Communication is the key to family business harmony

Being able to share a passion for your business with your family can be hugely rewarding. But when things go wrong in a family concern the fallout can be felt far and wide.

That is why it is vital to have proper structures in place to mitigate those affects and prevent real damage to the business and relationships.

The problems often start when second and third generations start to be involved and power and decision making is spread amongst wider family who have differing skills, expectations and work ethics.

Problems may start to arise when businesses are handed down to cousins and beyond where there may not be the same shared ideas as held by the previous generations.

Family members with completely different abilities may be rewarded with the same salaries, bonuses, dividend and benefits regardless of their respective contribution to the business – a situation that simply would not happen in non-family run businesses.

These differences can build up resentment that starts to have effects on relationships outside the business. Throw in the opinions of in-laws and the problems can get worse.”

It is important to at the start of the business’ life to make sure everyone is clear about their expectations and requirements and how things will be handled if situations change.

Have a shareholders agreement drawn up by a solicitor specialising in business matters. Advice on the content and implications is needed such that there is guidance on the type of issues to be incorporated into an agreement.

Consider the Articles of Association and whether there needs to be specific clauses that relate to the management of the business. Generic articles adopted when most companies are formed will not be specific on a number of issues that could arise.

Also be mindful of succession planning in advance. Individuals may have ideas that don’t fit with other family members so it is better to address early to avoid misunderstandings.”

I’d also recommend a general code of corporate governance. It would be a mistake not to hold regular meetings to assess, plan and communicate. Many problems can be avoided by good communication.

Giving clearly defined roles to individuals can also create a team mentality and it pays to agree a method of dispute resolution.

Also, and importantly, don’t bring things home. Keep work at work is sound advice for everyone but especially in family businesses. Likewise, don’t take it to work.

Problems and issues at home should not prevent a professional and focused attitude at work.

To discuss any issues raised by this article please call me on 01772 430000

Tax return warning over pensions’ growth

AN HMRC warning that high earners are failing to report pensions’ growth on their tax returns means thousands of people could face large bills in the future, it has been claimed.

The alert comes from insurer Royal London. It explains that when completing annual tax returns, taxpayers are asked if they have put money into a pension above the ‘annual allowance’.

That is currently £40,000 per year for most people, but as little as £10,000 for those affected by the ‘tapered annual allowance’.

This would include growth in their Defined Benefit pension rights as well as cash paid in to Defined Contribution pots. But this requires taxpayers to understand the rules and put the correct data on their tax return.

Royal London says there “has long been a suspicion” that individuals who do not understand the system have been leaving a blank in answer to this question.

And the insurer says that the taxman has declared that it knows “that scheme members are forgetting to declare details of their annual allowance charge on their self-assessment returns.”

Royal London say that means that people who may have failed to declare large pension inputs on their tax return could face a large bill when HMRC finally catches up with them.

Any pension input above the annual allowance is charged at an individual’s marginal income tax rate which could be 40 per cent or 45 per cent.

The taxman has now asked pension schemes to remind members of their duty to put this information on their tax return.

However, schemes will only notify members if they have breached the £40,000 annual allowance limit. If an individual is caught in the ‘tapered annual allowance’ and perhaps has an annual allowance between £40,000 and £10,000, the scheme may not be aware of this and may not notify the member.

Royal London says that if the member is unaware of the rules around the tapered annual allowance then they may simply enter a ‘zero’ for this question on their tax return. But this could be incorrect and they could later on find themselves with a large tax bill.

Steve Webb, Royal London’s director of policy, says: “The shocking saga around the annual allowance for pension tax relief gets worse.

“We now have HMRC admitting that they know that people are forgetting to put information about their pension tax bills on their annual return.

“But filling in this tax return question requires individuals to understand the system, especially if they are affected by the tapered annual allowance.

“Thousands of people could be set to face huge tax bills because they have innocently failed to declare this information on their tax return.

“HMRC needs to get to the bottom of how many people have failed to declare this information and contact them immediately. And the government needs to radically simplify the tax relief limits, to avoid this sort of situation happening again.”

To discuss any issues this article may have raised please contact me on 01772 430000.

R&D tax credit claims up 20 per cent

There has been a 20 per cent increase in the total number of claims for R&D tax credits, according to the latest HMRC figures.

And the good news is that the increase in the take-up is being attributed to a growing number of SME claims, with the department forced to add extra resource to meet the demand.

Manufacturing firms claimed £1.25bn using R&D tax relief in the 2017-18 financial year – more than any other industry sector, new research has revealed.

And since its launch at the beginning of the decade, more than 300,000 claims have been made overall, with £26.9bn claimed in tax relief.

That is a sizeable sum and the figures are moving in the right direction; however it is clear that many small businesses are still unaware of the support available to them.

There is a perception that the credits are just for young companies at the start of their development. That is certainly NOT the case.

The SME R&D relief provides an enhanced deduction for tax purposes of an additional 130 per cent of qualifying revenue expenditure on qualifying R&D, in addition to the 100 per cent deduction already available for revenue expenditure under the normal tax rules.

Where the SME is loss making, alternatively, the SME may claim a tax credit up to 14.5 per cent of the surrenderable loss.

So who is eligible for R&D tax relief? HMRC has set out some clear rules and guidelines.

It says your company can only claim for R&D tax relief if a “project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty” – and not simply an “advance in its own state of knowledge or capability”.

The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.

And if your company or organisation is claiming tax relief under the SME scheme it must own any intellectual property that might arise from the project.

It is not enough to say that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services if they don’t incorporate any advance in science or technology.

You can’t claim R&D tax relief under the SME Scheme if you’ve been subcontracted to do the work on behalf of somebody else.

It’s also worth pointing out that your project doesn’t have to be a success in order to qualify for the relief. The fact that it failed can be used to show that its work was genuinely pioneering.

However, if your company receives a subsidy or grant for an R&D project, it may affect how much tax relief you can claim.

Gaining this support can be an important part of a business’ decision whether to make an investment that can see very real benefits for its future.

The requirements of the scheme are broad. It can include creating new products, processes or services or changing or modifying existing ones.

To discuss the possibility of claiming R&D tax relief please contact me on 01772 430000

Accidental landlords on the wain

The number of homes let by ‘accidental landlords’ has fallen for the first time in five years, a new report reveals.

So-called accidental landlords are those who didn’t buy a property with the intention of letting it out, but who have ended up doing so.

That’s usually because they cannot sell and need to move, or have decided to buy a new home and hold on to their existing property as an investment.

Research from lettings expert Hamptons International has revealed that one in 14 (7.1 per cent) homes that came onto the rental market this year had been listed for sale within the previous six months, the lowest level since 2015.

It says that since tax changes were introduced in the 2018 Budget, the proportion of homes let by accidental landlords has fallen.

The changes that come into being in April 2020 will increase the amount of tax some landlords, who have lived in their rental property at some point, will have to pay if they sell.

Aneisha Beveridge, head of research at Hamptons International, said: “Despite a weaker sales market, which tends to encourage accidental landlords, the proportion of homes to let having previously been listed for sale has fallen for the first time in five years.

“The tax changes being introduced in April 2020 will increase the capital gains tax bill for some accidental landlords who choose to sell after that date.

“Great Britain’s most expensive regions and where prices have risen the most, recorded the biggest fall in accidental landlords.

“This is unsurprising given that landlords in these areas will have seen the greatest gains and therefore could see their tax bills rise the most.”

As well as changes to capital gains tax, bigger potential stamp duty bills for buying another property and changes to tax on rental income have also contributed to the decline in accidental landlord numbers, the agency says.

Previously people could offset all their mortgage interest on the property against rent and only pay income tax on the difference.

However, this is being cut back to a maximum 20 per cent tax credit against mortgage interest, which will be in place fully from April next year.

Total rental revenue is also now added to a landlord’s income to decide their tax rate – previously it was only profit after interest that counted. That potentially means some will find themselves moving up a tax bracket.

To discuss any aspect of these changes and how they may affect you please contact me on 01772 430 000.

Calls for small business support grow

UK business leaders are calling for decisive action to support struggling small firms.

The Lancashire-headquartered Federation of Small Business (FSB) is calling for a major reduction in business rates bills for small firms, as thousands struggle to stay afloat amid spiralling operating costs.

It is calling for the ‘Retail Discount’ – which allows small retailers with rateable values of up to £51,000 to claim a 33 per cent discount on their rates bills – to be increased to at least 50 per cent.

And it wants the support to be made permanent and extended to small firms operating in other sectors, including manufacturing.

The organisation is also calling for the threshold for Small Business Rates Relief to be increased from £12,000 to at least £30,000.

The FSB has been arguing for wider business rate reform as confidence among small businesses falls and costs spiral.

Responding to ONS figures showing monthly retail sales were flat (0.0 per cent) in September, FSB national chairman Mike Cherry said: “The latest retail sales figures reflect a difficult year for the sector, and demonstrate the struggles our high street firms are currently facing.

“Confidence among small retailers remains low, with pressure from employment costs, high rents and competition from large, exclusively online brands.

He added: “While the retail rates discounts this year have been welcomed, these will soon come to an end – leaving us with a system that remains regressive and is not linked to a business’ ability to pay.

“Given the pressure on small businesses, improving the relief by increasing the 33 per cent discount to 50 per cent or more, making it permanent – and indeed extending it to include small firms across the economy, would help revitalise and reform town centres.”

The organisation also says small business want to see “a significant uprating” of the small business discount on national insurance bills available through the Employment Allowance.”

To discuss any issues raised by this article please contact me on 01772 430 000.

Loan Charge review announced

An independent review of the Loan Charge will be led by Amyas Morse, former chief executive of the National Audit Office, it has been revealed.

Announced by Chancellor Sajid Javid, the appointment follows months of pressure from MPs, taxpayers and campaigners concerned by the controversial charge and its impact on people.

The Loan Charge came into effect on April 6 and applies to anyone who used so-called ‘disguised remuneration schemes’.

The legislation added a 45 per cent non-refundable charge on all loans advanced through the schemes – some of them dating back to 20 years ago – unless the individual had agreed with HMRC to settle their tax affairs beforehand.

However, many of the 50,000 people caught up in the issue are low paid and were persuaded by their employers to join the schemes. Many of them are reported to be facing bankruptcy.

Yet, at the time the schemes were set up, HMRC did not question their legitimacy.

The Treasury says Sir Amyas will report back with his recommendations by mid-November, ahead of the January deadline when individuals would need to pay the charge.

The review will consider whether it is an “appropriate way” of dealing with individuals that entered the schemes.

Instead of being paid a salary that would be subject to income tax and national insurance, workers in these schemes were loaned money — typically via an offshore trust — on terms that meant the debt was unlikely to be repaid.

Financial Secretary to the Treasury Jesse Norman said: “These disguised remuneration schemes are highly contrived attempts to avoid tax, but it is right to consider if the Loan Charge is the appropriate way of tackling them.

“The government fully appreciates the concerns expressed by individuals, campaigners, and MPs who have raised concerns about the Loan Charge.”

The government says that while the review is under way the Loan Charge remains in force.

Federation of Small Businesses (FSB) national chairman Mike Cherry, said: “Telling sole traders that they’ll have an update on where they stand as late as November, with then potentially only two months to settle-up, is unreasonable, especially so in such an uncertain and unpredictable climate.

“The loan charge is causing misery for thousands of sole traders – many of whom were acting on the advice of employers or financial professionals when they agreed to schemes which were, at the time of participation, perfectly legal.

“Interventions like the loan charge make it impossible to plan for the future. Many who are playing fair when planning their tax affairs today will be wondering where else the Government might suddenly change the rules, start applying new laws to years past and demand big pay-outs.

“In future, HRMC should establish a tax efficiency white list, guaranteeing that – if the scheme is listed – you have cast iron protection from a retrospective grab if you use it.”

To discuss any business or personal tax matters please contact me on 01772 430 000.

Why it doesn’t have to be taxing!

With so many tax topics currently impacting on small businesses, it is little wonder that it can be struggle to keep up leaving owners and managers feeling intimidated by the whole process.

That is the starting point to a special information and advice session that WNJ is organising next month in conjunction with The Business Clinic.

We’ll be looking to help business owners better understand their tax bill and plan for their tax liabilities.

Originally scheduled to take place earlier this year, I’ll be delivering the advice clinic ‘Don’t Let Your Tax Become Taxing’ with my colleague Steve Towler on Wednesday November 27.

Steve deals with tax consultancy and compliance matters here at WNJ, principally for owner managed businesses.

That includes corporate reconstructions and exit planning, as well as advising on income tax, capital gains tax and inheritance tax matters.

The advice clinic is WNJ’s latest collaboration with The Business Clinic – a growing Preston-based community interest company set up to support businesses across Lancashire.

The Business Clinic delivers independent and thought-provoking strategy, skills and support to ensure healthier profits.

The organisation is run and supported by local business professionals like ourselves – who come from an array of different sectors and backgrounds.

They take part in surgeries and clinics giving businesses impartial support and advice and focusing on their strategy and development.

They include ‘peerworking’ surgeries that explore business opportunities and challenges and bespoke open clinics centre on business development and skills.

WNJ’s tax advice session will take place at The Business Clinic’s offices at Lockside Office Park in Preston from 6pm-8pm on November 27. To book your place online visit www.thebusinessclinic.org

And to discuss any tax matters in your business please contact me on 01772 430 000.

Why charities need an experienced auditor

The importance of charities appointing auditors and independent examiners with specific experience and a proper understanding of the sector has been underlined by a new report.

The study by the Charity Commission has revealed that only around half of the charity accounts reviewed met the regulator’s external scrutiny benchmark.

Nigel Davies, head of accountancy services at the Charity Commission, says: “We know from research we have carried out into public trust in charities that the public care deeply about transparency.

“It is therefore vital that charities are able to provide an accurate and clear picture of their finances.

“External scrutiny is an essential part of the checks and balances process that charity accounts go through and so it is disappointing that so many independent examiners and auditors appear to lack the necessary understanding of the external scrutiny framework.

“Those that are getting this right are playing an important role in upholding charities’ accountability to us as regulator, and the public.”

The team at WNJ has widespread experience working with a range of small charities, supporting them and working to understand their specific and special requirements.

It is important to remember that these organisations are totally different to limited companies operating in the commercial world.

Take their fundraising. A charity’s money can come from a wide range of sources, from local authorities, private donations and raffles.

Their stakeholders are also different and that also has to be borne in mind. Working with a charity is a different discipline to working in the commercial world.

A sample of 296 charity accounts was assessed in the latest study. The accounts were assessed against a new external scrutiny benchmark to determine whether a minimum standard of scrutiny by auditors and independent examiners had been met.

The commission drew the accounts, for the financial year ending in 2017, from three random samples of charities of different sizes.

It found that 46 per cent of the accounts failed to meet the benchmark, with standards worse for smaller charities.

Nigel Davies adds: “I hope trustees will learn from this study, in terms of the expectations around reporting, and in ensuring they select an independent examiner that knows about and understands the requirements.”

To discuss any aspects of this report and how we can help your charity please contact me on 01772 430000.

Construction VAT changes are delayed

Major changes to the way VAT is collected in the construction industry have been delayed until October 1 next year.

It follows growing concerns that some businesses were not ready to implement the VAT ‘domestic reverse charge’ for building and construction which was set to come into force at the start of next month.

The delay aims to give businesses more time to prepare and also avoid the changes coinciding with an October Brexit, if that takes place.

In a briefing note, HM Revenue & Customs, said: “HMRC remains committed to the introduction of the reverse charge and has already increased compliance resource.

“It has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.

“In the intervening year, HMRC will focus additional resource on identifying and tackling existing perpetrators of the fraud. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.

“HRMC recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.

“Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date which they can reverse by using the appropriate stagger option on the HMRC website.”

The construction industry will be relieved by the delay to the changes, which were likely to have a big impact on SMEs in the sector.

It has been estimated that the new domestic reverse charge rules could affect up to 150,000 businesses in the construction and building trade in the UK.

There have been fears that the change could hit the cash flow of sub-contractors in an industry already feeling the squeeze when it comes to payments.

However, it is important to stress this is just a delay and not a cancellation of the scheme.

Some businesses use the VAT they collect from customers as working capital before they pay it over to the HMRC. And they will need to prepare for potential cash flow problems when the new rules come into effect.

It makes it really important that businesses look closely at their supply chain and their customers now and determine how the change will affect them, and what they can do to minimise any impact and get prepared for the implementation.

The reverse charge will apply throughout the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS).

It is expected that supplies between sub-contractors and main contractors will be most affected by the change. At present a sub-contractor is responsible for charging and accounting for VAT to the taxman on supplies to main contractors.

Under the new reverse charge rules the main contractor will be responsible for declaring the VAT on supplies received from the sub-contractor.

An equivalent VAT deduction can also be claimed by the main contractor subject to the normal rules of VAT recovery.

The new rules will apply only to certain building and construction services and to charges in the supply chain – not to end users.

What it does mean is that VAT cash will no longer flow between businesses. For every transaction, the VAT will be registered and clearly stated on the invoice as a reverse charge.

Businesses which receive services from another contractor will need to determine which VAT rate applies and whether the services received will be subject to the charge.

To discuss how the construction industry domestic reverse charge for VAT could affect your business, or to talk about any aspect of VAT, please contact me on 01772 430000.

HMRC collects record £5.4bn ‘death taxes’

The government’s coffers have been boosted by a record £5.4bn in inheritance tax, new figures have revealed.

The number of estates paying inheritance tax (IHT) has also risen sharply, with figures released by HM Revenue & Customs (HMRC) revealing 28,100 estates paid it in 2016-17, an increase of 15 per cent on the year before.

Of the £5.4bn raised, 72 per cent of this was collected from estates worth £1m or more. On average, liable estates paid £179,000 of tax.

The upward trend is explained by rising asset prices and the freezing of the main IHT threshold at £325,000 since 2009, according to the taxman.

As I have stressed before, while IHT receipts are on the rise in a big way, people’s understanding of the system and how it could help them pass wealth onto their beneficiaries isn’t anywhere near as high.

A survey this summer from wealth management specialist Quilter revealed that only 37 per cent of those asked were aware of IHT rules. And under half of those quizzed knew about basic IHT rules around gifting or the nil rate band.

Meanwhile, July saw the publication of the long-awaited second report on IHT from the Office of Tax Simplification (OTS) with a range of useful proposals.

Focused on simplifying the structure of IHT, the report contained some surprises, not only in the recommendations it made, but also in those areas it has left untouched.

The OTS suggests that the annual exemption (£3,000 since 1981) and the wedding gifts exemption (a maximum of £5,000 and a minimum of £1,000, unchanged since 1975) should be combined into a single ‘personal gift allowance’.

While no specific number was pinned on the new allowance, the OTS did note that the annual allowance would be £11,900 in 2019/20, had it been inflation proofed.

Currently you need to survive seven years for any lifetime gifts not to form part of your estate on death and, in some instances, gifts made up to 14 years before death could affect the level of tax payable.

The OTS says that only gifts made within five years of death should be relevant.

That sounds like good news, but there is a sting in the tail: the OTS wants to scrap taper relief, which currently reduces the tax payable – if any – on gifts made more than three years but less than seven years before death.

The paper also discusses the availability of 100 per cent business relief for holdings of AIM shares, but does not propose the relief’s withdrawal.

However, it does make some recommendations about business relief generally and its twin, agricultural relief, which could have a major impact.

The OTS is now being considered by the Chancellor. What changes we will see, if any, depends very much on the political landscape, if there is a general election soon and the winner of that poll.

Amid all the uncertainty, there are ways in which the existing IHT regime can currently benefit your own estate planning and ensure a fairer distribution of your assets through your family.

The £3,000 a year annual gift allowance is good place to start. So is reviewing your will and making sure your assets will be dispersed the way you wish.

To discuss if your estate planning is up to date, or any other tax issues please contact me on 01772 430000.