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It’s early March and spring is in the air. The spring flowers are coming out into bloom – our garden is filled with snowdrops and daffodils. But then again last week we couldn’t see them because of snow! The start of spring though means not just the end of winter but also the end of one tax year and the start of another. This year, on the 6th April, though brings with it the start of a brand new tax – the dividend tax.
You may have seen lots of hype, but just what is it all about. For many of you David or I will already have had a chat, but we wanted to put a few thoughts down on paper for you!
Let’s have a brief look at what it’s all about.
What are the changes?
Change 1 –Grossing up of dividends is scrapped (believe it or not this little change is good news)
Currently all net dividends (this is same as the cash you receive) are grossed up by 100/90 before they are taxed. The 10% difference is a tax credit which is added to reflect the fact that the company paying the dividend has already paid corporation tax. Don’t worry if you don’t get this what it really means for most of us is that this ‘adjustment’ has the effect of reducing how much in terms of dividends taxpayers can really earn before they go into a higher tax band.
So for many company shareholder/directors the scrapping of this rule is good news as it
- Removes an area of tax which many tax payers find confusing as they grapple with gross and net dividends.
- It increases how much cash dividends they can take before they fall into a higher tax band.
Change 2 – Dividend Tax (This is the bad news for most Small & Micro business owner’s)
This new tax is applied to dividend income received in a year which is more than £5,000. The two groups of taxpayers who will be affected and therefore pay more tax in 2016/17 than they did in 2015/16 are:-
- Company directors who take a modest a salary and the rest of their income as dividends
- Taxpayers who have sizeable share portfolios which generate sizeable amounts of income
And when is an allowance not really an allowance?
Everyone will be entitled to a £5,000 tax free dividend allowance. This sounds very generous – after all its tax free. Well it’s not generous and that’s because it’s not really an allowance it’s a new 0% tax band has been created. The net result, is that it reduces a taxpayer’s basic rate tax band.
How much more tax could I pay?
Let’s have a look at the numbers (well I am an Accountant). This should make it easier to understand how the changes are likely to affect you!
The following table summarises the extra income tax which will be payable next year (2016/17) compared to this year (2015/16). Or put in simple terms for any Dividends you take from 6th April 2016 onwards!
|Cash Dividend||2015/16 Tax||2016/17 Tax||Increase|
The dividend tax is particularly punitive for the many family owned businesses where both the shares and income is split between both the husband and wife. In these cases the tax increases (as shown above) are doubled. So now coupled with increased operating costs in your business as a result of Auto Enrolment and the National Living Wage you can see why I am concerned that this is all too much for many small business owners. 2016 is the year of going backwards for many business owners’ in terms of PROFITABILITY unless they act now!
When will I be paying the extra tax for 2016/17?
Under the usual self-assessment rules then this extra tax would be payable in one lump sum payment by 31/1/2018. That gives taxpayers time to put some money aside each month and can budget accordingly.
It appears though that HMRC doesn’t want to wait that long for the extra tax. We understand that HMRC is in the process of amending tax codes for many company directors so that the lower ‘new’ code reflects the estimated amount of tax due on dividend income.
If you are a taxpayer where cashflow is challenging then this change will be bad news as you will be required an extra monthly tax payment to HMRC potentially as early as May this year. This doesn’t give much time to plan and budget.
How will it work?
Every taxpayer is notified of their tax code via a P2 (PAYE coding notice) and those affected the estimated amount of dividend tax will be shown within the notes.
Tip: If you get one of these tax coding notices it’s advisable to check the figures – an incorrect tax code could mean you unwittingly pay way too much or too little tax.
If you are unsure that the code is correct get in touch with your accountant.
What Can I do?
Everyone’s situation is different which I’m afraid mean the possible tax saving options that are available will also be different. That said here are a few ideas:-
Maximise the annual tax free dividend allowance
Everyone is entitled to the new £5,000 allowance. Married couples can spread their share portfolios in order to spread their dividend income and thereby use the whole of their allowance.
Use an ISA
ISA dividends are tax free and will be not be subject to the new dividend tax. You can transfer up to £15,240 worth of shares and investments into ISAs this year.
Maximise a spouse’s income tax allowance and tax band
Married couples should use the whole of their personal allowances and basic rate tax bands, where applicable, so that any dividends that paid to the spouse who pays the lowest rate of tax.
Invest in VCTs
VCT (Venture Capital Trust) are for taxpayers who are willing to take higher risks. Exactly like ISAs VCTs will give a taxpayer tax free dividends. Also like ISAs when the investment is sold the gain or profit is also tax free as it’s not subject to Capital Gains Tax.
Kim KMA Accountancy
This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavor to ensure that the information contained in this article is correct, no liability will be accepted by KMA Accountancy for damages of any kind arising from the contents of this communication, or for any action or decision taken as a result of using any such information.
During my employed career working for a range of smaller privately owned businesses I always had a vision that I could perform the FC/FD role across a much wider range of businesses. In each work role I made an impact by just doing what came naturally to me; getting stuck into the numbers, working out the key drivers, assessing the different personalities, getting the right information at the right time to the right people, planning the future with all the potential scenarios. So I took a leap of faith!
15 years on…
I realised that I’ve now spent as much time in my current career than all of my other roles put together, so it was a successful career move. It wasn’t plain sailing in the beginning, I had to fill some gaps with contract work, but I backed myself and my passion for getting the numbers right and giving true commercial insight to smaller business owners and managers. The strongest business relationships I have today go back to those first few years of trading.
In celebration of this achievement, over the next few months I plan to share some of my thoughts and experiences gained over the last 15 years. I am hoping this will provide encouragement and insight to those who are following, or planning to follow, a similar career path.
Mark Tomsett, Avalon Management Accounting Limited
Celebrating 15 years as a Freelance Management Accountant
Whilst consulting down in London for a client, I pop out quite frequently for lunch at a small local Cafe / ‘Wrap- bar’. The establishment is only about 8.5 square metres in size, and customers queue outside in long lines sometimes to get served. Obviously the wraps they serve up at lunch time are very good, but it the process that the proprietor has established, that has struck me as so novel.
You are the sole director in a company that undertakes some R&D. The annual profit is estimated at £140,000 for the year ended 31 March 2016 before taking into account the director’s remuneration.
You might think that the most tax-efficient remuneration package is £10,600 for 2015/16 to cover the personal allowance and then net dividends of £28,606 to take the director up to the basic rate band. You also need to consider whether the company can make an R&D relief claim and, if it can, how this might affect your decision.
Salary vs Dividends
If the director takes a typical remuneration package, then the net tax and NI savings over taking a salary of £39,206 would be £5,265, assuming the £2,000 employment allowance is available. This saving is made because dividends received within the basic rate band attract no further income tax plus no NI for the director or the company. This more than outweighs the additional corporation tax suffered on profits retained for dividends.
Taking R&D relief into account
From 1 April 2015 the R&D tax credit for SMEs increased from 225% to 230%. There is no R&D uplift on dividends received – only on salary. This means that paying a £39,206 salary would actually result in a saving over taking a small salary and dividends of £1,208.
What about a larger salary? In fact, if the client wanted to take out more than the basic rate band, then the salary may become even more tax efficient. A £70,000 salary would result in net tax/NI due of £1,366 after the R&D relief (assuming there was sufficient profit to offset the CT relief), whereas a salary of £10,600 and net dividends of £59,400 would result in net tax/NI of £5,883 – so the saving by taking a salary over dividends is £4,517.
HMRC will generally not accept 100% of a director’s salary costs within the R&D claim unless it can be clearly demonstrated that the director was exclusively involved in R&D activity.
While dividends don’t qualify as eligible staff costs for R&D claims, company pension contributions do. New pension freedoms make pension contributions a much more attractive option, so you might want to consider this as part of your remuneration package.
If a company makes pension contributions of £40,000 for the director and they spend 60% of their time on R&D, the R&D relief on this will be £55,200 (£40,000 x 60% x 230%). This means that the overall CT saving on the pension contribution will be £14,240 (((£40,000 x 40%) + £55,200) x 20%). As there’s no NI due on pension contributions, this is an even more efficient option than taking additional salary.
Get the best deal for yourself
For advice on the best split between salary and dividends or help with setting up a limited company and registering for VAT, please contact Alterledger.
FRS102 will affect us all, even small companies will be subject to a version of FRS102.
Its not just a reporting standard it will affect your tax position too, for example
Intangible Assets and Goodwill
Under FRS102 these assets will have a maximum life of 5 years where as UK GAAP allowed them to have an infinite useful life.
There are various FRS102 changes that can effect these but one specific one is deferred tax which will be calculated on investment properties.
Leases incentives will be spread over the entire life of the lease rather than to first break clause.
Some assets such as Websites and software development could be reclassified as Intangible
Have you assessed the changes for your business?
FRS 102 is effective for periods beginning on or after 1 January 2015.
Apply before 31st March to get up to £2,000 from the Government for professional business advice
• Growth Vouchers are a grant from the Government to help businesses like yours get business advice from accredited advisers.
• The voucher match-funds your investment in professional advice for your business so you could get a grant of up to £2,000 towards the cost of the advice.
You can use the voucher to get advice on:
• Finance – and how to manage your cash flow better
• Recruiting staff – how to develop their skills
• Improving management and leadership skills
• Marketing – attracting and keeping customers
• Technology – and how your business can make the most of it.
Anyone who works with businesses is fully aware of how important accounting is for the success of a company. Yet many business owners have a negative attitude towards accounting. A high percentage of entrepreneurs see accounting as a necessary evil and often a hindrance to starting a new company.
How is that possible? Wasn’t accounting invented to help companies manage their business?
The IT industry has brought us computers and the ability to create software to automate bookkeeping. While there is no doubt that accounting software has been a great help, when we look at the usage of it, something is wrong. More than half of the businesses in the UK keep track of their finances by using a combination of spreadsheets and word processors rather than using accounting software. In an age where computing power is ubiquitous and virtually never too far from our pocket, we should be able to do better than this.
In 2013, international accounting software provider e-conomic was considering what its next generation accounting software should look like. And decided to take a different approach. What would happen if we created a piece of accounting software for people who had no knowledge of accounting? And what if we made the basic functions free for people to use? We hoped that it would make accounting approachable by virtually anybody.
That’s how the Debitoor invoicing and accounting software was born.
Introducing simple accounting to the world
Today, more than 33,000 people in the UK and almost 300,000 people worldwide have signed up for Debitoor and have given us the privilege of approaching accounting in a different way. Debitoor is used in more than 30 countries, from the UK to South Africa, from Colombia to Australia and New Zealand.
Debitoor is an accounting package for very small businesses. It allows them to manage their customers, create quotes and invoices. It allows them to register their purchases, deal with bank and payments and helps them report their VAT directly to HMRC at the click of a button. Debitoor helps those small companies manage their assets and keep track of what’s on their balance sheet in a very simple manner. Finally, Debitoor helps business owners collaborate with their accountants by allowing them to share their data with them.
Debitoor’s mission is to make accounting cool to work with. Two years after we started, the typical reaction we get from accountants is: “Wow, convincing my clients to use this is going to be super easy!”. We have captured the essence of Debitoor in this video.
Letting users shape accounting software
But what have we done to make this possible? The most important ingredient has been a clear focus. Our mission has always been to make accounting easy for small business owners who know very little about accounting.
Here are some of the key principles we followed to build the Debitoor invoicing and accounting software:
– Approachable: We have removed any obstacles to getting started. There is no setup needed, we do not ask questions, users can start on the free package, the program is ready to go.
– Natural: We have eliminated all technical lingo. You will not find the words “debit” and “credit” in Debitoor. The workflows in the program follow the natural flows of a user with no accounting knowledge and the program uses the typical words he’d use.
– Forgiving: People make mistakes; and accounting systems typically make it quite complicated to correct mistakes. In Debitoor, actions can be undone and mistakes can easily be corrected.
– Instructive: We assume people do not know much about accounting, so we have structured the entire program to let users learn along the way. This is not just functionality but it encompasses the entire packaging of the product.
– User-driven: In an open forum, users can give their feedback and suggest new features, vote for their own or others’ suggestions and influence the further development of the software. This transparency is super important for us to develop a truly user-driven program.
– Collaborative: Most of our users share their data with their accountants in order to get help with taxes, reporting and ensuring quality.
We also had the privilege of building the product with the technology which was available in 2013. This has huge benefits for our users because it allows us to provide them with a service which is reliable, improving at a fast pace and very secure. Having a modern architecture also ensures that Debitoor is very easy to connect to other popular cloud services.
Debitoor’s user base is very diverse as its appeal is quite broad. Many of our users are freelancers, artists, consultants, designers or other creative people, but we have also small artisans and shop keepers or owners of clinics and small distributors. They all have missions and purposes in their lives and we try to help them with their accounting.
Changing how an industry works
As with any change in technology, this brings great opportunities to the industry it affects. The introduction of new technology, however, takes a bit of time to mature. When television started to gain mass adoption in the 1950s, broadcasters used it as it was radio. The first shows had older men with glasses reading papers in front of a microphone. This was how it used to be with radio programs.
The availability of cloud software has created a set of providers who simply made traditional accounting software available on the internet. This, we believe, will change and we will see more and more software which is transformational in nature. That is what we are trying to do with Debitoor.
We are only at the beginning of this journey. The roadmap for Debitoor will focus on three main aspects:
1. Continue to add simple flows to support what today are very difficult accounting scenarios
2. Introduce more and more automation and intelligence to enable our users to do more with less knowledge
3. Strengthen the collaboration between users and their accountants by facilitating the sharing of data between them.
What will this mean for accountants and the accounting industry? This is what our users are telling us: They love doing their invoices and keeping track of their costs in Debitoor. It gives the nice feeling of being in control, it keeps them organized and allows them to focus on their business going forward.
At the same time, they also tell us that they need help from their accountants. They need help with taxes, they need help with reporting to authorities and a lot of them need a quality check from the experts. In addition, most of them need legal and financial advice on ad hoc issues they encounter in their life as entrepreneurs.
The biggest change for accountants is to be prepared to embrace the possibilities that technology gives us. Things like cloud storage and online applications will substitute manual processes, paper and data disks. Everything is now available via a web browser on your computer or on your phone.
In order to be successful, accountants will have focus on services that draw on their knowledge and experience and they will need to be prepared to serve their customers as they move towards those new technologies.
Increased access will not be limited to technology but also to services. This will also mean increased competition. The best thing an accountant can do is embrace change and be ahead of the curve, start small but start early. The customers are already going there.
Back in June 2013 the EU passed a directive 2013/34/EU which changed the thresholds for small companies.
|Average no. of employees||50||50|
As before its a 2 out of 3 test. The Audit thresholds are unchanged.
The UK was required to transpose this into UK Law no later than 20th July 2015.
The Dept for Business Innovation and Skills (BIS) concluded their consultation (24th October 2014) and the plan is currently to implement the change for financial years starting on or after 1st January 2016.
As pointed out by SWAT
This could mean that a company with a turnover between £6.5m and £10.2m will be required to prepare its accounts for year ended 31 December as follows:
2014 as a medium sized company under present UK GAAP;
2015 as a medium sized company under FRS 102;
2016 as a small company under the applicable accounting regime for small companies.
This might depend on whether the company could early adopt the new regulations for its 2015 accounts. The possibility of early adoption is one of the questions asked by BIS.
Surely BIS can see that not allowing early adoption will place an unnecessary reporting burden on Small Companies?
Almost a third of British workers run some kind of creative business outside their main job contributing an estimated £15bn to the UK economy, according to new research from Moo.com. Profitability among this group of enterprises has increased by 32% in the past year. One in ten part-time creative entrepreneurs plans to leave their job to focus on their business full-time within the next year. However, 60% said it was their passion for the business, and not making money, that motivated them. The most popular part-time creative ventures are in food and cooking, gardening, photography and knitting. (According to Law Donut)
So why are micro businesses taking off:
- You can start off working at home
- Your start up costs are low
- You can do it part time when it suits you
- With wages frozen and costs rising it can provide a useful additional income
- Its easy to be price competitive with low overheads
- The Internet makes it easy to sell your goods and services
- Your social capital can be used to generate sales ie use your contacts and connections
- There could tax advantages – employees generally pay more tax than sole traders
- Some clients prefer the personal touch
- It could be start of something big
Here are my top 20 home based business ideas:
- Get a lodger – Under rent-a-room a taxpayer can be exempt from Income Tax on profits from furnished accommodation in their only or main home if the gross receipts they get (that is, before expenses) are £4,250 or less
- Ironing and Laundry Services – Always popular and you can start with friends and family
- E Bay Trading – as E Bay say… The first task is to sort through those bulging drawers and messy cupboards, finding stuff to flog. Get a big eBay box to stash your wares in, and systematically clear out wardrobes, DVD and CD piles, the loft and garage. Use the easy 12-month rule of thumb to help you decide what to offload: Haven’t used it for a year? Flog it.
- Blogging – Blogging has taken off and many businesses are looking for people to write blogs for them
- Candle Making – You can sell the candles on line and its easy to buy the wax and things you need to make the candles
- Car Boot Sale – As with E Bay but without going on line
- Cake Making – Make sure everything is labelled correctly and you comply with Health & Safety issues
- Data Entry – The internet makes it easy to enter data from where ever you are
- Social Media – Similar to blogging, businesses need help to manage Twitter, Facebook and Linked In
- Website Design – If you have the expertise, go for it
- Sales Parties – Cosmetics to Ann Summers, there is a long list of opportunities
- Sewing and Clothes Alterations – Perfect before and after Christmas
- Jewellery – Making and selling jewellery is always popular and great for Christmas presents
- Car Repairs – Assuming you have the skills needed and comply with legal requirements
- Pet Care – Walking dogs or grooming is popular
- Virtual Assistant – Also personal organiser or personal shopper
- Wedding Planner – You could start by creating a blog about your expertise
- Direct Sales – For example http://www.netmums.com/back-to-work/working-for-yourself/direct-selling-opportunities
- Computer Repair – Great provided you have the skills
- Marketing – Telesales to leaflet design and freelance writing
A OnePoll survey commissioned by AppsBuilder reveals that £52.6 billion of potential revenue to be gained via mobile is being ignored by over 3.2 million UK SMEs. It found that 65.8% of the nation’s 4.9 million SMEs don’t currently have a mobile presence, equating to potential lost revenues of £52.6 billion in the next 12 months alone. The number of consumers in the UK using mobile phones to access the internet has doubled over the past three years and about 5% of all UK retail sales come via mobile phones. (Law Donut)
Its not just about Apps, websites too need to be optimised…
With only 10% of the UK’s small and medium-sized enterprises (SMEs) having a mobile optimized website, businesses could be missing out on £77 billion in annual revenue a study has found. And only 13% of those without a mobile optimized site plan to have one by the end of 2014.
The survey, conducted by Impact Research for hibu, asked 900 UK SME owners and IT leaders about their companies’ websites, revenues and future plans for the mobile web. It showed that 45% of UK SMEs do not have a website, yet believe their annual revenue could rise by 5.4% if they had a website that was optimised for mobile transactions, equating to an average of £11,155 extra turnover annually.
I find it incredible that 45% of SME’s do not have a website? how will customers find them?
The days of looking yellow pages and printed directories are long gone, most people search google to find the goods and services they need.