Author Archives: Mark Cupitt

3 Top tips for tax saving for the family

Each spouse is taxed separately, and so it is an important element of basic income tax planning that maximum use is made of personal reliefs and the starting and basic rate tax bands. It may be necessary to consider gifts of assets (which must be outright and unconditional) to distribute income more evenly.

Currently, a transfer of just £1,000 of savings income from a higher rate (40%) taxpaying spouse to one with income below the personal allowance of £10,600 (£11,000) may save up to £400 a year. For those paying the additional rate of tax of 45%, which applies to those with taxable income above £150,000, the saving may be £450 a year.

Tip 1

It is also possible to transfer part of the personal allowance between spouses. A marriage allowance of £1,060 (£1,100) can be transferred between spouses for 2015/16 onwards where neither spouse pays tax at above the basic rate.

Income from assets jointly owned by spouses is generally shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset. The exception is dividend income from jointly owned shares in ‘close’ companies which is split according to the actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people.

Tip 2

If you are self-employed or run a family company, consider employing your spouse or taking them into partnership as a way of redistributing income. This could be just as relevant for a property investment business producing rental income as for a trade or profession.

Comment

Care must be taken because HMRC may look at such situations to ensure that they are commercially justified. If a spouse is employed by the family business, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum and Living Wage rules may also impact.

Child Benefit

If you are in receipt of Child Benefit and either you or your live-in partner (widely defined) have income above £50,000, then it is possible that you may have to pay back some or all of the benefit through the High Income Child Benefit Charge. If you think this may affect you please contact us as it might be possible to reduce the impact of this charge. This could be achieved by reducing your income for this purpose. Methods include making additional pension contributions or charitable donations or reviewing how profits are shared and extracted from the family business.

Children

Children have their own allowances and tax bands. Therefore it may be possible for tax savings to be achieved by the transfer of income producing assets to a child. Generally, this is ineffective if the source of the asset is a parent and the child is under 18. In this case the income remains taxable on the parent unless the income arising amounts to no more than £100 gross per annum.

Tip 3

Consider transfers of assets from other relatives (eg grandparents) and/or employing teenage children in the family business to use personal allowances and the basic rate tax band.

Remember that children also have their own capital gains tax (CGT) annual exemption (see Capital gains section).

Tax free savings

A Junior ISA (for children born from 3 January 2011) or Child Trust Fund (CTF) accounts offer tax free savings opportunities for children. Existing CTF accounts continue alongside the Junior ISA (a child can only have one type) but can be transferred to a Junior ISA at the request of the registered contact for the CTF.

Both CTF and Junior ISA accounts allow parents, other family members and friends to invest up to £4,080 annually in a tax free fund for a child. There are no government contributions and no access to the funds until the child reaches 18.

Throughout this publication the term spouse includes a registered civil partner. We have included the relevant amounts for 2015/16. The 2016/17 figures are shown in brackets where these are known and different.

If you require any assistance or further information about the above please do not hesitate to contact us on our contact page. To find out more about the services that we offer, visit our Services page.

Are you aware of the new tax dangers when buying residential property?

Are you aware of the new tax dangers when buying residential property? Many are not.

The Chancellor announced in his Autumn Statement in November 2015 that he would be introducing new rates of Stamp Duty Land Tax (SDLT) on purchases of buy to let properties or second homes. Few perhaps realised how much more complicated property transactions may well be as a result.

At the end of December the government launched a consultation paper which revealed the proposed details of the regime. SDLT does not cover property transactions in Scotland. However, the Scottish government has introduced a bill in the Scottish Parliament at the end of January 2016 which proposes similar changes to the Land and Buildings Transaction Tax (LBTT).

The impact of the additional taxes is potentially wide ranging. If a purchaser falls within the regimes, the SDLT and LBTT additional charges are 3% on the full price and so the charge on a property costing £200,000 increases by £6,000.

It is proposed that the additional charges will potentially apply if, at the end of the day of the purchase transaction, the individual owns two or more residential properties. Married couples are to be treated as one unit. There will be an exemption if the purchaser has sold their main residence and purchased a property which is to be their new main residence. But there will be some purchasers who will have to pay the additional charge even though the property purchased will not be a buy to let or a second home.

Examples include:

Mr A has bought a property which will be his new main residence but he has been unable to sell his previous main He will be subject to the additional charge!

It is proposed that a refund will be available but only if the previous main residence is sold within 18 months.

Mr and Mrs B own one main Mrs B decides to help her daughter buy her first house and makes a joint purchase of the property with her daughter. The higher rates will apply to the total price paid.

The measures are expected to come into effect for completions on or after 1 April 2016 so make sure you consider the proposals before entering into purchase contracts.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

New regime on property income and interest relief

The new regime on property income and interest relief is now in force.

This was the surprise announcement in the Summer Budget 2015 restricting income tax relief for interest costs incurred by landlords of residential properties became law in November 2015. Any hopes that the Chancellor would change his mind were dashed in the Autumn Statement in December when additional charges to Stamp Duty Land Tax on purchases and acceleration of capital gains tax on sale were announced.

From April 2017, income tax relief will start to be restricted to the basic rate of tax. The restriction will be phased in over four years and therefore be fully in place by 2020/21. In the first year the restriction will apply to 25% of the interest, then 50% the year after and 75% in the third.

The new rules only apply to residential properties and do not apply to companies or furnished holiday lettings. The restrictions apply to any interest and finance costs and so would also limit mortgage application fees and interest costs on loans to buy fixtures or furniture.

When thinking of investing in a new residential property, careful consideration should be given to the amount of tax relief to decide on the viability of taking on a new loan.

How much extra tax will this mean?

The additional amounts of tax arising will depend on the marginal rate of tax for the taxpayer. Basic rate taxpayers should not be substantively affected by the proposals. A higher rate taxpayer will, in principle, get 20% less relief for finance costs.

However the calculation method may mean that some taxpayers move into higher rate tax brackets. The following example illustrates this situation.

Example

Consider the 2020/21 tax year when the transitional period is over. Let’s assume that the personal allowance is £12,000 and the basic rate band is £38,000 meaning that the higher rate band starts at £50,000. Toni has a salary of £35,000, rental income before interest of £23,000 and interest on the property mortgage of £8,000.

Under the current tax rules, taxable rental income is £15,000. He will not pay higher rate tax as his total income is £50,000 – the point from which higher rate tax is payable.

With the new rules, taxable rental income is £23,000. So £8,000 is taxable at 40% – £3,200. Interest relief is given after having computed the tax liability on his income. The relief is £8,000 at 20% – £1,600. So an extra £1,600 tax is payable.

Can it get worse than this?

Yes it can. Other things to watch for include:

The amount of the interest relief is restricted where either total property income or total taxable income (excluding savings and dividend income) of the landlord is lower than the finance costs For example, if net property income is £4,500 before interest of £6,000, the landlord is making a £1,500 loss. Despite this £4,500 is taxable. Also the interest relief is restricted to £4,500 at 20% rather than £6,000 at 20%. The unrelieved interest (£1,500 at 20%) is carried forward and may get tax relief in a later year.

Child benefit is clawed back if ‘adjusted net income’ of a couple with children is above £50,000. Interest will not be deductible in the calculation of ‘adjusted net income’.

The personal allowance is reduced if ‘adjusted net income’ is above £100,000.

If you require any assistance or further information about the deduction of interest by residential landlords please do not hesitate to contact us on our contact page. To find out more about the services that we offer, visit our Services page.

Key aspects of valuing a business for sale

A valuation ahead of a sale will always be a theoretical exercise and the final valuation of the business is that which a willing purchaser is prepared to pay the vendor.

A vendor will only really get a feel for what the valuation is likely to achieve when conversations are initiated with purchasers and the level of interest in the business determined. Prices of companies in common with other prices are largely determined by the laws of supply and demand.

Nonetheless, a pre-sale valuation of a business can be an advisable component of the sales process.

There are several factors which will affect the value of a business, including:

the company’s historic and projected financial performance;
the attractiveness of the sector in which the company operates and the strength of its market position;
the size of the company;
the strength of its management team; and
the company’s asset base.

During the course of negotiations with potential acquirers, a number of different valuation methodologies will be used to establish the range of prices within which to negotiate the sale. it is important for the adviser and the vendor to understand these methodologies and the issues that may arise.

Common valuation methodologies are outlined below.

Methods of valuation

Although there are a number of methods for valuing a company, the following two are the most utilised by acquirers:

multiple of the normalised earnings and turnover using multiples from comparable quoted companies and transactions (typically favoured by trade buyers); and
discounted cash flows (used by private equity houses).

Multiple of normalised earnings

This valuation methodology applies an appropriate multiple to the normalised earnings to capitalise those earnings into a value for the business. normalised earnings are a company’s reported pro ts adjusted for abnormal or non-recurring items.

Having established normalised earnings, the appropriate variant of earnings to multiples must be applied. The multiples normally applied are:

Earnings Before interest and Tax (EBIT)
Earnings Before interest, Tax, depreciation, Amortisation (EBITDA)

Care should be taken in selecting the appropriate earnings multiples to be applied, taking the following into consideration:

EBIT

Companies have different financial structures and, therefore, different interest costs and rates of taxation. The EBIT multiple is a pre-tax multiple and is considered by many to be a more appropriate multiple where a company has significant levels of debt.

EBITDA

In using an EBIT multiple, an assumption is being made that the depreciation charge for the year broadly equates to the company’s capital expenditure for that year. This could clearly not be the case, thus, the EBITDA multiple extends the EBIT assumptions to include differences due to financing arrangements for fixed assets and growth through acquisitions or organic growth by stripping out the effects of depreciation and amortisation.

PE ratio

The Pe ratio is the ratio of the market value of the equity of the company to its after-tax earnings. The Pe ratio focuses directly on profits available to equity holders, but its drawback is that it does not reflect differences in gearing, depreciation and amortisation.

It some cases, it is advisable to use the different types of earnings multiples to act as a counter check to each other.

Turnover, gross profit and contribution

In addition to the above more commonly applied earnings multiples, where profits are very low or non-existent, it may be appropriate to use multiples of gross profit, contribution or turnover.

Turnover multiples may also be used preferentially in certain sectors, such as technology and consumer brands, usually, where there is huge growth potential relative to the size and profitability of the business for sale.

Comparable companies

The earnings multiples applied are typically based on multiples of quoted companies that, ideally, are comparable in terms of activities, size, geographical location and financial performance. The multiples of the comparator companies are derived from quoted public companies, since only quoted companies have valuations which are readily accessible and which have been established by the market.

Once the comparable quoted public company multiples are identified, an appropriate discount should be applied if valuing a private company. On the average UK private companies are sold at a discount to quoted public companies though the level of this discount has reduced in recent years. it may be appropriate to reduce the discount applied due to particular strengths of the business such as growth, profile, market share and size.

Comparable transactions

in conjunction with multiples of quoted public companies, it is also useful to utilise the exit multiples of recently completed transactions in the same sector as the company to give an indication of pricing and trends in its market.

Discounted cash ow (dCF) valuations

The discounted cashflow methodology values a business by discounting the projected future free cash flows to the company, in order to arrive at a net present value (nPV) of those cash flows. The free cash flows are the residual cash amount after deducting all operating expenses, taxes and expenditures for maintenance of the business, but prior to deducting debt and equity financing payments.

The appropriate discount rate (or cost of capital) used to calculate the nPV will reflect the risks associated with the future cash flows. The discount rate is calculated by taking a weighted average cost of capital (WACC). The rationale for using a weighted average is that the assets of a business are financed through a combination of both debt and equity.

Estimating the costs of equity and debt are determined by reference to debt instruments and comparable quoted companies for which data is available. The higher the inherent risk of investment, the higher the required rate of return, and hence the discount rate, that will be applied.

Care should be taken in drawing conclusions from this methodology, as this valuation is heavily reliant on the company’s financial projections and even small changes in the discount rate and other assumptions could have a material effect on the valuation. As with all valuations reliant on projections, the result is only as good as the assumptions made.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

Points to consider when buying a business

The process of buying a business is often long and complex, but it can be straightforward if you cover all of your bases.19

Type of purchase, assets or shares

If the business is run by a sole trader or a partnership then there will be no shares to buy. The assets including contracts and goodwill of the business will be sold by the seller – an “asset sale”.

If the business is owned by a company there is a choice of buying the assets from the company or buying the whole company itself by acquiring its shares from its shareholders.

Much of what follows concentrates on share sales and purchases, but most of the principles are very similar in an asset sale. We have highlighted the main differences where appropriate.

The general rule of thumb for a company sale is that a buyer will normally prefer to buy the assets of a business and the seller will prefer to sell the shares; the next section explains why.

The important point to remember is that in an asset sale, the company itself will be selling the assets, whereas, in a share sale, the individual shareholders of the company will be the sellers.

From the Seller’s Perspective

Share Sale

If a shareholder sells his shares in a company then he achieves a complete break in the relationship between him and the company. However, the buyer will probably insist on some contractual promises (warranties) and indemnities about the company, which will continue to bind the shareholder after the sale.

No Liability for Debts

Assuming that the seller of shares is released from all third party guarantees (eg: as a director, any personal guarantees given to the bank) at completion, he will have no liability for the debts of the business which remain the responsibility of the company in the hands of the new owners, because in law a company has a separate legal personality from its directors and shareholders.

Asset Sale

If there is an asset sale, then, with a few exceptions (eg: employees), the seller will keep all the current liabilities of the business – unless he can negotiate with the buyer to take them over with the business.

Purchase Price

By selling his shares, the selling shareholder will usually receive the purchase price directly himself. If there is an asset sale then the money is received by the selling company. The owners (shareholders) of the company have the problem of extracting that money either by dividends (often tax inefficient) or liquidation (expensive).

Tax Clearance

In some circumstances the seller’s accountant will need to apply to HMRC to obtain “clearance” for the structure of the deal to avoid unexpected tax liabilities after completion.

From the Buyer’s Perspective

The buyer will generally prefer to buy the assets and goodwill of a company, as this will enable him to pick exactly which assets he is buying and identify precisely those liabilities he wishes to take over. All other liabilities will be left with the seller.

“Warts and All”

As mentioned above, when buying shares, a buyer takes the company “warts and all” – which is why thorough due diligence is so important. Although the buyer can take warranties from the seller and receive indemnities, they are generally only as good as the wealth of the person giving them. Also, the buyer may be forced into expensive litigation to recover monies under the warranties/indemnities.

Retention

Sometimes the buyer may be advised to keep back part of the purchase price (“a retention”) as security against unwelcome undisclosed liabilities after completion.

Due Diligence

In-depth business, legal and accounting investigations into the target company (called “due diligence”) will inevitably be more extensive in a share sale than would be the case in an asset purchase. This does cost time and money but we strongly recommend that you take the opportunity to make these enquiries to assess the true position of the business before you are committed to the deal. For more detailed discussion on due diligence please see section 10.

When would a buyer choose to buy shares rather than assets?

There are several instances where this might be the case:

There may be important contracts that are non-transferable, or certain licences and consents might be unique to the seller. Sometimes a buyer will want simply to preserve as many of the customer relations as possible.
There may be tax losses that can be set against future profits to minimise tax liabilities.
The company may occupy leasehold premises and there may be a problem or significant delay in obtaining the landlord’s consent to an assignment (i.e. a transfer) of the lease. Alternatively, the buyer may not be in a position to take an assignment without personal guarantees being given in support of the buying company by its directors, which may not be acceptable.
The buyer may not want to alert the company’s customers to a change of ownership.

Stamp Duty

If shares are purchased, the duty will be payable at the rate of 1⁄2% of the total consideration paid for the shares. Only once the duty has been paid, and the stock transfer forms have been received back from the Stamp Office, can the transfer be registered in the target company’s books.

The Price

The decision to buy or sell shares or assets is one that has to be made early on in the transaction following negotiation between the buyer and seller. This should be one of the first points you agree. To change when the legal process is underway can add unnecessary substantial fees. Whichever route is followed, it will have an effect on the format and structure of the deal and crucially on the price paid by the buyer.

Steps to review when acquiring a business

Identify the industry you want to be in: Step one of business acquisition is defining the type of enterprise you’re looking for.
This will begin with a general decision of which industry to move into. You’ll need to research the mid-to-long-term prospects of the sector before moving forward.
Pay specific attention to legal concerns, changes in regulations, and look at local competition within the industry.
Trade magazines and newsletters are a good start – they provide expert opinion on the prospects of your chosen business.
Target the business for acquisition: With broad marketplace knowledge now at your disposal, the next logical move is to target a suitable, specific business.
Have in mind an ideal budget, size, location and annual turnover and, most importantly – whether you feel you can make a success of it. Now to find one which matches these expectations.
Think about businesses that are not actively seeking a buyer, as well as those advertised for sale. Every enterprise has its price, and tabling an unsolicited offer may convince the owners that the time is right to sell.
You will also beat competitive bidders to the negotiating room this way.
Don’t promise a deal that you cannot deliver, simply to open negotiations. A professional broker can be instructed to begin talks discreetly on your behalf and help draw up mutually agreeable terms.
Research: Before you bring in the experts you can undertake a little investigating of your own.
Pose as a customer to experience the service first-hand, whilst also working with the company to look through its finances.
This position of trust and privilege cannot be abused, and you will most likely need to sign a confidentiality agreement before you can get access to sensitive company data.
Open negotiations: At this point in the acquisition, you will have a more detailed picture of both the target business and the industry within which it operates.
With your clearer understanding of its business activities, you can begin to talk directly to the current owners and work together to build a deal that will satisfy all parties.
One of the first points of negotiation will be price, after a preliminary valuation. At this point, you do not have to worry whether your initial offers are legally binding – they are not.
Spend time formulating a plan to work towards so that everyone is pulling in the same direction.
Evaluate the enterprise: The valuation stage of buying a business is perhaps the most vital to ensuring a successful purchase.
The approach you use will differ depending on the type of concern that you are buying. Assets will often make up the bulk of any valuation: value from property and real estate to machinery and equipment.
However, whilst these can be relatively easy to appraise, you shouldn’t overlook the importance of turnover, profitability, and ongoing contracts as a way of informing your offer.
A specialist accountant may be brought in, and they will often provide expertise within a certain field or industry that can help inform your offer.
The Heads of Agreement: The Heads of Agreement, though not a legally binding document, is nevertheless an important and useful stage in the negotiations process. It essentially condenses the key elements of a sale into a single document.
Payment, responsibilities, periods of confidentiality will all be set down in the heads of agreement at a point in the negotiations when each party is still free to walk away from the proceedings.
Most importantly, the Heads of Agreement will act as a timetable towards completion: explaining to each party the time-scale and deadlines for every step of the deal, from financing to the release of payments.
Due diligence: By this point in the buying process, you will be intimately familiar with all aspects of the sale and you should have a detailed understanding of how the rest of the process should unfold.
Having already undertaken your own, informal due diligence in the early stages of the purchase, you can now look to bring in the professionals, who will offer a more thorough analysis of the target business’ accounts, practices and day-to-day operations.
Although you don’t want to take risks by cutting costs at this important stage, remember to stay in budget and keep your outgoings to a sensible ratio of the overall purchase: you do not want to be spending tens of thousands on accountants and lawyers for a firm worth only a hundred thousand.
The Sale and Purchase Agreement: The completion of your sale and purchase agreement will mark the closing stage of the acquisition process.
Whereas the Heads of Agreement sets out in broad, non-legally binding terms an overview of the purchase, your Sale and Purchase agreement will give both parties their legal obligations for the sale.
Pay: You will have a different set of options for paying for your new acquisition, depending on the size and scale of your purchase.
A larger merger of multinational interests may involve complex financing from multiple sources. For a smaller scale buy-out, the most common method is a straightforward payment on completion agreement.
Financing can come from private means, angel investors, banks, loans companies, or peer-to-peer lending platforms.
Sometimes, the current owners may relinquish full control of their business at sale, but take only a percentage of the full value on completion, in return for ongoing shares in company profits.
Completion: With the final documents completed, contracts signed and payment agreement in place, you have completed your newest business acquisition.
Although this ten step process may at times seem slow and the workload insurmountable, everything will fall into place with time. Even the hardest negotiations can find a positive resolution.

Working capital impact on enlarged business

The amount of cash tied up in a business as working capital is broadly determined by the relative speed of being paid by customers compared to the speed at which suppliers are paid.

All private equity investors will look very closely at the working capital of the business. Many will have an explicit plan to reduce the amount of working capital by reducing stocks, or paying suppliers later, or speeding up customer collections, or a combination of all of these. From the perspective of the company, this is unequivocally a positive thing to do; it represents a step change in the efficiency of the business.

From the perspective of the overall economy, if all that happens is that the reduction
in working capital in a company creates an equal and opposite increase in the working capital of its suppliers and customers, then there is unlikely to be a gain in efficiency in the supply chain. However, if the pressure to reduce working capital flows up and down the supply chain, it is a net gain in economic efficiency: the product or service is being produced using less valuable capital.

Irrespective of the overall effect on the economy, it is one significant way in which leverage creates the imperative to maximise cash flow.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

Importance of cashflow management when a business is growing

Cash flow is the lifeblood of all businesses and is the primary indicator of business health. It is generally acknowledged as the single most pressing concern of most small and medium-sized enterprises (SMEs), although even finance directors of the largest organisations emphasise the importance of cash, and cash flow modelling is a fundamental part of any private equity buy-out.

Cash needs to be monitored, protected, controlled and put to work. There are four principles regarding cash management:

Cash is not given. It is not the passive, inevitable outcome of your business endeavours. It does not arrive in your bank account willingly. Rather it has to be tracked, chased and captured. You need to control the process and there is always scope for improvement.
Cash management is as much an integral part of your business cycle as, for example, making and shipping widgets or preparing and providing detailed consultancy services.
Good cash ow management requires information. For example, you need immediate access to data on:
- your customers’ creditworthiness
- your customers’ current track record on payments
- outstanding receipts
- your suppliers’ payment terms
- short-term cash demands
- short-term surpluses
- investment options
- current debt capacity and maturity of facilities
- longer-term projections.
You must be masterful. Managing cash flow is a skill and having a grip on the cash conversion process will yield results.

Cash management, credit and overtrading

During a credit crunch and recession, every business needs to monitor cash flow. Where it is poorly managed, even a company’s successes can lead to its own downfall. Simply put, big new orders require you to pay for new plant, extra workers and additional stock before your brilliant new customer settles their invoice, resulting in you running out of cash. Hence the term ‘insolvency by overtrading’. It is surprisingly common to hear people say, `everything was all right until we got that large order’ or, having just suffered insolvency, `next time I will keep the business small’.

Working capital

Working Capital relates to the amount of cash tied up in the business’ trading assets. It is usually calculated as: stock (including finished goods, work in progress and raw materials) + trade debtors – trade creditors. It is made up of three components:

Days sales outstanding (DSO, or `debtor days’) is an expression of the amount of cash you have tied up in unpaid invoices from customers. Most businesses offer credit in order to help customers manage their own cash flow cycle (more on that shortly) and that uncollected cash is a cost to the business. DSO = 65 x accounts receivable balance/annual sales.
Days payable outstanding (DPO or creditor days) tells you how you’re doing with suppliers. The aim here is a higher number, if your suppliers are effectively lending you money to buy their services, that’s cash you can use elsewhere in the business. DPO = 65 x accounts payable balance/annual cost of goods sold.
Finally, your days of inventory (DI). This is tells you how much cash you have tied up in stock and raw materials. Like DSO, a lower number is better. DI = 365 x inventory balance/annual sales.

Cash conversion period

The cash conversion period measures the amount of time it takes to convert your product or service into cash in flows. There are three key components, which will be familiar as constituents of working capital.

Inventory conversion – the time taken to transform raw materials into a state where they are ready to fulfill customers’ requirements. A manufacturer will have funds tied up in physical stocks while service organisations will have funds tied up in work-in-progress that has not been invoiced to the customer.
Receivables conversion – the time taken to convert sales into cash.
Payable deferment – the time between taking delivery of input goods and services and paying for them.The net period of (1+2)-3 gives the cash conversion period (or working capital cycle). The trick is to minimise (1) and (2) and maximise (3), but it is essential to consider the overall needs of the business.

Funding for Small Businesses

Find government-backed support and finance for business, including:

grants
finance and loans
business support eg mentoring, consultancy
funding for small and medium-sized businesses and start-ups

Customise your search by location, size and activity, by clicking here https://www.gov.uk/business-finance-support-finder

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

Impact on changes of FRS 102 on businesses accounts. Are you ready?

Impact on changes on FRS 102 on business accounts. Are you ready?

FRS102 is replacing current accounting standards. So what? This will mean your accounts will look different, profits could change, your remuneration packages and bonus schemes may also change as well as your tax position. Are you ready?

How ready are you for this change and how well do you understand the impact it will have on your business? Here are our Top Five points for you on first time adoption:

1. Know when the change is taking place

2. Know your transition date

3. Calculate your opening balance sheet: The 4 main steps in preparing this balance sheet are:

Recognise all assets & liabilities required by FRS102
Omit assets & liabilities for which recognition is prohibited by FRS102
Reclassify any items which recognition is different under FRS102 to that of previous UK GAAP
Apply FRS102 in the measurement of all such assets & liabilities

4. Prepare reconciliations: In accordance with Section 35 of FRS102 you are required to include the following in your financial statements:

An explanation of the nature of all changes to accounting policies
A reconciliation of equity to that reported under the previous UK GAAP at both of the following dates:
transition date.
the end of the latest period presented in the entity’s most recent annual financial statements determined in accordance with its previous financial reporting framework.
A reconciliation of profit or loss determined in accordance with its previous financial reporting framework for the latest period in the entity’s most recent annual financial statements to its profit or loss determined in accordance with FRS 102 for the same period.

5. Understand the financial and taxation implications

Accounting standard and basis is changing for accounting periods from 1^st January 2016

Key changes that will impact on the clients accounts such as:

Employment costs, provisions re holiday pay: If you have sent an EPS (Employer Payment Summary) in 15/16 activating employment allowance you do not need to notify HMRC again for 16/17. The option will remain activated in both your payroll software and in HMRC records. Continue with your payroll as normal, you will only need to send an EPS if the normal requirements apply for statutory payment recovery/compensation, CIS deductions suffered or inactivity of PAYE.

Current UK GAAP is much less explicit about the accounting for short-term benefits than FRS 102, but there is no conceptual difference between the two. However, in practice many UK reporting entities do not provide for holiday pay (short-term compensated absences) and will need to consider this when applying FRS 102 for the first time.

Treatment of negative revaluation reserves on Property and Deferred tax on property revaluations: Transition to the new FRS 102 accounting standard will allow business owners to inject a one-off boost to the balance sheet, with a revaluation of land and buildings. It also relaxes the requirements for ongoing property revaluations as Lancaster Clements Limited explains.

If you have a property asset sat on the balance sheet at, say, £150,000 but with an actual value of £1 million, FRS 102 would allow you to have a final ‘one off’ valuation at transition date and for this valuation to be used as the deemed cost. This means you don’t have to apply a policy of revaluation going forward and can then revert to a depreciation method.

This can also work for plant and machinery but be aware that you have to apply the valuation to the whole class of plant and machinery. It’s the same for Property but is generally more manageable as fewer property assets are held.

Under the old accounting rules, if you opted to revalue your property, you would then have needed to maintain this policy of revaluation every year – an expensive and time-consuming exercise.

Under FRS 102, the requirements simply state that ‘revaluations are carried out with sufficient regularity to ensure the carrying value does not differ materially from the fair value at the end of the reporting period.’

In other words, FRS 102 gives business owners a one-off opportunity to revalue their property assets and then revert back to accounting for them on a depreciation basis.

Impact on profit and loss reserves which could mean less distributable reserves, and therefore, availability of dividends: There is some additional disclosure required by FRS 102 in relation to capital and reserves, and the standard allows for this to be presented either on the face of the balance sheet or by way of Note. The standard requires a description of each reserve; and for each class of share a capital, the rights, preferences and restrictions attaching to that class including restrictions on dividends and repayment of capital must be disclosed. FRS 102 also requires details of shares in the entity held by ‘its subsidiaries, associates, or joint ventures’. Although it should be noted that Companies Act 2006, section 136 prohibits a subsidiary from holding shares in its parent, unless the subsidiary is acting as personal representative or trustee, or as an authorised dealer in securities.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

Are you ready for Scottish Rate of Income Tax and the birth of two types of income tax?

On 6 April 2016, a fundamental change will be made to the taxation system for UK resident individuals. Those who are resident in Scotland will pay two types of income tax on their non-savings income. This will potentially impact on Non Scottish employers and will lead to the birth of two types of income tax. Are you ready?

The main UK rates of income tax will be reduced by 10p for Scottish taxpayers and in its place the Scottish Parliament will be able to levy a Scottish Rate of Income Tax (SRIT) applied equally to all Scottish taxpayers. If the SRIT is set at 10p then income tax rates will be the same as in the rest of the UK. SRIT can however be reduced to zero and there is no upper limit.

Importantly, this change may affect not just Scottish employees and employers. Any employer in the UK will see a change to PAYE procedures if an employee is classed as a Scottish taxpayer. Individuals will be Scottish taxpayers if they are UK tax resident and their sole or main place of residence is in Scotland. So if an employer based in England recruits an individual who stays in temporary accommodation near to the employer’s base but returns to their family home in Scotland at weekends, the employer has a Scottish employee.

HMRC have given some guidance as to what this will mean for employers and there is good news:

HMRC will identify those individuals who will be Scottish taxpayers based on their records of where individuals live – an employer will not have to make any assessments on taxpayer status. Individuals moving into or out of Scotland will be encouraged by HMRC to notify them of a change of address.

Scottish taxpayers will have their tax codes prefixed with the letter ‘S’. There will be no requirement to include the SRIT separately on payslips. Payroll software will however have to cope with the possibility of SRIT not being 10%.

What is the likelihood of there being different rates?

This is a matter for the Scottish Parliament. SRIT will need to be set every year for only one tax year and for the whole of that year. The rate needs to be applied equally to all Scottish taxpayers so if SRIT is set at 12%, a basic rate taxpayer would have a marginal rate of income tax of 22% (rather than 20%) and an additional rate taxpayer would have a marginal rate of 47% (rather than 45%). So lower earners will have a higher percentage increase in their tax bill compared to higher earners. This factor will not encourage the Scottish government to set a higher rate in 2016. However, Scotland is expected to receive complete control over income tax bands and rates in 2018, under new powers devolved in the Scotland Bill.

We can also help you assess the impact on these proposed scottish rate of income tax in your business, please do contact us if this is an area of interest.

If you want to read more about the various topics and services we provide, then please go through our FAQs.

Potential impact on mortgage interest relief and changes in stamp duty on buy to let properties

Landlords left reeling by the Chancellor’s July Budget tax changes received a further blow in his Autumn Statement.

Investors hoping to build their portfolios face a 3% surcharge on Stamp Duty Land Tax on properties bought for rental or as a second home. The extra tax will come into effect in April 2016.

Landlords were already coming to terms with tax changes which will stop them deducting the cost of mortgage interest from their rental income when calculating profit – and will restrict tax relief on mortgage interest to 20% by 6 April 2020.

This means that higher rate taxpayers with large mortgages will pay substantially more tax. Some could find the tax rate rises above 100%. Even basic rate taxpayers will be affected.

To make matters worse, the automatic right for landlords of furnished property to claim a 10% wear and tear allowance is being scrapped – from April 2016 they will only be able to deduct costs they incur based on actual expenditure.

However, all is not lost. The new rules will apply to individuals, partnerships and trusts. Companies are excluded from the provisions and this offers a solution.

Some landlords who let a number of properties have the option of transferring their properties to a limited company, free of significant tax charges, if they manage their property portfolio as a business.

Company profits are taxed at corporation tax rates (currently 20%, reducing to 18%) rather than income tax rates (up to 45%), leaving more funds to finance acquisitions and grow the
property portfolio.

Landlords letting commercial property and qualifying furnished holiday accommodation are also not affected. Whatever your situation, now is the time to do the review your portfollio and weigh up the options.

Let’s take a closer look at the effect of the changes on a basic rate taxpayer (assuming the taxpayer has no other income).

2016-17 will be the final tax year in which the mortgage interest is deductible in full. In the example below, that results in a taxable income of £29,000, which falls within the 20% tax band.

By 2020-21 the impact of the new rules will be fully felt, resulting in a tax increase of £19,400 (assuming all other things being equal). The mortgage interest will no longer be deductible from the rental income – instead 20% relief of £16,000 is given as a deduction against the tax.

The effect is to push income into the higher rate tax bracket and leads to a withdrawal of the personal allowance as income exceeds £100,000. Recipients of child benefit and tax credits will also be affected.

Example for Landlords

It is disturbing that the effective rate of tax will increase to 63% of the ‘real’ rental profit (£25,200/£40,000) when the changes are fully implemented.

For larger property portfolios with high borrowings, the position is even more dramatic. Consider the following property business run by a married couple in partnership (again assuming no other income).

In this example the tax increase is a staggering £76,600, resulting in a tax charge of £82,200 or 164.4% of the ‘real’ rental profit. This could put these landlords out of business.

Even more astonishing, is that some landlords will be forced to pay tax when they have made a loss, perhaps due to difficulties in finding a tenant or as a result of facing unexpected repair bills.

The restriction of interest relief is only aimed at landlords of residential property, but landlords of commercial property can also benefit from significant tax savings by operating through a company.

The main stumbling block is that current finance will need to be renegotiated. Current lenders need to be consulted early to discuss potential refinancing costs.

We would encourage landlords to review their options now as the tax break on incorporation may be short lived.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.

Company reorganisations to realise balance sheet value for shareholders

In December, HMRC published a consultation paper including proposals for new anti-avoidance legislation to prevent shareholders extracting funds from companies as capital. This coincides with the new dividend regime which starts from April 2016 which will tax dividends at 7.5%, 32.5% and 38.1%.

Capital and share reorganisation

During the lifetime of a company, it will often need to restructure the format of its capital by the issue of new shares to include new investors or new classes of shares with different class rights with different voting and dividends rights for each class of shares. It may be necessary to subdivide or consolidate shares where the nominal value needs to reflect the market or floatation value. Where capital is in excess of requirements or the balance sheet needs to be re-aligned or capital needs to be released to reserves to pay dividends to encourage investors in these cases a reduction of capital may be required.

The company may at some time need to purchase its own share from an existing shareholder to prevent the shares being sold to a third party. All these changes, however, will require documentation and may also require alteration to company’s Articles of Association to grant authority to the directors to alter the capital structure.

Individuals in certain cases individuals have been able to attract entrepreneurial relief on these transactions which has meant that they have paid 10% capital gains tax on the amounts distributed rather than income tax. The consultation and the subsequent finance act id reviewing the treatment and whether this will be still be allowed or whether it will be caught by the new anti avoidance legislation. Early planning prior to the commencement of the 2016/17 tax year will be essential in order to ensure you maximise the reliefs available. If you are considering how these changes may impact on you then contact us in order to ensure you obtain the reliefs you are entitled and enhance your the returns.

Company reorganisation

If your company proposes changes such as its name, registered office, single alternative inspection (SAIL) address, appoint or resign directors of the Company including the procedure to remove a director, the company secretarial team at Lancaster Clements Limited, can provide all related documentation and advice on what’s required under the Companies Act. You may also wish to re-register a private company as a public limited company. Lancaster Clements can provide all the documentation you will need to re-register yours to a different type of company.

To find out more about the services that we offer, visit our Services page. Alternatively, if you would like further information on the issues raised above, please contact us using our contact page.