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What flavour is your Accountant?
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One of the great joys of working as a ‘CIMA MiP’ (“Chartered Institute of Management Accountants, Member in Pratice”) is that we are generally dealing with ‘small’ and ‘micro’ client firms (micro defined by EU regulations as firms with less than 10 employees/ £2m turnover; small defined as firms with less than 50 employees/ £10m turnover) and that we become involved in an enormous breadth and depth of subjects.
One of the less welcome challenges however is that as far as most small and micro business owners and managers are concerned, one accountant is the same as any other and this includes the myriad unqualified accountants who practice their particular brand of accounting services at rock-bottom rates. Indeed it is rare that I have been asked whether I am a ‘qualified’ accountant, and is rarer still that I am asked what that qualification is (in fact I cannot ever recall being asked that question by a client). The client generally assumes that because one calls oneself an ‘accountant’ then one can ‘do accounts’ and that accountants are all the same.
We’re not.
My particular practice specialises in manufacturing clients and most new clients have come from existing client referrals. Fortunately I do not need to be a great sales person to convert a prospect into a new client when (a). there is a recommendation from an existing client and (b). we appear to ‘speak the same language’. Clients generally put this down to my having owned and run manufacturing firms and to some degree that is true, but is is also because of my CIMA training.
If you’re looking for year end accounts, audit, or tax computation then you will likely be talking to a ‘Certified Accountant’ or ‘Chartered Accountant’, but where they will be reporting back to you on how well (or otherwise) you did overall last year and what your tax liability is, the CIMA ‘Chartered Management Accountant’ will be working with you to establish what activities made money and why, and whether you can do more of it, and of course which did not and how to avoid this in future; indeed the focus is very much ‘future’ as much as ‘past’.
In terms of the client business, it’s not difficult to see that helping the client to understand their business is a valuable element in managing, changing, and improving the business, and this is something which CIMA qualified people have to offer any business, so it’s a great shame that Chartered Management Accountants tend to be employed by big businesses who understand the difference between the different accounting disciplines.
None of this is to say that a Certified Accountant or Chartered Accountant could never do what the Chartered Management Accountant does, but it is not what they have been trained to do and equally as a Chartered Management Accountant in practice for twenty-two years I provide a ‘full service’ including year end accounts and tax returns for my clients, albeit the main focus remains helping them to improve their business.
I would urge Chartered Management Accountants to seriously consider a career in the small and micro business sector which accounts for 99.3% of the 4.7 million businesses in the UK (source: BIS 2013) and 47% of private sector employment (source: FSB 2013) and which is a vital part of the UK economy: whether in practice servicing a number of clients, or a full-time employee of a particular firm, I am sure that you will find the experience very rewarding
I would equally urge owners and managers in that sector to become aware of the differences between the main accounting bodies and the relative strengths of each, and to be sure that whoever they engage with will meet the needs of their particular business.
Paul Driscoll is a Chairman of CIMA MiPs in South West England and South Wales, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and a number of manufacturing companies, and is a board level adviser to a variety of other businesses.
HMRC aims to raise further £5bn in tax revenue
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Her Majesty’s Revenue & Customs (“HMRC”) are seeking new powers as follows:
1. Advance Payment – basically in any dispute between HMRC and a tax payer HMRC would be able to assess what tax they believe is due and require the tax payer to pay this as a sort of ‘refundable deposit’ until such time as the dispute is resolved through arbitration or court. Perhaps more importantly, if granted, these powers will be applied retrospectively.
Given that at the current time there are unresolved cases going back ten years or more and that once HMRC has the tax payers’ money there will be even less incentive for them to come to a resolution then this is essentially HMRC to act as judge, jury, and executioner. Isn’t this simply a ‘guilty until proven innocent’ treatment of tax payers?
2. Direct Debit – where HMRC believe that the tax payer owes them money then they will be able to simply take money directly from the tax payer’s bank account. As I understand it there will be further powers to obtain previous bank statements and this will no doubt lead to further tax investigations.
The legislation which will encapsulate these powers is currently going through Parliament, and despite opposition from lobby groups and committee members alike, HMRC seem intent upon pushing this legislation through with a view to achieving Royal ascent in mid July 2014.
Of course, should HMRC gain these powers they will hit the easy targets first i.e. those who have ‘played by the rules’ and properly disclosed everything through DOTAS, and those who operate proper business bank accounts, so it will do nothing to address those who have hidden their activities from HMRC and those who operate in the black ‘cash-in-hand’ economy.
Whilst the general public may have little sympathy for people who ‘don’t pay their fair share of tax’ (if there is such as thing – see Did Jimmy Carr just use the wrong vehicle?) we have to remember that tax avoidance is entirely legal as it simply takes the rules and regulations enacted in law and uses these to reduce a tax payer’s liability.
The new powers will do nothing to tackle tax evasion, which is illegal, and so it is no surprise that spokesmen for HMRC, and representatives for HM Government, have sought to blur the lines between legal avoidance and illegal evasion in recent times. We can be equally sure that HMRC will not be tackling the multi-nationals like Google and Starbucks who have made recent headlines with their tax affairs, and so it will (as ever) be small firms that will bear the brunt of any HMRC action.
What we shall no doubt see is an increase in non-DOTAS schemes being made available to tax payers by providers of such schemes, and I fear beyond that we shall see a rise in business insolvencies and loss of jobs, all of which will run contrary to HMRC’s aim to raise further tax revenues.
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Free access to accounts filed at Companies House
60% of the 3.5 million companies in the UK now file accounts electronically and you can access those accounts free of charge via http://companies.corefiling.com/search
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
RTI Payroll Year End
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RTI Payroll Year End
Payroll year end under RTI should now be a much more straightforward affair than in pre-RTI times. Our suggested procedure is as follows.
1. Last FPS submission will be the last payment date (not necessarily payroll date) on or before 05-Apr-14: for monthly paid this will normally be payroll for the month of Mar-14, but for weekly paid it may be less clear.
If for example your pay week ends on a Friday and is paid Wednesday the following week then week ending Friday 28-Mar-14 will be paid Wednesday 02-Apr-14, and this will be your last payroll for 2013-14 tax year; the week ending Friday 04-Apr-14 will be paid on Wednesday 09-Apr-14 which is in 2014-15 tax year (CAERP: users should check the Company Settings ‘Tax & Payroll details’ tab).
2. Make sure you ‘tick the box’ (CAERP: “This is the final FPS submission of the tax year.“) to indicate that this is your last FPS submission for the tax year, and answer the additional questions.
3. If you have made no employee payments and do not therefore need to make a FPS submission then you will need to make an EPS submission as soon as possible after 05-Apr-14 (CAERP: users will find this at the bottom of the P32 report), and tick both the “No payments were made” box and the “This is the final EPS or FPS submission of the tax year.”
HMRC provide further guidance at http://www.hmrc.gov.uk/payerti/end-of-year/tasks.htm
4. Run your P60 reports and forward to all the individuals who have been employed in the 2013-14 tax year.
5. Update the tax codes for those individuals where notices for 2014-15 have been received from HMRC.
6. Update ‘L’ tax codes by adding 56 so that for example ‘944L’ becomes ‘1000L’.
7. Remove any ‘Week 1’ or ‘Month 1’ indicators (CAERP: untick ‘Wk 1 Mth 1 Basis ‘ in employee records).
HMRC provide further guidance at http://www.hmrc.gov.uk/payerti/payroll/year-start.htm
New for tax year 2014-15
8. From 06-Apr14 you will no longer be able to recover a proportion of SSP paid to employees and the NIC holiday arrangements will come to an end.
9. There is however a new employer’s national insurance ‘Employment Allowance’ whereby eligible employers can reduce their Employer Class 1 NICs bill by up to £2,000 per year. Employers who qualify should submit an EPS as soon as possible after 05-May-14 and tick the ‘Employment Allowance Indicator’ box.
HMRC provide further guidance at http://www.hmrc.gov.uk/news/nic-emp-allowance.htm
10. Perhaps the biggest change for the new tax year is that HMRC will be taking a much harder line on late submission of FPS/ EPS returns with automatic penalties, so please be sure that you make a submission at least monthly, even if only a ‘nil’ EPS return.
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Mind the GAAP
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There are changes afoot and much is being made of ‘FRS 102’ and ‘new UK GAAP’, so in an effort to understand what all the fuss is about, and how it will impact on a small accounting practice with a client base firmly in the SME sector, I have dragged myself off to seminars and scoured t’Internet, and what follows is a brief summary of my understanding to date of these changes.
If you can put further flesh on these bones or correct misunderstanding then please feel free to comment.
First a little terminology:
- “IFRS Foundation”: an independent, not-for-profit private sector organisation.
- “IASB”: International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation.
- “IFRS”: International Financial Reporting Standards which are designed to be global standard so that company accounts are understandable and comparable across international boundaries.
- “IFRIC”: International Financial Reporting Standards Interpretations are the official interpretations of IFRSs.
- “IAS”: International Accounting Standards are international financial reporting standards that were created by the predecessor body of the IASB and form part of the body of IFRS requirements.
- “SIC”: the official interpretations of the IASs.
- “IFRS for SMEs”: a self-contained standard of 230 pages, designed to meet the needs and capabilities of small and medium sized enterprises (SMEs) and includes simplified language and fewer disclosure requirements (expect to be aligned with FRS 102 in due course).
- “SMEIG”: SME Implementation Group is an advisory body to the IASB, is providing recommendations to the IASB in connection with IFRS for SMEs.
- “Small Company”: organisations with up to £6.5m turnover, £3.26m assets, and 50 employees (to be revised to £10m turnover etc. under new EU directive).
- “Micro Company”: companies with up to £632k turnover, £316k assets, and 10 employees.
- “UK GAAP”: Generally Accepted Accounting Practice in the UK is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom.
- “ASB”: UK Accounting Standards Board which is the body responsible for publishing accounting standards and other guidance.
- “FRS”: Financial Reporting Standard.
- “SSAP”: Statements of Standard Accounting Practice.
- “UITF”: Urgent Issues Task Force of the UK Accounting Standards Board (now disbanded).
- “SORP”: Statement of Recommended Practice for charity accounts and reports.
- “New UK GAAP”: new reporting standards applicable from 1st January 2015 (latest) comprising
- “FRS 100”: Application of Financial Reporting Requirements which sets out the overall reporting framework.
- “FRS 101”: Reduced Disclosure Framework which permits disclosure exemptions from the requirements of EU-adopted IFRSs for certain qualifying entities.
- “FRS 102”: the Financial Reporting Standard applicable in the UK and ROI which replaces all existing FRSs, SSAPs and UITF Abstracts.
- “FRS 103”: the Financial Reporting Standard for insurance companies.
- “FRSSE”: the Financial Reporting Standard for small company accounts includes reduced reporting requirements (anticipate this may be phased out in due course).
Phew! so which standard do I use?
Listed company consolidated accounts: must use IFRS
Listed company parent/ subsidiary accounts: either IFRS or UK GAAP (FRS 102)
Other companies: either IFRS or UK GAAP (FRS 102)
Small (& micro) companies: either above or IFRS for SMEs or FRSSE
Charities: must use UK GAAP (FRS 102 or FRSSE) and the new Charities SORP
So in particular, what is FRS 102?
- for medium and large companies is similar to IFRS but reduced disclosure requirements
- allows ‘amortised cost’ or ‘fair value’ methods of valuation except equities held which which must be at fair value
- investment properties should be valued at far value via the P&L where possible but depreciated costs allowable if fair value involves undue cost or effort
- allows goodwill to be amortised rather than applying impairment method
- no ‘indefinite life’ option for goodwill
- other intangibles to be recognised separately from goodwill
- greater regulation of hedge accounting such as forward currency contracts
- option to use IAS 39 (which outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items)
- deferred tax to be provided on revaluations
- government grants can be recognised immediately or accrued and matched with costs
- holiday pay entitlement must be accrued where holiday not taken
- disclosure of total lease commitment (i.e. note on operating lease liability)
- cash flow statement required
- reduced reporting for small companies which will no longer be required to include a director’s report, analysis of income
New EU Directive
From 1st September 2013 micro companies can report a greatly simplified balance sheet (and P&L) and are not required to provide notes and analysis on most balance sheet items, but must still include details of directors’ loans.
HM Revenue & Customs
All the above deal with reporting for public record; there are no changes on reporting requirements to HMRC at this time, so from a parochial point of view, is this going to make any real difference?
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Head in the cloud …… feet very much on the ground!
I’m a director of a software development business which develops ‘cloud’ based applications. Of course, when we started in 2005, I was quite unaware of this, but then the marketing men seized on the ‘latest idea’, gave it a label so that they could sell it more easily, and hey-presto, ‘the cloud’ was born.
So if we set aside all the marketing hype, what exactly is ‘cloud computing’?
I’m not an ‘IT Professional’ so forgive me if I reduce this to more simplistic terms but actually it is quite straightforward, and in many ways something of a natural progression in a trend that has gained momentum over the last few decades.
If I can go back further for a moment, I can recall managing the new IT department of a large manufacturing operation in the early 1980’s (the directors didn’t really know where it should sit within the organisation so they gave it to the accountant because it had something to do with ‘information’). In those days, data was input by cards or paper tape, and we had a department of ‘punch card operators’, and an air conditioned room in which sat a ‘mainframe computer’ which was the size of a small car, and had various attendant tape drives for storage of data and programmes.
Users had a screen and keyboard and a wired connection to the mainframe to and from which they could send and retrieve data using application programmes which controlled how that data should be input and processed or presented when retrieved. All the processing was done by the mainframe as it was the only computer in this network of users and machines.
The advantages were clear and immediate: instead of having to walk to the other end of the factory to speak with a colleague who kept a written record of the information we were looking for, a user could now sit at his or her desk and look at the data which that colleague had input only moments earlier.
We then saw the explosion in availability of the personal computer (PC), cheaper and more flexible yes, but a backward step in productivity since written records were replaced by computerised records, but now held on desktop machines. And so we were back to walking the corridors to speak with a colleague who kept a computerised record of the information we were looking for, but this time carrying a floppy disk to write that information on rather than a pad and pencil.
Hence the advent in networking these PCs to a central ‘file server’ which, as the name suggests, is designed to store our files. Again this enabled us to work more collaboratively and more productively, by working on the same files and data, and indeed more securely as protection and regular backups of centralised data is far easier to achieve than for a myriad different personal computers.
The only real difference between this model and the early mainframes is that whereas the mainframe computer did all the work – stored the data, retrieved the data, ran the software applications, and so on – now the work was shared between the server which largely stored and retrieved data only, and the PCs which ran the applications to process that data, so overall processing speeds reduced dramatically whilst achieving a significant cost saving over a mainframe investment – a real ‘win-win’.
The development of ‘data warehouses’ where the centralised data storage was taken away from ‘in-house’ networks, and to more secure remote locations with ‘thin client’ access to data and business applications, was essentially a return to the mainframe model, and with much more powerful modern servers, overall processing speeds reduced still further.
However the real driver for this change was again an economic one – why spend money on lots of expensive PCs and a server, and all the attendant network paraphernalia and maintenance, when one very powerful central server could do it all, and all the users would need would be a screen, a keyboard, a mouse, and a telephone line (hence the thin client)!
I would have to say that this latter development probably by-passed most small and medium sized enterprises (SMEs) and still remains the reserve of larger firms who can afford the fees charged by vendors of large ‘enterprise’ (organisation wide) applications.
However, cloud computing is really little different to the thin client arrangement in that it enables access to data stored on a remote centralised server, and the applications to process that data. Our own cloud based applications store data on servers in the North of England, with backups in Docklands, and whilst most of the processing takes place on the server, some is done on the user’s PC, so that we can harness as much processing power as we need to ensure fast response times.
At its best, the cloud can provide access to software applications and services previously available only to larger enterprises, to smaller firms, and at a very economic cost, often on a ‘pay-as-you-go’ or rental basis instead of outright purchase – this is often termed ‘Software as a Service’ (SaaS).
And so to the inevitable questions: is cloud computing safe, and is it reliable enough to use to run my business?
Most small and medium sized enterprises do not have a dedicated IT team at their disposal, and as a result, backups may not be made reliably, firewalls and anti-virus software may not be the best (or as I have seen, not exist at all), and network access may require nothing more than a password written down on countless sticky notes attached to keyboards and monitors around the office.
The level of security employed in a cloud environment is likely to be significantly higher on average then the security of a typical SME, but it really is for prospective users to verify this for themselves: where is the server physically? What do you know about the firm that runs and maintains the server?
And is the application you plan to run secure? I would not claim that any application or network is one hundred percent secure (there have been too many high profile news stories to the contrary) but for example our accounting/ ERP application includes encryption between user and server so that even if the data transmission is intercepted by a hacker, they will have nothing more than a string of gobbledygook – a whole lot better than someone being able to hack into your in-house network and steal files, or even physically break into your office and steal a laptop with confidential data on it, or indeed losing your in-house data in a fire, all of which have happened to clients in the past.
That said, there are draw-backs, and in particular, reliability: do you have a reliable connection to the Internet, and does the cloud service provider give any guarantee of service availability?
I have sometimes advised prospective customers to look at ‘in-house’ software applications rather than our cloud based ERP application where they have poor or unreliable broadband, though this is becoming less of an issue as the infrastructure improves, indeed we even see our clients taking and processing customer orders directly into their system at trade shows using just a tablet computer.
And our experience with the firm who warehouses our servers has been good to date in that in five years we, and therefore our clients, have experienced only twenty minutes loss of service on a Saturday just before Christmas 2010 due to an attack by hackers on one of the other servers located in the same facility (this was dealt with effectively by the server centre staff without any need for our becoming involved), and this compares favourably to all the hours work lost previously when our in-house network has failed because one-or-other component or machine had stopped working (often following a software ‘upgrade’).
So is cloud computing for you?
A first step might be offsite backup and storage of your valuable data either by way of a simple copy and paste routine using Dropbox or Google Drive, or one of many providers that enable you to schedule regular data backups without any intervention from the system user.
You might also consider having your e-mail accounts hosted by an external provider, perhaps the same one that hosts your web site?
And what about your accounts/ ERP, or other business critical applications?
In June 2013 Larry Ellison of Oracle essentially endorsed cloud for such business applications; the article states “Oracle’s Larry Ellison is the epitome of the old guard. He built an empire on traditional enterprise software, purchased by a central IT department that worked through expensive and lengthy implementations to ultimately foist it on workers. But now he admits times have changed. ‘When you move to the cloud, companies don’t expect a multi hundred million dollar project to make their CRM from Salesforce work with ERP from Oracle.’”
Ultimately only you can decide – for me, as an accountant, this is just a normal investment proposition – what are the pros and cons for my particular organisation and what are the relative costs? Having actioned all the above in our accounting practice several years ago we immediately saved c.£3.5k when it came to replace out onsite server, quite apart from time and money on maintenance, servicing, and updates.
Will your experience be as good as ours to date?
I really can’t say. All I would suggest is that you check out the supplier of cloud services in the same way as you would anyone that is offering you any other service: Who are they? Do they have a good reputation, have they been recommended?
All I can hope is that this article has helped you to better understand what the cloud is about, and to therefore make a more informed decision.
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Twenty-first birthday
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Our practice is twenty-one years old this year and to celebrate …. well, we’re just working as normal. That’s not to say we’re not pleased, because we are, and though we’ve had our ups and downs, overall it’s been a good experience.
Why we, or more to the point, I, went into practice is a story for another day, but I am frequently asked how we got started, and how we secured new clients, so what marketing tips can we pass on to those just starting out or struggling to develop a customer base?
I would not pretend to have any particular marketing expertise, so all I can do is pass on some things that have, and have not, worked for us, and hope that it might help others as they take their first steps into what might be a very alien environment.
1. Advertising in local press and Yellow Pages: yes, we did pick up some early work from both these sources (remember this was early 1990s) but generally this was low value and poor quality work and certainly did not warrant the expenditure, so after a few years we stopped advertising. I guess this route to market is largely redundant in today’s digital era so it would be interesting to hear from other MiPs whether this type of advertising does indeed still generate any new business.
2. Direct mailing: we took advice from a marketing consultant and spent a small fortune, or so it seemed at the time, on brochures, mailing lists, and postage, and dutifully followed up every mailing with a telephone call to ensure that the brochure had been received and enquire whether they would be interested in meeting …. they were not.
3. Recruitment agencies: thinking that I really would need to step back into the world of paid employment after just a few months of ‘independence’, I reluctantly started contacting agencies, and found to my surprise that there was quite a demand for temporary, part-time, and interim, accountants.
At the time I had no idea what the latter term meant, but it paid well and I soon had a number of short-term projects under my belt and suddenly agencies were approaching me rather than the other way around. This gave me the confidence to continue, and one of these short-term assignments turned into a one-or-two-day-per-week marathon over eighteen months which provided a platform from which to build the practice.
4. Networking: I think I need to distinguish here between networking which occurs in the normal course of business where say, I have been discussing a client’s affairs with a bank manager and he or she asks for a card and then contacts me later to see whether I can also help with another of their customers, because this has lead to some good, long lasting client engagements, and the type of staged events which now proliferate and are promoted by various business and trade groups: as a colleague once remarked, “too many predators, too little prey”; I have to agree with the latter sentiment.
5. Referrals: similarly I have picked up new work from existing clients who have a brother, sister, uncle, good friend, customer, supplier, etcetera who has “… a problem you might be able to help them with”. Some have turned out to be headaches we could really have done without, but some have turned into good, long term clients, and indeed almost all new clients now come via this route – I have just learned to be a little more adept at asking the right questions to work out which I should pursue, and which I should avoid.
Yes I still find myself taking on things I probably shouldn’t when I see someone in need of help but I guess that it at least earns some goodwill with the client who has made the referral, or is that just wishful thinking?
6. Training: I have been delivering ‘Finance for non-financial managers’ courses via Chambers of Commerce and the former Business Links since 1997 (and still do via one such Chamber). Over the years it has proven to be a useful marketing tool in that inevitably a proportion of participants will approach me afterwards for more specific advice and some will then invite me to meet and to review their business requirements – it is one reason why a small practice based in South East Wales has clients from Birmingham, to Bristol, to Cardiff, and various points between.
In short I have been paid to market my business! How often does that happen?
A few year ago my colleagues and I put this online for our own clients at http://centralaccounting.co.uk/home/documentation/accounting-basics/ and I have already made an offer to other members of the local area MiP group that if they wished to do likewise with local Chambers, FSB, and similar organisations, then I have no problem with them using this ‘online workshop’ to deliver training provided the appropriate acknowledgements are made – it will be for them to bring it to life in a classroom situation with their own anecdotes and personal experiences.
I’m very happy to make the same offer to MiPs generally: we have had a very good return on the work I undertook to develop the course so it owes us nothing, and we’re not looking for anything in return beyond brand awareness for the award winning cloud/ SaaS ERP software in which we have had some involvement over the past several years, and on which website the workshop sits.
7. Website: we have one at www.centralaccounting.ltd.uk and yes, we do get occasional enquires from prospective clients who have found it via search engine, but it’s much the same as the early advertising and Yellow Pages experience – nothing to get too excited about. We also get quite a number of sole traders in particular who are just looking for some free advice.
That said, it’s proven useful as an electronic brochure that can be ‘left with’ a prospective client, so it is worthwhile in my view, and it can act to both encourage the type of clients we are looking for, and discourage those we are not.
It might also be worth mentioning that the other question that often crops up in conversation with new MiPs is “how do I price for the work?” and over the years we have developed a formula that gives us a good starting point and which we use in discussion with the client in a question and answer session so that (a). we get clarity on what we are being asked to do, and (b). they understand the cost implications for their business.
If you think it might be useful and want to use it it’s at http://www.centralaccounting.ltd.uk/cost.html but remember not to send it to us when you’ve completed the form with the client as that will generate a good deal of confusion.
8. Social media: yes, we are active on LinkedIn, Facebook, and Twitter, and have been for a few years, and the received wisdom is that this is the future for marketing. To date I cannot think of a single client that has been generated via this route, so for me the jury is still out. Clearly others may have had a more fruitful experience and there is no guarantee that we are using this tool to best effect so it would be interesting to learn of other MiPs experiences in using this.
I should also note that we have used pay-per-click advertising in another business in which I am involved, and this has delivered new customers, but I think the critical difference here is that that business has a well defined product, rather than a service that needs to tailored around the client’s wants and needs.
For our practice, there is nothing quite like face-to-face engagement with a prospective client to initially listen to what it is they want and need, and then deliver a response to address those needs, and if those prospects are there because of a referral and/ or recommendation from an existing satisfied client, it makes life all the easier.
As I write this I have no idea whether this very personal experience is similar in any way to that of other established MiPs, so it would be very interesting to learn of your experiences, and I’m sure that if you are able to share those experiences it might provide guidance and encouragement to those just starting out, or about to start out, in practice.
Look forward to hearing from you.
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Did Jimmy Carr just use the wrong vehicle?
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A year on from when comedian Jimmy Carr apologised for using a legal tax avoidance scheme which enabled him to pay as little as 1% tax on his earnings, and with GAAR upon us, tax avoidance has rarely been out of the news headines.
Prime Minister David Cameron stated that “… some of these schemes we have seen are quite frankly morally wrong”, and Danny Alexander, chief secretary to the Treasury, suggested that tax avoiders are the “… moral equivalent of benefit cheats”.
Whether you feel that David Cameron has the moral high ground given the alleged source of his family’s wealth, and whether you feel he was right to name Jimmy Carr in this way, are discussions for another day, but what the comedian had done was entirely legal, so what is the real problem here?
Do we really think that the tax system is a level playing field and that there is a ‘right amount of tax’ we should be paying, and that everyone on similar earnings pays the same amount of tax?
Well think again, because it just ain’t so!
Let’s take for example three fictional friends in the 2012-13 tax year, each of whom receive an income of £25,000.
Tom works for an employer and receives a salary each month from which tax and Class 1 National Insurance is deducted under PAYE; from his £25,000 earnings he might expect to see £19,532 in his pocket, and additionally, the employer has had to pay a further £2,417 for the privilege of employing him.
Dick is a self-employed plumber and his £25,000 income has been calculated from the sales less the expenses of running his business; he would expect to see £19,917.65 in his pocket at the end of the year having paid the tax, and both Class 2 and Class 4 National Insurance due under ‘self assessment’.
Harry didn’t work during the year but was fortunate enough to sell an antique that had been ‘kicking around’ at home for years; after paying Capital Gains Tax he would expect his £25,000 income to be reduced to a net £22,408.
At these modest income levels even relatively small variations can be significant and whilst we can argue about the relative merits of whether the working men and women in the UK should be paying tax at a higher rate than those who can live off the proceeds of asset sales, the central issue here is that because the tax system creates such disparities it is a racing certainty that those who are having to pay tax will, if they are able, seek to arrange their affairs in such a way that they minimise their tax liability.
And it doesn’t stop there.
I have clients who have more than one source of income and because of the way the tax system is arranged into ‘schedules’ it is not automatic that income from once source can be offset against losses from another source, so there have been years in which the client has no overall income, or even a ‘net loss’, but will still be liable for tax on the income from a particular source.
I think we would have to conclude that HM Revenue and Customs are not so much on the side of fairness and equity as that of maximising tax receipts. Indeed in a recent informal conversation a retired tax inspector noted that the “… tax rules are complicated …”, and when HMRC uses those rules to maximise tax collections they are said to be “… applying the law …”, but when a taxpayer uses those same rules to minimise the tax he or she pays, they are said to be “… tax cheats …”, “… tax avoiders …”, or worse.
In Ayrshire Pullman Motor Services & Ritchie v IR Commrs (1929) 14 TC 754, Lord Clyde stated that ‘no man is under the smallest obligation, moral or other, to arrange his legal relations to his business as to enable the Inland Revenue to put the largest shovel into his stores’.
This was endorsed by Lord Tomlin in IR Commrs v Duke of Westminster [1936] 19 TC 490, in which he stated that ‘every man is entitled if he can, to order his affairs so that the tax attaching under the appropriate acts is less than it would otherwise be’.
There has been a good deal of legislation and case law in the intervening period but today we have a whole industry which has grown up around legally minimising the tax their clients need to pay, with HM Revenue and Customs playing catch up and introducing ever more and complex legislation to plug the loopholes that the legislation itself creates.
Anecdotally I believe there is evidence that as tax rates increase so do the number of taxpayers seeking help to minimise their tax liability, and that again would not be a great surprise to me if found to be true. It seems to me that the only real beneficiaries are the ranks of lawyers on both sides.
So how do we halt the madness?
The Office of Tax Simplification has identified various areas ripe for reform, but in my view at least this amounts to ‘tinkering round the edges’, and in the meantime, the 2012 Finance Bill has added almost 700 pages of legislation.
Perhaps we should look at real simplification such as a flat rate tax for all income in a period, from whatever source, with a few (very few) exemptions such as the profit on the sale of one’s family home?
Yes, I know that immediately we introduce exemptions and exceptions there will be opportunities for those seeking to avoid tax, but if the system is seen to be ‘simple’, and more importantly ‘fair’, my belief is that the incentive for avoidance will all but evaporate, and at the very least we might see a reduction in the cost of collecting tax.
Time for real change?
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
… should I ‘go limited’?
thanks to http://www.freedigitalphotos.net
This is a question I am asked often, normally in casual conversation at social gatherings, and one of the reasons I try not to let people know that I’m an accountant; I can only imagine how much worse it must be for doctors …..
Without knowing precise details of a business operation, it is difficult to respond to such questions with any great certainty, but there are some ‘rules of thumb’ we can employ to which might lead us to a reasonable conclusion.
But first, it might be worth taking a brief look at what options exist and what the main features of each are, and in doing so I am deliberately excluding Public Limited Companies (“plc”) which is the legal form of a majority of large businesses which shares are traded on various stock exchanges.
Private Limited Liability Company (“Limited”)
A limited company is formed, or ‘incorporated’, by an individual or group of individuals wishing to carry out a particular business. Most importantly, once incorporated, the company is a separate legal ‘person’ from its owner(s); it exists in its own right, pays its own taxes, can sue or be sued, and so on.
A Memorandum of Association is drawn up which states why the company has been incorporated and what business it is allowed to undertake, and Articles of Association set out the basic rules by which the company should be run, such as what happens when one of the owners wishes to sell their share of the company.
The owner(s), often referred to as ‘members’, will each own a share of the company (hence the alternative term ‘shareholder’), their liabilities for the debts of the company are generally limited to whatever they have paid for that share of the company, and their personal assets are therefore protected from attack by creditors of the company.
The owner(s) will appoint one or more ‘directors’ to run the company for them (i.e. to ‘act for the company’ so that it effectively operates through them). The directors may be paid a fee and/ or expenses for attending meetings and generally acting for the company.
In turn the director(s) may employ staff to work within the company and may themselves work within the company, and this is often referred to as an ‘executive’ directorship, as distinct from a ‘non-executive’ directorship where the director may attend board meetings only and vote on various issues concerning the running of the company.
In law, executive and non-executive directors are all simply directors and have the same authority and responsibilities for the running of the company, but executive directors will have additional authority and responsibilities in terms of running the business of the company as set out in their service contract or contract of employment, and for which they will normally be paid a wage or salary.
So an individual may be a shareholder, and/ or a director, and/ or an employee (executive) of the company, but they are three very distinct roles and whenever an individual acts ‘on behalf’ of the company, or the company’s business, he or she needs to be clear which ‘hat’ they are wearing so that these roles do not become confused.
This distinction is particularly important when considering payments made between the company, its director(s), its owner(s), and its employee(s) so for clarity:
The company itself (not the owners), is liable for ‘Corporation Tax’ on the profits it makes and currently there is a Small Companies Rate of 20% on profits of up to £300,000 in a year, and thereafter a Main rate of Corporation Tax of 23%, but these change periodically so please check the current rates at http://www.hmrc.gov.uk/rates/corp.htm.
The company pays its employee(s) for the work they do and such payments are legitimate business costs and can be set against profits thereby reducing any corporation tax due; conversely these payments are income for the employee(s) on which they will need to pay tax and other deductions (the company is required by law to act as tax collector on behalf of HM Revenue and Customs making deductions at source under “Pay As You Earn”).
Any profits made by the company, after corporation tax has been paid, can be shared out between the owner(s), normally pro-rata to their shareholding, and this is termed a ‘dividend’ payment, and because corporation tax has already been paid in respect of these profits, the dividend carries a tax credit (currently 10%) which the owner(s) can effectively claim back as tax already paid against any other tax they may need to pay.
Tax on such dividend income is at a lower rate to normal earned income (I don’t know why but have always presumed in recognition of the risk the owner(s) have taken in investing in their company), and so currently if the owner is a basic rate taxpayer, the tax credit fully offsets the tax due on the dividend income, and so there is no further tax to pay on it; again these rates change from time-to-time so please check the current rates at http://www.hmrc.gov.uk/rates/it.htm.
One particular downside of tax regime as applied to limited companies to be aware of is that where the company provides a car for its employees, whether executive directors or other staff, this is deemed to be in lieu of wages or salary, and regardless of whether the car is a necessary tool of the trade as it is for many small business owner/ directors, or individuals with for example sales roles. And depending upon the cost of the particular car and whether the company also provides fuel, the tax assessment can be quite harsh – see http://www.hmrc.gov.uk/calcs/cars.htm. This tax regime also applies to commercial vehicles provided by the company though the tax assessment is currently less harsh.
Finally, a company is required to disclose details of its operation including a ‘filing’ of its annual accounts at Companies House where other individuals and organisations can view these. For many small businesses this will be an abbreviated version of what is prepared and submitted to HM Revenue and Customs being limited to an end of year balance sheet only, rather than the full profit and loss account required by HMRC.
Sole Trader
When an individual ‘starts up in business for themselves’ then they are termed a ‘sole trader’, and unlike the limited company, which is a separate legal entity from its owner(s), the sole trader and his or her business are one and the same.
The most important consequence of this is that generally, all the personal assets of the sole trader are at risk from attack by creditors should the business fail or find itself in difficulty.
The main advantages of this trading form is its simplicity and the lack of disclosure of the businesses financial affairs at Companies House (there is little real saving in record keeping or accounts preparation since the accounts to be prepared each year for HMRC are little different to those required for a limited company).
The sole trader is liable for tax and national insurance on the profits made by their business and any salary or wage which they take out of the business is not allowable against these profits in calculation the tax and NI due.
Conversely such payments, which are termed ‘drawings’, are essentially a distribution of the profits made and are not assessable for tax since they have already been taxed originally as profits. Note that monies introduced into the business by the sole trader are termed ‘capital introduced’, profits made add to this capital, and drawings (including tax paid) taken reduce it, so if the business is not making profits then any drawings simply deplete the capital (and cash reserves) of the business
Further, there is no saving in payroll administration once the sole trader takes on staff since as with a company the sole trader pays its employee(s) for the work they do and whilst such payments are legitimate business costs thereby reducing any tax due from the owner in respect of his/ her business profits, these payments are of course, income for the employee(s) on which they will need to pay tax and other deductions (the sole trader is required by law to act as tax collector on behalf of HM Revenue and Customs making deductions at source under “Pay As You Earn”).
Equally, whereas the sole trader can generally charge the business proportion of all running costs of a vehicle to profits, thus reducing their tax bill, any vehicle provided to employees fall under the same regulations as those for company employees.
The sole trader will generally have to make advance payments of tax, essentially a deposit or ‘on account’ payment on the current year’s anticipated profits, and which will be estimated based on the previous year’s profit, so there is a real danger in a poor trading year of substantially overpaying tax when cashflow can least afford it, albeit the overpayment can be refunded once the true trading position becomes clear.
Finally, consideration should be given to timing when starting up the business in relation to the tax year since HMRC will assess profits made by ‘basis period’ – see http://www.hmrc.gov.uk/manuals/bimmanual/BIM71010.htm which may mean that any profit may be the basis for assessment of tax in more than one tax year.
Partnership
There are several types of partnership but generally what is referred to when speaking of ‘a partnership’ is a Partnership within the meaning of the Partnership Act 1890 – see http://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents
Such partnerships are formed by two or more individuals wishing to carry out a particular business, and they may or may not formally write down any rules and regulations for running the partnership such as who will receive what share of any profits.
If such partnerships are thought of as a ‘group of sole traders’, then much of what is set out in the above section can be said to apply equally here. However there are two variations on this basic theme:
Limited Partnership regulated by the Limited Partnership Act 1907 see – http://www.legislation.gov.uk/ukpga/Edw7/7/24/contents – in which at least one of the partners restricts their liability for the debts and obligations of the firm to a pre-determined sum, instead of bearing unlimited liability as a partner normally does.
The partnership must consist of at least one general partner who manages the business and bears unlimited liability to creditors, and at least one limited partner (who may not take part in the management of the firm’s business). The limited partner must contribute a specified amount of capital on joining the firm, which they cannot withdraw as long as they remain a limited partner, but cannot be made to bear any liability to creditors or their fellow partner(s) in excess of that amount plus any undrawn profits.
A limited partnership must register with the Registrar of Limited Partnerships in London or Edinburgh as appropriate and failure to register deprives it of its limited liability status.
Limited Liability Partnership (“LLP”) – governed by the Limited Liability Partnership Act 2000 – see http://www.legislation.gov.uk/ukpga/2000/12/contents – an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership.
It is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the partners will be limited.
Any new or existing firm of two or more persons can incorporate as an LLP, which must be registered at Companies House and for which the registration process and cost of registration are similar to that for a limited company.
Disclosure requirements are also similar to those of a company since LLPs are required to provide financial information equivalent to that of companies, including the filing of annual accounts, an annual return, and notification of any changes to the LLP’s membership, members names & residential addresses, and change to their Registered Office Address.
However, a LLP is taxed as a partnership, the partners providing capital and sharing any profits (the LLP will normally be regarded as transparent for tax purposes and each member will be assessed to tax on their share of the LLP’s income or gains as if they were partners of a general partnership governed by the Partnership Act 1890; partners will be liable to pay Class 2 and Class 4 NIC.
Summary
The trading form of the business, as we can see from the above, can take a variety of forms, and in answer to the question originally posed it is useful to consider the response to the following points:
1. if the business is relatively simple with little by way of borrowings from banks and other lenders, or credit to customers, or from suppliers, then a simple sole trader (or partnership for more than one individual) may be most appropriate;
2. where protection of personal assets and therefore limited liability is an important consideration then incorporation as a private limited liability company (or change to LLP status for an existing partnership) should be seriously considered (but be aware that this will still not protect the owner/ director if personal guarantees have been given to lenders in lieu of security for their loan);
3. if the business runs expensive motor cars then there could be a significant additional tax liability arising on incorporation of the business which might outweigh other advantages (if limited liability is desired then it may be worthwhile considering removing the vehicles from the business and running as privately owned vehicles, and charging the company per mile for use on company business post incorporation);
4. there is some flexibility on when and how much tax is paid overall for a limited liability company, for example, profits and therefore cash could be retained in the company, say for investment, and distributed subsequently as dividends when cashflow permits (as a sole trader or partnership there is less flexibility in that tax is due on profits irrespective of whether cashflow has permitted the profits to have been taken as drawings) so if such flexibility is important then again incorporation should be considered;
5. save for at business start up, tax is normally paid earlier by sole traders and partners, so there may be cashflow advantages in incorporating once the business has been established.
The above is of course, a very generalised assessment and having given due consideration to these generalities, I would advise that you then talk over the particular requirements of your particular business with your accountant and/ or business adviser before making a final decision.
As ever in life, few alternatives are ‘all good’ or ‘all bad’, and you will need to weight up the pros and cons as they apply to your particular circumstances and settle on the best overall option for you.
Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.
Business Accountant 