Hornbeam Highlights 30

Welcome 1

For many of you reading this, this will be the first Hornbeam Highlights you have read. We would like to take this opportunity to welcome our many new clients.

Welcome 2

We would very much like to welcome Paul Betts who has joined us to head our tax department, stepping in as Nicky Cooper has decided to move on. Paul is a Chartered Accountant with 28 years experience in a range of roles. He is now your first point of contact for all tax matters.

Welcome 3

We would very much like to welcome Su Wagstaff who has joined us as Office Manager. Su previously administered the Tax Department at Martin and Acock.

A Small Victory

We recently agreed to settle a significant tax investigation with a tax refund to our clients. This was the first investigation largely handled by Clare Beevers, and those of us who have been qualified for many years have been muttering about “beginners luck”. Our fees for handling tax investigations are inevitably substantial, we offer insurance to cover our fees in this circumstance, and recommend our clients consider this cover. If you would like a quotation for this cover please contact us and ask for Su Wagstaff or Andrew Bloy.

Mainly for owner managed businesses:

Incorporation

Recent tax changes have reduced the advantages of incorporation from about 11% on profits up to £40,000 to about 6% by April 2009. For most of our incorporated clients it remains advantageous to operate through a company, however… it looks likely that in future years the government will bring in further legislation to ensure that small businesses will pay tax at (at least) the same rate if incorporated as if sole traders. It is a case of “watch this space” but future incorporations will need very careful consideration.

Capital Allowances

From 1 April 2008 the capital allowances regime changes radically. Each business can claim 100% relief on capital expenditure up to £50,000 per year from 1 April 2008. The rules for the transition are complex so anyone thinking of substantial capital expenditure should contact us. The rate of capital allowances on acquisitions over £50,000 is reduced from 25% to 20% and Industrial and Agricultural Buildings allowances are being phased out. Even so most of our businesses should be better off. The car regime is also changed to further penalise higher emission vehicles.

Income Shifting

This is the term HMRC use for the practice of “bringing the wife into the business” the object of which is to make use of her personal tax allowance and lower rate tax bands. We have been doing this at Hornbeam, where appropriate, since the firm has been in existence. We have only been challenged by HMRC once and we won that case. Usually the wife is set up as a shareholder or business partner in a successful business. The share of profits which goes to the wife is taxed only at basic rate rather than at the husband’s higher tax rate. HMRC consider that they lose a lot of tax, which is genuinely due, because of income switching.

HMRC have pursued the unfortunate proprietors of an IT consulancy called Arctic Systems Ltd, all the way to the House of Lords, in a determined attempt to enforce some very old legislation prohibiting this practice. To the surprise of most accountants HMRC have lost this case. However, this may prove to be a pyrrhic victory for taxpayers generally as it has prompted the government to come forward with some draconian draft legislation. The uproar from the accountancy profession and taxpayers representatives has persuaded the government to delay implementation until 2009, presumably for further consultation and changes to the draft legislation. So we do not really know what the position is (the legislation looks like being retrospective!).

Our view is that all too many wives go unpaid for the contribution that they make to the family business and too much tax is paid as a result! Best practice remains to recognise the involvement of the wife wherever this exists.

If the wife buys a shareholding in a substantial business for real money, perhaps raising a loan to do so, she will be entitled to the income from those shares and the old legislation against income shifting would not apply. Under the new legislation she will be entitled to a reasonable economic return on her investment before any income is assigned back to the husband. In the draft legislation it is also given as an example that if the wife is a director of the business she will be entitled to be paid for that role (directors pay can be quite substantial). Similarly, a business partner takes a level of business risk, for which she is entitled to be paid.

Our advice is that:

• It remains tax efficient to use both spouses’ (and older children's) personal allowances and lower tax rates. Wherever appropriate a business should be structured to do this
• Where the wife introduces her own money into the business (perhaps half of a remortgage) that should be carefully documented
• All else being equal the wife should be made a partner or director of the business and should attend board meetings, for which she is entitled to be remunerated
• A careful record should be maintained of all those phone calls answered, letters typed, trips to the bank, trips to suppliers and to sites, strategy meetings held over the dining table, for which the wife is entitled to be paid

If you do all these things we should have little to fear from the income shifting legislation – but the situation is rapidly changing and warrants regular review. Please ask us to review your situation. 

Surviving the Credit Crunch

Here are 5 ways Hornbeam can help you to survive and prosper through the coming months:

• With more business failures looming excellent credit control is essential. One quarter of the “Hornbeam Guide to Successfully Managing Your Small Business” is devoted to getting paid on time. This booklet is free of charge to clients (usually £20)
• Hornbeam have a credit control department, operated by Jayne Everett, an ex Inland Revenue tax collector. We are happy to outsource your entire credit control function or to collect specific debts
• Refinancing can become a real problem in a credit crunch. We can help you with this in several ways. Firstly, banks are always more inclined to lend when presented with a proper business plan / proposal. Our prices for such a plan start from £500. Secondly, we can help you find a bank that is prepared to lend in your circumstances.
• Lastly, in tightened circumstances it is even more essential that you use every technique available to maximise the money you receive for your efforts. The whole first chapter of the “Hornbeam Guide to Successfully Managing Your Small Business” is devoted to “how to sell for more”.

Whether you are a client or not, if we can provide further help or advice concerning any of the matters covered here, please do not hesitate to contact us.

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