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ContentsThe ‘dividend tax’ and
your business The ‘dividend tax’ and your businessWhen the starting 10% rate of corporation tax was reduced
to nil from April 2002, there was an added advantage for many
small businesses to operate as limited companies. For example, a sole trader whose only income was the
business profit of £10,000 for 2003-04 would be liable
to pay £1,484.30 in tax and national insurance. If the
same business was a limited company, the entire profit could
be taken as dividend, with no tax payable!
Stemming the flowAlthough the rate reduction was meant to encourage small businesses to reinvest their profits, the results clearly showed that businesses were incorporating to gain the tax advantages of maximising net profit withdrawals. Consequently, the Government has now introduced measures intended to counter this perceived ‘abuse’. Example Distributed profit £10,000 @ 19% £1,900 Total
profit £12,000 £1,979 Fred
Small, sole trader, would have paid £2,041 in tax and
national insurance, an extra cost of £62. This example also illustrates some anomalies: dividends are paid out of
after-tax profits; and any profit which is not distributed
has to bear the full tax cost (the retained profit is only £21). The nearer the profit is to £50,000 and the greater the proportion
of the profits retained, the less effect the new rules will
have. For profits over £50,000, the advantages of incorporation
are undiminished. Where there is no other personal income, the savings can be increased
by paying a salary equal to the personal allowance. This incurs
no PAYE or national insurance charges but also has the following
benefits:
So
there can still be considerable tax advantages to incorporation.
However, each situation depends on individual circumstances,
and you should always contact us for a detailed review before
acting.
Recognising profits: A work in progress?
Since
the announcement just before Christmas last year of a change
in the rules for recognition of profits in business accounts,
there has been much speculation in the professional and general
press that this might be a major problem for small and medium-sized
businesses. The proposal They have announced a change to the rules requiring
that income is not recognised until such time as the business
is entitled to payment for the goods or services concerned. What implications does it have? The new rules mean that such companies can no longer
include in their accounts any income to which they are not
yet entitled, but they also stop businesses delaying recognition,
for example by leaving completed work in Work-in-Progress (WIP)
at the end of the year, to defer the tax. Is this a problem for me? This change is likely to bring a closer examination
by the Inland Revenue on the treatment of WIP in your accounts,
to be sure that the profit declared for tax includes all sums
to which you were entitled at the year end, and that nothing
has been deferred. How can I avoid a problem? If your bills are up to date, then not only will your
accounts fully recognise the value of work completed in the
year, but your cash flow should also receive a boost.
Working, spending and saving: bridging the ‘38 week gap’
The warning signs have been clear for some
time: the state pension is increasingly inadequate; too many
people are borrowing just to finance everyday spending; and
too few are investing for the future. Of course, during our
working years we need sufficient spending resources to live,
acquire a home and repay debts. But we also need to look ahead
to retirement. How much will you
need? The ‘38 week
gap’ As many as half
of all pensioners will be paying no tax at all this year, which
means that their income is less than £7,000. Many are
people who retired during the late 1980s and 1990s. If they
had saved, they would have benefited from the growth of markets
and higher levels of returns from their investments during
those years. Yet today an increasing number are falling back
on releasing the equity from their homes to access much needed
capital. The ‘spending
and borrowing culture’ How can we help?
Legislation
Update:
The Privacy and Electronic Communications (EC Directive) Regulations 2003 What are they? What do they outlaw? How do they apply?
·
Companies or individuals wishing to
carry out direct marketing to individuals via commercial emails
and text messages must secure the advance permission of the addressee,
via an opt-in procedure.
·
While corporate subscribers are exempt
from this rule, all direct marketing emails must now include proper
sender and contact details.
·
Visitors to a company website must
be informed of the use of any internet ‘cookies’ or
similar web tracking devices, and must be given the option to opt
out.
·
When marketing to existing customers,
companies will only be able to e-market goods or services that
are similar to those of which the customer is already aware, and
must again provide an opt-out facility.
·
Mobile network operators wishing to
provide advertising and subscription services based on location
and traffic data must give subscribers information about data processing,
and obtain their consent.
·
Directory providers must give subscribers
full information about data usage, and an opportunity to have their
details removed from directories. Businesses failing to adhere to the regulations will
be committing a criminal offence, and will face a fine of up
to £5,000, or an unlimited fine should a case go before
a jury. In certain circumstances, individuals on the receiving
end of unwanted messages will have the right to sue for compensation. Action to take
Only two
Red Tape days?
The seemingly never-ending changes to UK employment
law that affect small and medium-sized businesses will in future
be introduced on only two days of each year: 6 April and 1
October. Given that it has become increasingly difficult for business owners to keep up with new legislation, this new initiative is intended to provide greater clarity and awareness about when changes will be made. The Government will also say at the beginning of each year what those changes are expected to be, through an annual statement of forthcoming employment regulations.
Don’t
give up on giving
The
basic rule for inheritance tax planners is that you should
give away as much as you can, as soon as you can. However, that simple rule can be incredibly hard to
implement. There is an old joke about the person being asked
in the street for ‘any spare change’, and responding ‘I
don’t know if I have any spare – I haven’t
finished with it yet’. That captures the difficulty,
and the art, of inheritance tax (IHT) planning: how much is
spare, and how can you give away just enough to leave you with
a taxable estate as close as possible to the IHT exempt amount
(£263,000 for 2004/05) at your death? Your gifts strategy Key ingredients of the strategy are the use of the annual
and regular gifts from income exemptions. These can create
considerable amounts of wealth outside your own estate. Trusts,
meanwhile, allow valuable assets to be passed out of your taxable
estate, but have the advantage of giving you the option of
retaining control (as trustee) over the funds – should
younger family members need to be ‘saved from themselves’. Your home But even they can use the exemption for annual gifts
out of income to fund insurance (written into trust for their
heirs) to release tax-free cash on their deaths, to meet the
final tax bill. Your Will Your charitable giving Inheritance tax has become a major issue for more and more people. If you would like to discuss ways of minimising your tax liability, contact us.
Olympic
thinking for your business
This August, all
eyes will be on Athens and the 2004 Olympic Games, but what
can business-owners learn from the world’s top athletes?
Here are four tips for success: 1. Respond to change and challenge Olympic tip: Be prepared to embrace change, and see
challenges as opportunities to improve your business. 2. Be ready to take calculated risks Olympic tip: Winning businesses are prepared to take
calculated risks, refusing to let the fear of possible failure
overshadow the prospect of success. 3. Success breeds success Olympic tip: In business, high-quality people like working
for high-quality companies. Ask yourself: Why would a highly
qualified person come to work for us? 4. Seek feedback Olympic tip: Seek feedback from all the key people involved
in your business: staff, customers, shareholders and suppliers – and
act upon it. We can’t all be as famous as Sir Steven Redgrave, but perhaps we can all be inspired to succeed in our own business lives. Enjoy the Games...
Changes
to the National Minimum Wage
Following recent changes to the National Minimum Wage
regulations, the following rates will apply from 1 October
2004:
·
The main rate for adult workers will
rise by 35p an hour, to £4.85
·
The development rate will rise by
30p an hour, to £4.10
·
16 and 17-year old workers will be
entitled to a minimum wage of £3 an hour · The earnings of home and piece workers will be linked to the minimum wage.
web watch
Essential
sites for business owners Directgov www.direct.gov.uk European Centre for Customer Strategies www.eccs.uk.com British Association of Women Entrepreneurs www.bawe-uk.org Biz/ed www.bized.ac.uk
reminders
for your diary
June 2004 Last
day for UK businesses to reclaim EC VAT chargeable in 2003 Annual
adjustment for VAT partial exemption calculations (March VAT
year end) July 6 Last
day to file Taxed Award Scheme Returns, file P11Ds, P11Dbs
and P9Ds. Issue copies of P11Ds or P9Ds to employees Deadline
for relevant third parties to give non-employees information
on benefits or expenses they have provided to them in 2003/04 14 Due
date for income tax for the CT61 period to 30 June 2004 19/22 Quarter 1 2004/05 PAYE
remittance due Final
date for payment of 2003/04 Class 1A NICs on relevant benefits
provided to employees 31 Second
self assessment payment on account for 2003/04 Annual
adjustment for VAT partial exemption calculations (April VAT
year end) Liability
to 2nd £100 penalty arises for 2003 Tax Return still
not filed 5%
surcharge on any tax unpaid for 2002/03 August 31 Annual
adjustment for VAT partial exemption calculations (May VAT
year end) September 30 Deadline
for submission of the 2004 tax return if you wish the Inland
Revenue to calculate the tax, or, if you are an employee, you
wish to have a 2003/04 balancing payment of less than £2,000
collected through your 2005/06 PAYE code End
of CT61 quarterly period
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