A very Happy New Year to all our clients and partners!
It was difficult to keep up with the major political shifts during 2016: Brexit, Donald Trump, David Cameron’s exit and the rise of Teresa May; but these changes will dictate and influence the economic conditions that we will all have to deal with during 2017.
In this post, we have listed our top ten tips that should keep you ahead of the game, whether you are employed or self-employed, in business, or managing a property portfolio.
During 2017, a raft of new tax legislation will apply. What we have done in this blog post is note our top-ten choices: those issues that will likely have the most impact for our clients, and for which we will need to work together to grasp any opportunities and deal effectively with any downside risks.
In no particular order, they are:
1. Embracing Cloud Accounting
In little more than a year, April 2018, HMRC have disclosed that certain businesses (including property letting businesses) will need to upload quarterly accounts data to HMRC, and by 2020, all businesses will need to comply. From 2020, most UK tax payers should be able to access their tax account with HMRC, online.
The so-called “Making Tax Digital” revolution will require businesses to keep their accounting data in an electronic format that will sync with HMRC’s online systems. Cloud accounting solutions, for example Sage, Xero, QuickBooks and others, provide the best solution as your data and the software is accessed via the internet. We will be working with clients during the coming year to ensure they are supported, and ready to comply with these changes, and to take advantage of any opportunities that the digitalisation will provide. Read more about digital tax accounts here…
2. Buy-to-let property issues
One of George Osborne’s legacies is the gradual reduction in a landlord’s ability to secure higher rate tax relief for finance charges – this includes mortgage and loan interest – and the process starts in April 2017. Those property investors who have borrowed heavily to grow their portfolios will be most at risk.
In some cases, landlords who presently pay tax at basic rate will be promoted by these changes to pay tax at higher rates, and with no increase in rental earnings their business plans will need a significant rethink.
If you feel that you may be affected, please take time out early in the new year to consider your options, and of course, we are willing and able to advise.
The restriction of income tax relief will apply to individuals: who let residential property in the UK or elsewhere, and who are claiming a deduction for financing costs from April 2017, and who pay income tax on their property income at the higher (40%) or additional (45%) rate. It will not apply to: financing costs for purchase of furnished holiday let or commercial property, property businesses subject to corporation tax – owned by companies, or individuals who pay tax on their property income at basic rate only.
The new measure will gradually restrict landlords’ tax relief for finance costs to purchase residential properties, to the basic rate of income tax. From 6 April 2020, landlords affected will no longer be able to deduct their finance costs from their property income. Instead they will receive a basic rate deduction from their income tax liability.
2017 is definitely not a time for sitting on the fence on this issue.
3. Salary sacrifice rethink
From April 2017, most salary sacrifice schemes will be subject to the same tax regime as cash income. Salary sacrifice schemes exchange salary for a non-cash benefit (such as a mobile phone). Both the employer and employee make a tax saving, because the benefit is taxed less than a salary or not taxed at all.
The changes will affect schemes differently: pensions, pensions advice, childcare, Cycle to Work and ultra-low emission cars will be exempt. All arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to 4 years.
Benefits presently taxed as ‘less than a salary or not taxed at all’ include mobile phones and other IT gadgets.
Speak to your Burton Sweet adviser for more information.
4. The right business structure
There has been a steady stream of business incorporations in recent years. This has benefitted a growing number of business owners who are able to reduce NIC contributions by substituting salary for dividends and further protect their personal assets from business risks. Those fortunate enough to generate more profit than they require for private use have also been able to retain profits inside their company and only pay tax at the 20% corporation tax rate.
Whilst there are no immediate signs that these planning options are to be withdrawn, the changes to the taxation of dividends and the introduction of possible limitation of liability for the self-employed, may benefit certain smaller businesses who have incorporated and could now consider unincorporating.
The goal posts are shifting. Each year sees the introduction of changes that may affect past planning decisions, so the new year may offer opportunities for a change in your business structure.
Where appropriate, we will be suggesting a review to clients, once the January self-assessment deadline has passed.
5. Profit extraction strategies
Director/shareholders of limited companies have a number of options when considering the most tax efficient way to extract their remuneration. They include: tax efficient benefits, salary, interest on loans made to their company and dividends.
Year on year, the relative merits of each option will vary as legislation changes. So, we recommend a review of your profit extraction options before the new tax year begins in April 2017.
Issues that need to be considered are: protecting your State Pension by maintaining a minimum level of NIC contribution; taking advantage of the savings allowance; minimising your exposure to the dividend tax and reconsidering benefits (company car etc.).
6. Tax planning BEFORE 6 April 2017
The ‘before’ in the title is upper case for good reason. Your options to change your tax circumstances in 2016-17 largely disappear once the last day of the tax year passes.
As every person’s financial affairs are different it is pretty well impossible to generalise regarding opportunities to make best use of tax planning. Individuals should consider their exposure to higher rates of tax, and in particular, will their income during 2016-17 push them into the next income tax rate band for the first time? Unfortunately, there are certain levels of income that trigger a loss of benefits or allowances as well as a charge to income tax. Because of this, the percentage rate of tax charged can be higher than the underlying rate of income tax.
For example: when your income exceeds £100,000 you lose £1 of your £11,000 personal allowance for every £2 your income exceeds £100,000. This means that when your income reaches or exceeds £122,000 you are no longer entitled to a personal tax allowance. The loss of this allowance, on top of the 40% income tax payable, means that your income in the band – £100,000 to £122,000 – is taxed at an eye-watering 60%.
Revisiting your tax planning options may result in a steady-as-you-go approach; it may also flag up changes that will reduce your exposure to higher taxes, as long as decisions are made and enacted BEFORE 6 April 2017.
7. What is your breakeven turnover?
In a nut-shell, this is the amount of sales your business has to generate to cover all its costs, taxes and the business owner’s drawings.
Why is it important to calculate this figure?
If you compare your current sales with a breakeven figure calculated some time ago, you may be under- or over-estimating the current state of your business profitability.
An accurate breakeven figure will provide you with a rule-of-thumb benchmark against which you can quickly measure business performance – any turnover that exceeds the breakeven number will likely turn in a bottom line profit, and vice versa.
We can calculate this for you if you would find the base line indicator useful.
8. Budgeting for 2017
Businesses that are serious about making progress during 2017 are advised to take time out before the start of their next financial year and create a projection of income and outgoings. This can be extended to include changes in your working capital and cash flow.
One of the major benefits of budgeting is that it allows a comparison with your actual results and thus, affects your management decisions based on this comparison. Ideally, the budgets should be dynamic, that is, you have the flexibility to revise the forward budget as circumstances change.
Managing small and medium sized businesses without a budget or forecasts is a lot like driving a car and wearing a blindfold; it will probably lead to an unforeseen outcome… Budgeting, especially for cash flow, will also highlight seasonal crunch-points: when, for example, you may need to take your numbers to the bank and organise a temporary overdraft.
The digital age has provided us with excellent tools for this purpose, and there is no need to spend hours contemplating the back of an envelope. We can help you design simple spreadsheets to manage the calculations, or use bespoke forecasting software.
To start the process, you will need to have forward estimates for turnover, costs and plans for capital investment together with your needs for remuneration. We can do the rest. If you use accounts software, it should be possible to import your budgets and produce monthly reports (actual v budget comparisons).
This is a vital new year resolution if you are serious about keeping your business plans on an even keel!
9. VAT special schemes
Small to medium sized business that are VAT registered normally pay over the difference between the VAT they add to their sales and the VAT added to the goods and services they buy.
In certain circumstances, the VAT special schemes may be beneficial.
The Cash Accounting option allows you to restrict your payments to the VAT on money received from customers less VAT paid to suppliers. This can be particularly beneficial if amounts due from customers regularly exceed amounts due to suppliers. There are no overall savings, but there may be cash flow advantages.
The Flat Rate Scheme can produce real cash savings for smaller traders, but recent changes may make this scheme less beneficial from April 2017.
You could also cut down on admin chores and register for the Annual Accounting option.
10. Business sales and start-ups
The effects of Brexit are largely an unknown. Depending on your point of view it seems to swing between the best thing that has happened to possibly the worst outcome for the UK.
Inevitably, until the i’s are dotted and the t’s crossed we are in unknown territory. Consequently, business owners wanting to exit their hard-won nest-egg, and new entrepreneurs about to dip their feet in the same pond, will need to proceed with caution.
So in summary…
This 2017 round-robin highlights the value of keeping on top of your business and financial affairs. If you want to optimise the value when you sell or pass on your business, or make a success of a new venture, planning is absolutely critical.
Planning will make the difference between celebration and despair. If you are selling, buyers may be thin on the ground, and if you do manage to get them interested, you should take care to structure that deal so that you maximise after tax proceeds. If you are starting or buying a business, you will likely be investing your own savings or offering your personal assets as security for funding. Without a degree of forethought, you may witness a lifetime’s effort evaporate as unforeseen factors quickly decimate your hard-won capital.
However, with careful planning and monitoring, all is possible. Shorten the odds in your favour and take professional advice before you sign to sell or buy. Good fortune not only favours the brave, but also favours the well informed.
We’ve all had enough change in the last year, enough to see us through the rest of this decade. Hopefully, this short update has provided a few nuggets that will help you see out 2017, and achieve a modicum of success along the way.
John F Kennedy made the following remark in 1966: “There is a Chinese curse which says ‘May he live in interesting times.’ Like it or not we live in interesting times. They are times of danger and uncertainty; but they are also more open to the creative energy of men than any other time in history“.
Perhaps, what goes around does come around…
Best wishes to you and your family for 2017.