Summer 2009 Newsletter

Summer 2009

Let the Rich Pay More Tax!

From 6 April 2010, those earning more than £100,000 will pay more tax. Firstly, the personal allowance will be reduced at the rate of £1 for every £2 of income above £100,000 – so, for income above £112,950, you will enjoy the benefit of no personal allowance. Secondly, the income tax rate is increased to 50% from 40% for income above £150,000.

In addition, from 6 April 2011, higher rate income tax relief will be restricted on income above £150,000. At present, higher rate tax relief of 40% is claimable for pension contributions paid up to the lower of a maximum of 100% of earnings and £245,000. The tax relief will be restricted to a rate between 40% and 20% on earnings between £150,000 and £180,000 and to 20% tax relief thereafter. Anti-avoidance legislation has been put in place from 22 April 2009 to restrict the tax relief on those who earn above £150,000 and who increase their regular pension contributions. If pension contributions (including those by the employer) exceed £20,000 and are increased, a tax charge of 20% of the excess contributions will be levied.

Careful planning will be required to navigate the proposed rules and making the right decisions early enough is vital.

The Tax Man Cometh - Tax Investigations, A New Era

If you have suffered a tax investigation in the past, you will be aware as to just how unpleasant an experience it can be. If you have not, you can only imagine.

What was previously called an investigation is now euphemistically called an enquiry. Be assured that the name may have changed, but the substance of the experience has not improved.

Enquiries are of 2 types – either a full enquiry in which all records are requested, or an aspect enquiry in which specific areas of ‘concern’ are the focus. A full enquiry would last typically 18 months plus and an aspect enquiry 6 weeks. Anecdotally, we are aware that aspect enquiries are changing and that it is not uncommon for these to last 18 months plus; in other words, the extent and scope of an aspect enquiry is widening.

In practical terms, this change in attitude by the taxman requires a change to how you should protect yourself. For many years, accountants have offered insurance for enquiries and the traditional offering was for full enquiries. Insurance is also available now for aspect enquiries. Due to the significantly higher risk of an aspect enquiry, the premiums are proportionately higher.

SIPP's & SSAS's

When looking at what are called member-directed pensions, schemes such as SIPP’s and SSAS’s can potentially offer greater investment opportunities for those more discerning investors.

SSAS’s, which became less popular since Pensions A-Day in 2006, have come back to the fore just recently. Specifically, SSAS’s have an ability to loanbackup to 50% of the net asset value of the pension fund to the employer at the time of lending.

Currently, the rate charged is generally 1% above the Bank of England’s base rate, which is considerably lower than most available rates at the moment.

This could offer an opportunity for small companies with a viable alternative way to raise capital to assist with cash flow; say in the short term.

As always, professional advice should be sought. Consideration should be made regarding any potential loss of existing pension guaranteed benefits on transfer. Also, such schemes are usually far more costly to set up and administer compared with say Stakeholder or Personal pension schemes. One must also be mindful that, attractive that this may seem, a SSAS is intended to be a pension and as such, individuals may have an over exposure to one class of investment asset such as property.

Alan Grout, of Ferris and Culverwell IFA Limited, can be contracted on 01380 729369, shall be pleased to offer assistance with any enquiries should you feel that your business may benefit from these or any other type of pension scheme.

Legal Distributions

What ever the economic climate, businesses regrettably fail. In such circumstances, it is important that monies drawn by directors are paid in such a manner that cannot be revised by an insolvency practitioner (looking to protect he interests of creditors). If amounts have been paid inappropriately and incorrectly documented, then the chances of an owner manger having to repay money is greatly increased.

Whist payments through the payroll provide the owner manger with certainty, they may still want to draw dividends, because of the tax and cash flow benefits. In such cases it is important that such dividends paid are legal and are made out of distributable profits.

The Companies Act 2006 defines distributable profits as, “A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated realised losses…”

To make a dividend payment a shareholder must know that there are distributable reserves. The shareholder must therefore maintain management accounts capable of providing them with such certainty. In calculating the distributable reserve the shareholder must be aware of items that will reduce distributable profits such as: past dividends, capital maintenance requirements and provisions, including deferred tax. Unrealised gains, for example on the increase in market value of property, cannot be taken into account until the property is actually sold.

Treatment of any dividend payment should be accounted for as such in the company books and records, the dividend minuted by the Board and a dividend voucher issued. Such actions minimise misunderstandings in the event of future scrutiny.

Marketing in a Recession

For large and small companies alike, a recession is not the time to cut marketing spend, but it is the time to refocus and hone it. Here are 6 areas for consideration.

  1. How well do you know your customers? Research your existing customers. Find out why they buy from you and promote this to others. What else would they like you to provide, what do they think of your customer service, your quality, your delivery performance and your value for money? Ensure that you are in contact with your customers frequently and that they know that you care. There may be more business waiting to be found.
  2. Focus close to home. During tough economic periods horizons shrink. Our first though is to ensure that our home base is secure and this applies to business to. Companies support local suppliers and may use this in their buying decision. Ensure that your marketing is focused locally first.
  3. Pricing. Everyone will be looking for the best deal. Avoid cutting prices but be flexible. Move quantity breaks, run promotions, bundle products together. Always get something in return for lowering the price, otherwise you are just destroying your margin.
  4. Use new Channels to market. Developing an effective e-marketing plan can take your products to a completely new market quickly and cost effectively. Developing distribution partnerships will allow you to free up working capital from stock.
  5. Marketing Spend. Maintain your marketing and advertising spend if you can. Your competition will be cutting back and your investment will be more effective in a less cluttered market place.
  6. Support your key Staff. Businesses are special because of the people in them. Ensure that you keep your key staff secure and motivated. Let them know what your plans are, that they are appreciated and are the core of the business.

If you would like further assistance with marketing your business contact Andy Christie of Key 3 Ltd on 01225 580103.