Salary versus Dividend is a hot topic when creating a Limited Company. I have tried to detail below a simplistic view of the order in which an owner managed business should extract funds from a company.

Step 1 – As a director you are entitled to be paid a salary. A salary should be paid up to the personal allowance limit. This reduces the company profits, decreasing the corporation tax liability. A small element of National Insurance is paid keeping your contributions up to date.

Step 2 – As a shareholder you can receive Dividends from the company. These do not reduce company profits and so there will still be tax to pay on the company; however tax on dividends for an individual, not in the higher rate tax band are payable on a 10% tax rate. This is declared as taxed at source so the tax payable is nil. Dividends do not generate an NI implication for the employer or employee.

Step 3 – Where the individuals earnings are outside of the higher rate band the next step is to reduce any directors loan balance. This is where personal funds have been used to pay for business expenses but have not yet been paid by the company.

On a simple small company this is generally the most tax efficient way of extracting money. Some very important points to note when doing this are:

Do not to use your Company bank account as if it is personal money. There are tax implications where a director owes the company money. Remember the company is a separate entity and it may be that you are not deemed to be acting in its best interest.

In order to pay dividends the company must have sufficient reserves to declare dividends. If directors payments are made out of a bank overdraft with the company not making profits these are effectively illegal.

Dividend payouts should be declared in meeting minutes and a proper voucher prepared. Also dividends are only shown in the accounts when they are officially declared. If they are declared after the year they cannot be backdated.

Be wary of any other organistions who may use your salary for credit checking etc. You may not get the credit required.

As always it is worth speaking to your accountant, either when starting up or on a regular basis. They will be able to advise the amount of dividends and salary accordingly. Why not use our Company v Sole Trader which will also show the appropriate ratios if you have are not sure how to pay yourself.

PAH Accounting are Chartered Certified Accountants based in Devizes, Wiltshire and specialise in the accounts for owner managed business. Check out the website for further information.

Most people will be aware of the upcoming July deadline to pay your payments on account to HM Revenue and Customs. However, are you aware that you may be able to reduce the amount you pay?

The amount due at 31st July 2009 is half of the liability from the tax year ended 5 April 2008. These were based on profits made during that year (dependant on staggered year ends of course). At that time we were not in the global recession of today and most businesses were making decent profits.

Move on a year and for the tax year ended 5 April 2009 most businesses will have seen a downturn in their profits.

If your profits are reduced your tax liability is also likely to be less than last year. Hence, your payments on account will be greater than your tax due. This means that you may be entitled to a refund when you file your tax return.
Would it not be better to not pay the higher amount at all?

There are two ways of reducing your July payment on account. The first is to prepare and file your tax return before 31 July 2009 and just pay an outstanding liability by that date. Your tax account will be up to date and no payment (other than next POA will be due in January 2010.

The second is to put a claim in to reduce the payment on account. Your accountant should be able to do this using their online software. Alternatively you can go the HMRC website and download the form to send in. Be wary about reducing it to levels below the tax you are likely to pay as interest could be applied.

If you feel you have had a downturn in profits and you want further information feel free to contact me.

Schools today need governing bodies to effectively question and challenge.

Your staff flourish in an environment where they feel valued and supported.

I am currently undertaking a series of pro bono visit to governing bodies giving you and your team the opportunity to learn how to use your personal knowledge to enhance the effectiveness of your governing body

In exchange for 30 minutes of your time you will learn about powerful questions and how to improve the effectiveness of the questions you ask of your head teacher and senior management team.

See what Ofsted had to say last year about the school I have been a governor at for over six years and what my coaching clients say about me today:

“Staff and governors know how well the school is doing, share a clear understanding of what the school needs to do to improve further and have a good capacity to bring these improvements about. The governors provide good support and challenge and have been fully involved in the strategic development of the school.” Ofsted, South Marston CofE Primary School, February 2008.

“Hannah have given me an invaluable opportunity to reflect on my own practice and really move ideas forward for a coaching culture throughout my school. It’s a friendly form of accountability that works.” Alison Evans, Kingsdown School, Swindon

To book your ‘Robust Conversations introduction’ contact me on 07545 141 774 or Hannah@BlueKiteCoach.com .

You can also read more about my learning from the “Coaching Tips” tab on the BizMeet Home Page or at www.BlueKiteCoach.com.

The Chancellor presented his second budget in the recent challenging economic climate; however, this budget appeared particularly unexciting for the low to middle earners. Most proposals were introduced in the pre budget report last November.

The increase in the proposed new additional rate of Income Tax from 45% to 50% and the acceleration of its introduction by one year to 6 April 2010 will hit the headlines but will add relatively little to the public purse.  This budget was clearly aimed at the ‘Fat Cat’ city slickers but may well affect other high earners, such as GP’s and head teachers. The effect of the tapering of personal allowances means that the highest effective rate of tax could be 60% for those earning between £100,000 and £113,000 per year.

As usual alcohol, tobacco and fuel were subject to increases.

National Insurance

From 6 April 2011, all rates of national insurance contributions payable by both employees and employers will increase by 0.5%. The point at which primary NI contributions become payable will also be aligned with the starting rate for income tax purposes.

Pension contributions

From midnight on 22 April 2009, rules on the level of tax relief available on pension contributions will be introduced. This will affect individuals with annual earnings over £150,000 that contribute more than £20,000 to pension schemes if they have not been paying regular premiums. The main changes from 6 April 2011 will set an upper limit on the amount of additional pension contributions upon which full tax relief at the highest rates of tax can be given which will depend on earnings.

Changes to car benefits

The Chancellor went against the Government’s usual green credentials, announcing that the discount applicable to company cars using more environmentally friendly fuel sources will be abolished from 2011. At present, qualifying low emission cars attract a lower percentage rate, when calculating the car benefit.   From 2011, the lowest percentage that will be used to calculate the car benefit will increase to 15%. There will be little or no incentive for company car drivers to switch to environmentally friendly vehicles and therefore will not assist the Government in achieving its stated targets on CO2 emissions.

Small companies tax rates

As announced in the Pre-Budget Report in November 2008, the small Companies rate of corporation tax of 21% will continue from 1 April 2009. It had previously been proposed to increase the rate to 22% from 1 April 2009.

Trading loss carry back provisions

A further extension of the loss carry back provisions both for companies and unincorporated businesses was granted. Generally, a loss incurred by a company in an accounting period can be offset against profits of the previous accounting period. In the Pre-Budget Report in November 2008, the Chancellor announced that these provisions would be extended to allow a company to carry back losses of up to £50,000 for a further two accounting periods. This extension will now apply to losses incurred in accounting periods ending in the twenty-four months to 23 November 2010. Relief for losses incurred by unincorporated businesses for the tax years 2008-09 and 2009-10 are also extended.

Businesses may need to consider changing their accounting date to maximise the benefit of the extended loss relief provisions.

Additional first-year allowances

The Chancellor has announced a further temporary measure to encourage businesses to invest in plant and machinery by increasing the rate of writing down allowance from 20% to 40% for one year from 1 April 2009. The new 40% rate will apply to expenditure on plant and machinery in excess of the £50,000 AIA entering the general pool. Expenditure on long-life assets and integral features which is allocated to the 10% special rate pool will not qualify.

Capital allowances on cars

Expenditure on new cars on or after 1 April 2009 will be allocated to the main rate pool or special rate pool, depending on the car’s CO2 emissions figure. Cars with CO2 emissions of between 110g/km and 160g/km will be allocated to the main rate pool and for 2009/10 will qualify for first year allowances at 40% and writing down allowances at 20%. Cars with higher emissions will be allocated to the special rate pool where the writing down allowance is 10%. The most efficient cars, those with emissions below 110g/km, qualify for a 100% first year allowance. Expensive cars acquired before 1 April 2009 will continue to be held in single asset pools for a five year transitional period, after which they will be transferred to the special rate pool. Cars costing over £12,000 acquired after 6 April 2009 will also continue to be in a single asset pool where there is non-business use.

Value added tax

VAT registration: The VAT registration threshold will increase from £67,000 to £68,000 from 1 May 2009. The VAT deregistration threshold will increase from £65,000 to £66,000 also from 1 May 2009.

Fuel scale charges: VAT fuel scale charge figures are to be reduced for VAT return periods beginning on or after 1 May 2009.

VAT standard rate: As expected, the standard rate of VAT will revert to 17.5% from 1 January 2010. Additional rules will be introduced to prevent VAT avoidance arising from the increase in the standard rate.

Jobs market

An additional £1.7bn is be put aside for Job Centres and the New Deal. The government intends to work with employers to create or support as many as 250,000 jobs. In particular there is a pledge to guarantee jobs or training for any individuals under the age of 25 who have been out of work for more than twelve months.

Written by Phil Hendy of Moore Stephens, Malmesbury. For further info check out the budget update on our website or email phil@msmalmesbury.com

Am I wrong in believing there was a time when we all thought banks could do no wrong - it was always us that got ourselves confused and could not make the figures add up. 

If that was the case how different it is now!

In my dealing with the cancellation of credit card agreements on a daily basis I have had two customers both with the same bank ( the one that pays its Chief Executive to much pension) having there oustanding balances - one of £12500 and the other of £22000 completely written off as a result of the banks failure to be able to locate any of the customers original documents and agreements and therefore unable to defend our challenge. 

My colleagues tell me this is a regular occurence with a number of household name banks resulting in their inability to respond to a challenge regarding its content.

I guess the message is always keep copies of your personal documents filed in a safe place at home - you never know when you may need them.

If you would like information on the cancellation of credit card debt please let me know.

Andy

You can read the blog feed by clicking on the “Inspirational” tab on the BizMeet homepage

Arjun has cleverly linked the blog from my website www.bluekitecoach.com to the bizmeet site - Thanks Arjun

I use my blog to jot down notes from my learning journey as a small business owner and coach and would love to hear from you about anything you have learnt about yourself or about owning a business.

THE END OF PAPER VAT RETURNS?
HM Revenue and Customs, VAT Note 4, warns that the phasing out of paper VAT returns starts in just over a year from now. From April 2010 all businesses with annual VAT exclusive turnover will have to file their VAT returns online, and any business registering for VAT will move straight to electronic returns. Businesses making their returns online will also have to pay their VAT by direct debit, but this facility allows extra time for payment, so that the VAT is not paid until at least the 10th of the following month.

BUSINESS PAYMENT SUPPORT SCHEME
The Business Payment Support Scheme has been a huge success. Businesses struggling to meet tax payments can contact special advisers at HMRC who will generally agree a time to pay arrangement within ten minutes on the telephone. Interest will be charged on any late paid tax, but penalties which would normally apply to late payment will not be charged. However, it is important that any business seeking extra time to pay tax liabilities contacts the scheme as early as possible, and sticks to the arrangement made. The telephone number is 0845 302 1435 and the scheme is available until 8pm on weekdays.

HMRC INTEREST RATES REDUCED
HMRC has reduced the interest rates charged on late paid tax, and also reduced the supplement paid when taxpayers overpay their liabilities. Unfortunately, this now means that the rate paid on overpaid income tax and similar amounts is now zero per cent. Further reductions in the bank base rate will not therefore see any further reduction in the rate paid – new legislation has had to be introduced to prevent the rates from becoming negative in the event of further bank rate reductions. Different rates apply to corporation tax, as the resulting interest is taxable on a company. The current rate charged on late paid income and capital gains tax is 3.5%, and on underpaid instalments of corporation tax 2.5%. Late paid corporation tax not due by instalments is also charged at 3.5%.

If you would like to discuss any of these issues, or if we can help with any of your accounting requirements please feel free to contact me.

The Budget – How will it affect small businesses?
 

Chancellor Alistair Darling presented his Pre-Budget report on Monday 24 November 2008.
 

As anticipated there was a concentrated effort to introduce measures to protect and support businesses through the difficult and challenging economic climate. The measures are also intended to help individuals and those on lower incomes.
 

So, what are the main changes that affect small business in the short term?

• Reduction in the rate of VAT from 17.5% to 15%. This is effective from 1 December 2008 and will revert on 1 January 2010.
• Personal tax allowance to increase to £6,475 for the 2009/10 year.
• Deferral of increase in lower rate of Corporation tax. Therefore the rate will remain at 21%.
• Trading losses will now be able to carry back losses of up to £50k for three years.
• The capital allowance regime on cars costing over £12k will be based on CO2 emissions from April 2009.

There are longer term affects, most notably the increase to national insurance, which will increase by 0.5% from April 2011.
 

In addition individuals earning in excess of £100k will start to find their tax burdens a lot more complex and expensive from April 2011.
 

The VAT issue is the one that will affect most businesses, not only from a cost position but from an administrative change. One area to be wary of are businesses using cash accounting. It is important that the rate at the date of supply is used, not the date of payment. This could make Vat returns, particularly for the first quarter of this a little more complex.
 

Anyone using manual or computerised book-keeping systems should ensure that they are updating at the appropriate rates. Sage have already issued guidance notes on how to amend their systems.
 

Loss making businesses should ensure that accounts are finalised and tax computations submitted as soon as possible after the year end to obtain repayments. In addition it would be worth considering a change in accounting date to increase the relief available.
 

Finally, an area that has been overlooked by some is the introduction of a Business Payment Support Service. This is intended to give help to businesses that are struggling to meet their liabilities in respect of all taxes. This will certainly be of benefit to most businesses in the current climate as it could help cash flow and budgeting.
 

Our detailed release, as well as other useful information, can be found here.
 

For further information or if you wish to discuss this further feel free to call me on 01666 823201 or email Phil@msmalmesbury.com .

If I were not in India on Tuesday 25th November (starting 3.30pm) I would have been attending a Sucessful Branding Seminar at the Liddington Hotel near J15 of the M4.

Details attached from Swindon Business News dated 11th October 2008

If anyone goes, I would be very grateful if you would you take some notes and pass them on to me afterwards.

Thank you

Hannah