it as the difference between traditional banking and online banking.

When online banking first came in there was resistance and worry over security. Now most people use online banking. It makes our lives easier. We can transfer money far quicker than writing out cheques and posting them. We can check our bank balance whenever we need to. We can move money between accounts instantly.

A cloud accounting system has many advantages over more traditional accounting systems (manual books and records, spreadsheets and desktop systems such as Sage Line 50).

Find out about the benefits of cloud accounting

Our firm specialises in cloud accounting systems. If you would like assistance in setting up or maintaining your cloud accounting system feel free to get in touch .

Have you just paid too much tax?

Wed, 25 Jan 2017 19:17:18 GMT

Of course you have ! It's that time of the year again when income tax is due for business owners after the tax returns have gone in.

Despite the amount of income drawn, it always feels like too much has gone to the taxman. You are probably left thinking if there was something else that could have been done to reduce the monstrous tax bill. Chances are there were...

What can you do over paying taxes?

For the last tax year not much. However, you have a small window of opportunity over the next 3 months before 5 April to undertake some tax planning so that this time next year you don't end up paying so much it hurts!

How to reduce tax liability?

There are a number of ways you can reduce your tax liability some of which you are probably aware of and some not. It is always worth seeking the advice of a good tax advisor as no doubt the savings they can obtain for you should exceed the cost of his/her services.

Any tips on reducing tax?

There are some easy ones that you can do right away without much advice but timing is critical. I have outlined these below:

Gift Aid contributions - any donations to charity / just giving pages etc can reduce your tax by 45% - make a note of these or pass them to your accountant as you make the donation so its not forgotten when your tax return is prepared.

Pension contributions - you can contribute up to £40,000 per annum to a pension scheme from your company and generate huge corporation tax savings. Any personal contributions can help to reduce your tax by 45% on the gross amount. Consider using a SSAS pension where you are in complete control of the pension's investments.

EIS / VCT schemes - these are a bit higher risk but essentially are tax favourable investments. By investing in an EIS or VCT investment you can claim income tax relief of up to 50% of your investment. Obviously care should be taken on which investment you choose.

Anything more exciting?

One of my favourite tax planning tips is using all the family's tax allowances - including the children's. Every individual has an allowance of £11,000 to use in addition to a £5,000 dividend allowance. I've written in a previous blog as to how this works and can generate tax savings of up to £7,200 PER CHILD PER ANNUM!

If you would like to set up a strategic consultation to see how I could help you reduce your tax bill, feel free to get in touch .

Don't miss out on claiming your tax-free allowances to fund your children's education

Wed, 26 Oct 2016 18:25:31 GMT

It's that time of the year when the kids are back to school or about to start their adventures at university. It also means that it's action time for those cheque books again!

Whether it is tuition fees and related university living costs or private school fees needing to be paid, there is a way to make the paying of these a little less painful.

You see, the tax-free earning allowance (currently £11,000) applies to everyone from birth. This means you can use their allowances to fund your children's own expenses rather than paying out of your taxed income at higher rates of up to 45%.

The allowance got even better from April of this year when the dividend allowance of £5,000 was introduced. So you potentially have £16,000 of tax free income you can extract PER CHILD. So how do you do this?

The answer is the discretionary trust

Get some advice to help you route some of your company shares to a trust set up for the benefit of your children. Then whenever the company votes a dividend, the trust receives its proportion. And this is money you can legitimately use for tuition fees, living costs, school fees, clothing, extra-curricular activities, presents, etc etc - basically anything for their benefit. Rather than you spending on the children from your post-tax drawings, you are effectively using your children’s allowances to fund their own (never-ending) expenses!

It’s not an aggressive tax scheme either

The concept of a trust set up to hold capital is a long established and respected one. And with income tax savings of at least £5,200 per child per year (and rising), you’d be crazy not to look into it.

To find out more about this tax saving strategy feel free to drop me a line to arrange a strategic consultation. Apply for a call today!

Remember – making strategic use of your family’s personal allowances helps you to keep more of what you earn.