thetaxguys, Author at The Tax Guys
Award Winning Accountants
MAKING BUSINESS LESS TAXING™
All Posts By

thetaxguys

How to lose the fear of accounts and learn to love your business numbers

By | Uncategorised | No Comments

 

 

Whether you are working from home from your kitchen table, fitting in with the school run or you are running a company with 100 employees you need to understand your business numbers.

If you are a fan of Dragons’ Den you’ll know that a lot of business owners struggle to explain their accounts and numbers. However, unless you understand the story your numbers are telling you, you are likely to be running your business with your fingers crossed and hoping for good luck.

Here are some tips on getting to grips with the numbers so you can use this knowledge to be even more successful with your business.

What’s your profit?

The first thing you want to do is check if you’re making profit and see if that profit figure makes sense. This is done by looking at the profit and loss account and scrolling down to the bottom figure which will show a profit (positive figure) or a loss (negative figure).

Then look at the top figure (the sales) and quickly glance through the list of expenses.

Take the bottom figure (let’s assume its £15,000 profit) and divide it by the top figure (assume £100,000 sales). This will give you 0.15 which means for every £1 of income, you are generating 15p in net profit.

How does the £15,000 profit compare with what you had in mind? And does the 15% net profit margin deliver the right return for you?

 

 

How healthy is your business?

The next thing you want to check is that the business has a positive balance sheet value. You do this by looking at the balance sheet statement which shows what your business has and what it owes. Scroll down to the bottom and make a note of the last number. It’s normally called capital and reserves. Is that figure positive or negative? A positive figure means your business has some value.

A negative figure is a red flag and means if things carry on as they are, you will not have a business for very long. Take action to improve this. Improving profits is a good place to start.

Because the balance sheet tells you about your assets and liabilities, your debtors and creditors, when you look it try to ask simple questions like; is this how much I owe my creditors? is this how much my customers owe me? If the amount your customers owe you is higher, this is a red flag. Get the debtors list, review and start making some calls.

Is your cash in the right place?

So, your profit figure shows £15,000 as above but your bank balance is only £3,000. Where did the £12,000 go? There is another financial statement called cashflow statement which reconciles your cash to your profit. But if you don’t get this, no need to panic. Here is what you can check:

Have your customers paid you late?

Have you drawn more money or dividends out?

Have you paid your suppliers early?

Have you purchased some equipment?

If you answer yes to any of the above, then chances are that’s where the £12,000 is sitting.

 

 

Is your gross margin where it should be?

Gross profit margin is an important number to calculate from your accounts, but it’s vastly ignored or misunderstood among most entrepreneurs. So, the next time you get your accounts, take the direct costs of sales or direct expenses (what we call variable costs) out from the revenue. Then divide that number by the revenue. That is your gross profit margin.

Let’s say your revenue is £100,000 and your materials or direct labour or direct expenses cost you £70,000. The difference of £30,000 divided by £100,000 revenue gives you a margin of 30%. This means that for every £1 of sale, you are making 30p in gross profit. This tells you how profitable you are at the gross margin level. It also tells you whether your business model works or not.

Here are two red flags. If you’re making £30,000 in gross profit but your fixed costs are say £35,000, something needs to change if you’re to remain in business for long. In addition, if your margin is far below the industry average, you need to understand why and take the necessary corrective action.

What’s the value of your business?

You now know how to get and make sense of your profit figure. You also know what to look out for when you review your balance sheet and the meaning of the balance sheet value. And how to look out for the cash drain in your business. Did you know that these give you a starting point in measuring the value of your business?

Healthy profits, good cashflow and positive balance sheet values are all good signs of a valuable business. Of course, there are many other factors to consider when valuing your business and other key drivers of business value. However, knowing how to read your accounts and what the numbers mean certainly puts you in a good position. It also helps you make the right decision with regards to building the value of your business.

If you need to improve your knowledge of your business numbers, set yourself some homework and you’ll improve your skills. It’s a good idea to have regular meetings with your accountant who can review the numbers discussed here as well as others that you need to know.

 

 

Is your gross margin where it should be?

Gross profit margin is an important number to calculate from your accounts, but it’s vastly ignored or misunderstood among most entrepreneurs. So, the next time you get your accounts, take the direct costs of sales or direct expenses (what we call variable costs) out from the revenue. Then divide that number by the revenue. That is your gross profit margin.

Let’s say your revenue is £100,000 and your materials or direct labour or direct expenses cost you £70,000. The difference of £30,000 divided by £100,000 revenue gives you a margin of 30%. This means that for every £1 of sale, you are making 30p in gross profit. This tells you how profitable you are at the gross margin level. It also tells you whether your business model works or not.

Here are two red flags. If you’re making £30,000 in gross profit but your fixed costs are say £35,000, something needs to change if you’re to remain in business for long. In addition, if your margin is far below the industry average, you need to understand why and take the necessary corrective action.

What’s the value of your business?

You now know how to get and make sense of your profit figure. You also know what to look out for when you review your balance sheet and the meaning of the balance sheet value. And how to look out for the cash drain in your business. Did you know that these give you a starting point in measuring the value of your business?

Healthy profits, good cashflow and positive balance sheet values are all good signs of a valuable business. Of course, there are many other factors to consider when valuing your business and other key drivers of business value. However, knowing how to read your accounts and what the numbers mean certainly puts you in a good position. It also helps you make the right decision with regards to building the value of your business.

If you need to improve your knowledge of your business numbers, set yourself some homework and you’ll improve your skills. It’s a good idea to have regular meetings with your accountant who can review the numbers discussed here as well as others that you need to know.

The 5 Biggest Tax Problems GP Practices Face That An Accounting Firm Can Help You Overcome

By | Medical | No Comments

As an award winning firm of Chartered Tax Advisers and Accountants who specialise in GP practices, here’s our prediction of the 5 tax problems and threats to the medical profession in the coming years.

  1. Making Tax Digital (This will have huge implications for you)
  2. Self-Employment Status Of Your Associates
  3. IR35 (similar to the self-employment status)
  4. HMRC enquiries (they are still interested despite the failed “tax plan” campaign and have now invested in £100m system called “Connect”)
  5. Superannuation and pension tax

In addition, we predict high personal tax rates for at least another 3 – 5 years.

12 Tax Mistakes Every Entrepreneur Makes

By | Financial, Taxes | No Comments

 

 

As a busy entrepreneur, you’re wearing many different hats and your focus is probably on making more money or getting the right team in place. Sometimes seeing your accountants can feel like a trip to the dentist. However, if you’re not talking to them, then in the current climate of complicated tax rules, it means you’re probably making the following tax mistakes.

1. Claiming too much use of home expenses

There is absolutely nothing wrong with claiming these expenses. The problem is that by over claiming them, you potentially end up paying a lot more tax in capital gains tax when you come to sell your property. Why? Because the value of your home would have gone up and you lose generous tax relief on the part of your home you turn into business.

2. Retrospective tax planning

You’re busy and fire fighting in the business. You take so many decisions and then at the end of the year you try to piece some clever planning together even though all the events have already happened without much thought.

Unless you prepare and plan for taxes, it’s likely that you will pay more tax. Now here’s a thought. You do have some sort of a business plan even if one page right? How about a tax plan?

3. Not keeping proper records

Those pesky receipts, collating and keeping them all is not a fun job is it..? But for VAT registered business owners, not keeping them is a common mistake akin to literally throwing or giving away your piggy bank to HMRC. So the next time you fail to get that VAT receipt, consider whether you will also dip into your pocket, grab those coins and throw them away.

The good news is that with so many apps on the market, the task of keeping proper tax records has become less taxing. With apps like Auto Entry, Expensify and Receipt Bank you can easily snap the receipts on the go and forget about them. The technology and your accountant would take care of the rest.

 

 

 

4. Wasting over £26,000 tax allowances

They say that tax allowances are like your muscles. If you don’t use them you lose them. And did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year? It’s not uncommon to see many of these go to waste.
If you’re an entrepreneur who has dabbled in crypto currencies, make sure you make the most of the capital gains tax allowance.
And do consider how to also make use the allowances of your spouse and children.

5. Missing out on these 8 generous tax breaks

There are more tax breaks within the law that most entrepreneurs miss out on but here are the most common ones

• Research and development
• Bad debt provision (make sure you have taken steps to recover the money)
• Capital allowances on equipment used for the business including fixtures which are part of the building you have bought
• Lease premiums
• Warranty provisions
• SEIS and EIS tax reliefs
• Entrepreneurs relief
• £40,000 lettings relief (this might be scrapped by HMRC)

The reason why most of these reliefs get missed is that you actually have to make a claim to get them.

6. Not putting aside money for tax

Cashflow can be a huge problem but when it comes to VAT and PAYE, the taxman’s stance is simple; it’s not your money. For income and corporation taxes, waiting till December or January to find out that you have this huge tax bill but no funds put aside is a common mistake entrepreneurs make.

To avoid this problem, look at the business model, plan for taxes and open a separate bank account to put cash away for taxes.

 

 

7. Poor or no evidence to back up claims

The rules on what expenses can/cannot be claimed are not as straight forward as you may think. By not taking extra care or failing to appoint a good accountant or tax adviser, most entrepreneurs make this costly but avoidable mistake Here’s an example: a business owner who rented an accommodation in Scotland in order to avoid expensive hotel bills during a long business trip was denied tax relief because the evidence he submitted was not sufficient to meet the so called “wholly and exclusively for the purpose of trade” test.

Tip - When claiming or incurring expenses for business, ensure that the primary purpose is for the business and have all the supporting documents to back this up.

8. Not reviewing the business structure

Maybe, when you started, you were rightly advised to go for a sole trader, partnership or a limited company. But the rules keep changing. When was the last time you reviewed and compared different tax structures?

9. Wasting Business Property Relief

Your business has value. It’s your life’s work. A common mistake I see is lack of planning around how the business should be passed-on tax free when you’re not here. The rules, subject to some conditions, allows your life’s work to be enjoyed tax free by your loved ones. But if you do not have a Will or if in your Will you’ve passed the business to say your spouse, you’re wasting this generous tax relief.

 

 

10. Getting self-employment status wrong

This is a complex area and one which keeps changing. Whilst you may safely get your own status right as an entrepreneurial business owner, how confident are you that your freelance workers and associates are genuinely self-employed? HMRC is cracking down on the so called ‘gig economy’ and are putting the onus on entrepreneurs to get this right.

11. Buying the shares of your competitor

Instead of organic growth, you’ve decided to acquire your competitor. In your haste to get the deal done, you buy the shares of the company instead of the assets. This is a common tax mistake because whilst buying the shares is a good for the seller, you lose the tax reliefs associated with buying the assets.

12. Accepting 30% more tax when selling your company

So it’s time to put your feet up and retire. You’ve decided to sell up but you’re dealing with a well-informed tax buyer who wants to pay more for the company’s assets but he or she is not interested in the shares. You’re tempted and you agree to sell the assets. You’ve potentially lost out on a 10% tax rate and are now looking at over 30% tax. Why 30%? So the company sells the assets and it pays corporation tax at, say, 19%. You then need to extract the cash out and let’s be conservative and say you pay 20% income tax. That’s 39% potential tax.

Conclusion

Take a look at your business plan, and your tax plan, and check you are not falling foul of any of these 12 mistakes – and if you aren’t sure, or need help, then call in a reputable accountant. The fees they charge you are often mitigated by the amount of tax they can save you.

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.

9 Ways To Make Christmas Tax Deductible and Keep The Taxman Ho Ho Ho Happy

By | Financial, Taxes | No Comments

The season of goodwill is upon us. Many business owners would be “splashing out” on gifts, parties, awards and other kind gestures to end the year on a high. And if you’re looking for some Christmas tax reliefs or ways to leverage your money this Christmas, then here are 9 ways to reduce your tax bills whilst keeping the taxman happy.

1. £5,000 Tax Free Award?

As the end of year draws to a close and you’re in the festive mood, you might decide to award one or two staff members for their outstanding contribution to your business and for going beyond their call of duty.

Did you know you can pay your staff tax free income for suggestions that benefit your business? Yes you can and actually there are two kinds of awards:

  • encouragement awards - for good suggestions, or to reward your employees for special effort
  • financial benefit awards - for suggestions that will save or make your business money

Encouragement awards are tax free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.

But before you go ahead and pay your staff tax free income this Christmas, please note that as will all tax reliefs and tax exemptions, there are conditions to meet. Some of the conditions for staff suggestion scheme includes:

  • the suggestion scheme must be open to all your employees
  • the suggestion must relate your business
  • your employee must go beyond their call of duty (ie suggestions made as part of their normal work will not count)
  • the suggestion can’t be made at a meeting for proposing new ideas

And to keep HMRC have a look at what they say on this by researching on their website. Here’s the reference EIM06600. And if you don’t qualify, then something to certainly think about in the new year.

2. Tax Free Gifts To Employees

In addition to awards, gifts you give to your employees are normally exempt from tax and NI. However this exemption only applies if the gift is deemed to be trivial. For a gift to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees’
contract or a reward for performance. It must also not be a cash reward as HMRC will tax this as earnings (payroll tax). So classic gifts including a bottle of wine or box of chocolates would be exempt from tax.

3. Tax Free Business Gifts To Customers

These are only allowable as a tax deduction if the total cost to each customer per year is less than £50 and the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products).

4. Tax Efficient Vouchers

If you give your employees cash vouchers, the amounts would need to be put through the payroll and subject to tax and National Insurance. Non-cash vouchers up to £50 may be exempt under the trivial benefit rules. Where the voucher exceeds £50, you will need to report these on a P11D form to HMRC.

5. Tax Free Christmas Parties

It seems to be common knowledge that an employer can spend up to £150 per head including VAT per year, in providing annual social functions to entertain its staff.

But here are some points to bear in mind. This £150 is per head and not per staff. To work
out the cost per head, divide the total cost by the number of attendees (staff and any other
guests). So when employees’ spouses and partners do attend the event you can budget for £300 per couple. The £150 is not an allowance. It’s an exemption and so if the cost per head works out at £151, then the full £151 is taxable and not just the £1 excess. So do watch out for attendees dropping out last minute as this could spoil the “tax party” for you and your staff.

Thinking of having two parties during the year? Let’s say the first party is budgeted at £145 per head. The second party will cost £100 per head. The £150 limit can be used against the first party leaving the second party as a fully taxable benefit.

To keep HMRC happy, do ensure that the annual event is a staff social event and opened to all staff. Plus do keep proper records especially on the number of attendees. For more info search for EIM21690 on HMRC’s site.

6. Tax Efficient Client Entertainment

Ok, so you’ve read somewhere or you’ve been told by your accountant that client entertainment is not tax deductible. And this is true. But please bear in mind that if you happen to entertain clients this Christmas and you meet any of the following 2 conditions, you can claim these expenses against your tax. These are the so called exceptions to the rules.

Contractual obligation: Where it’s part of your business to entertain, say if you’re providing a training course to businesses and you entertain them as part of the course – maybe providing tea, coffee, lunch and so on – even if it’s food, you’re still allowed to claim that because you’re under a contractual obligation to give them food.
Quid pro quo: Let’s say you’re a freelance journalist and you want to speak to say Andy, a man who has world of experience on a topic you’re writing about. You offer to take Andy out to lunch this Christmas in exchange for his insight into the topic which you’re researching. Because Andy is coming to the table with something of value but not benefitting from it apart from getting free lunch, you’re actually allowed to claim the expense, even though it appears as entertainment.

In order to keep HMRC happy, do have plenty of evidence to support your claim.

7. Inheritance Tax Free Gift:

Gifts between family members are normally dealt with under the inheritance tax code subject to the various reliefs and the seven-year rule. This rule, also called PET (Potentially Exempt Transfer), says that if you make a gift and then survive for seven years afterwards, the gift becomes exempt (i.e. no tax is payable) and therefore falls outside of your estate for tax purposes. Luckily, the inheritance tax code has some pretty generous reliefs and exemptions including an annual exemption of £3,000 and a small gift exemption of up to £250 a year.

8. Christmas and Tax Incentives

According to a recent studies by Gallup, about 60% of employees are not engaged. This is not good news for most employers. However most employees do look forward to Christmas. Why not capture this mood and announce some good staff retention and performance
incentives at Christmas? So you can consider things like tax efficient share option schemes if appropriate or tax efficient remuneration packages. How about Christmas shopping half day off? This may well save you some recruitment costs in the New Year.

9. Upto £1,000 Long Service Award

Let’s say you have an employee who has worked for you for a very long time. It’s time to move on and you’ve both decided that December will be a good month to say your goodbyes. Did you know you can give them a non-cash award of upto £1,000 if certain conditions apply? Search HMRC’s site for long service award for more details.

Plan Ahead to Save Tax Next Year

If you’re reading this and thinking you’ve missed out on some useful tax reliefs, the only way to ensure you make next year tax deductible is to plan ahead. Until then, Merry Christmas..!

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant. He is the founder of The Tax Guys.

Should you transfer your buy-to-let properties into a limited company?

By | Financial, Taxes | No Comments

With mortgage interest tax relief disappearing, landlords who have a few buy-to-let properties could consider transferring them into a limited company.  But is it worth doing? Jonathan Amponsah, CEO at The Tax Guys, explains the pros and cons.

Mortgage interest relief for buy-to-let (BTL) landlords is changing, with the new rules being phased in between April 2017 and 2020.

MORE

Landlords will no longer be able to deduct all of their finance costs from their property income.  From 2020, you will instead receive a basic rate reduction from your income tax liability for your finance costs. So, if you incur £1,000 interest, you will only be able to claim £200 (20% x £1,000) off your tax bill.

However, this change doesn‘t apply to limited companies so many BTL landlords are now tempted to transfer their property into a limited company to continue claiming tax relief on all the interest and finance costs.

It’s an attractive proposition as a limited company will enjoy the tax relief that individuals are now losing, and any net profit will be taxed at the lower company tax rates of 20%.

But… you may find yourself landed with unnecessary tax bills and costs.

Pitfalls

Here are five common pitfalls to be aware of if you are considering a transfer to a limited company:

  • Stamp Duty Land Tax. If you transfer the property from yourself to the company (effectively the company buys the property) then the company could become liable to pay stamp duty land tax. So while you reduce income tax, you may end up paying the same amount or more in stamp duty land tax.
  • Capital Gains Tax. If you transfer the property to the company, this will be treated as if you’ve sold the property to the company. If the property has gone up in value since you originally bought it, you’ll have to pay up to 28% capital gains tax on the difference, subject to any tax reliefs and allowances. If you have a few properties to transfer, seek advice about a relief you could claim to defer your capital gains tax.

These two main tax pitfalls could potentially wipe out any short-term tax savings.

  • Your Mortgage. If your company needs a mortgage to buy the property from you then watch out as in most cases the interest rate is higher for commercial or company mortgages than it is for individuals. So, you could end up paying a lot more over the full term of the mortgage.
  • Once the property is transferred, the company owns it, not the landlord. If something happens to the company, all its assets will be exposed including the property that you put in it.
  • At some point in the future if you sell the property the company will pay Corporation Tax on the profits and the balance of the money from the sale will remain in the company.  In order to get access to the funds to enjoy you’d need to take it out of the company either as salary or dividends or other means. You’d then pay additional tax on that income. When you take the above into account the idea of transferring your BTL property into a limited company starts to sound rather bleak.

Benefits

But there are some situations where you can reduce or eliminate the pitfalls above and enjoy some of the benefits of holding your properties through a limited company.

  • If you’re buying a new property then a limited company could be a good idea. But if it’s an existing property and you’re only managing one or two properties, I’d say: don’t bother. You’re better off paying just a little bit of tax now instead of triggering all these taxes and then having to pay additional double tax if you sell the property in the future.
  • If you currently run your BTL through a properly arranged partnership business, then transferring into a limited company could be a good idea because some of the tax burdens above could be reduced.
  • Legacy planning. Landlords who want to leave their BTL properties to their children could consider the pros and cons of a Family Investment Company as an alternative to a Trust.

Important decision

Clearly the message here is ‘don’t rush into it’. It’s extremely unwise to move BTL properties into a company without taking professional advice.

Whilst there’s no simple answer to the question and it all depends on your circumstances, as a general ‘rule of thumb’ I would say that if it‘s only one or two existing properties in your name, it‘s not a good idea.

If you‘ve got six to 10 properties, it might be worth your while to look at how you can enjoy the benefits of a limited company without triggering unnecessary taxes and costs.

Source: https://www.whatmortgage.co.uk/news/buy-to-let/transfer-buy-let-properties-limited-company/

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant. He is the founder of The Tax Guys.

LESS