Finding the right exit: Seeking good advice

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In the latest in our series looking at exiting a business we look at the importance of getting the right professional advice when it comes to issues like tax

Most people who have been in business for a number of years should have learned that their accountant is not just there to add up the numbers, file accounts and work out the tax.

They have a thorough understanding of the business, how it works, its products, markets and people, and are therefore in a great position to be able to see its value in the future.

Change within the business of any sort can affect its value and a good accountant will help identify this and be able to discuss how the risks can be reduced or mitigated.

Accountants should be able to help plan and communicate the plan to the stakeholders. The same can be said of solicitors, familiar with any employment, property or other potential issues.

It is also important to be aware of the importance of tax mitigation when it comes to an exit strategy. For instance, if a business is handed or sold to the next generation, there will be a number of tax issues to address.

The family’s position in term of potential exposure to Capital Gains Tax and Inheritance Tax will be significantly affected by the transfer of the ownership of the business.

Just as a sale to a third party will have tax consequences, selling or transferring a family business needs to be understood and planned to mitigate the tax loss.

However, a transfer to other family members also provides a number of tax planning opportunities.

The best solution will depend upon a number of factors such as the family position, in terms of wealth and income both internal and external to the business itself, how much and how quickly the incumbent owners want to see the benefits of a sale of and the long-term intentions of the new owners.

It is very important to get an early understanding of the position and preferences of all involved to plan an approach which minimises the tax to a family, both at the time of the transfer and the future.

That is why it discussions are needed with professional advisers at an early point to get the appropriate structure in place.

There are other matters where that professional advice and knowledge can really help.

Consideration should be given to the fact that a family business may be run by two generations but there are often children of the current owners who are not involved or do not want to become involved in the business.

If the business is sold or given to one and no other children, then this can cause problems within the family.

Parents usually want to treat all their children equally, but this can be difficult when the value of a business is uncertain and likely to vary over a period of time, so achieving an equitable solution that all family members agree upon is difficult.

Professional advisers will help all concerned understand a realistic valuation of a business and the variations in the short and longer term as well as the risks involved within a business that can have a significant impact on its values.

Solicitors may need to understand the intentions of business owners when drafting clients’ wills as there can often be unintended consequences of such situations. Wills should be updated as soon as a handover of the family business is considered.

If differing siblings have different roles, shareholdings or involvement in the future business then a Shareholders’ Agreement may be necessary to clarify and document the situation. Again, professional advisers should be consulted when considering these matters.

If the incumbent owners wish to extract significant funds from the business or the new owners need to raise funds to buy-out their parents, then financial advice may be necessary to raise the new funds or invest the extracted funds.

It may take time to raise the finance as putting appropriate applications forward to lenders will need professional input and making the proposition to a lender or investor attractive will take time to prepare.

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

Inheritance tax hits a record high

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Inheritance Tax (IHT) receipts for April 2022 to February 2023 hit a record £6.4billion – almost £1bn higher than in the same period a year earlier.

The announcement by HMRC has renewed calls for action to be taken on the long-frozen tax threshold.

The IHT nil-rate band, which is the maximum amount a person can inherit before paying the tax, has been stuck at £325,000 since 2009 – despite rising house prices.

Last November, chancellor Jeremy Hunt announced that the nil rate would remain frozen until at least April 2028, despite inflationary pressures.

And it is important to point out that the IHT gifting allowance of £3,000 a year has also remained unchanged since 1981.

Add those lengthy freezes to recent property price rises and it is little wonder that experts say that an ever-growing proportion of estates are likely to become liable to pay IHT, despite the slowdown in the housing market.

It is also little wonder that the Office for Budget Responsibility has also updated its forecasts for future IHT receipts.

It is now estimating that between 2022/23 and 2027/28, the Treasury will receive nearly £3bn more than previously forecast after last November’s budget statement.

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.

As with most tax issues the key here is to start your planning early and to get a good handle on your estate. Having a clear strategy is also important.

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.

The first question you should be asking is: “Is my estate planning up to date?”

To discuss any issues around IHT or other tax issues please contact me on 01772 430000

Finding the right exit: Making a smooth transition

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In the second part of our series looking at exiting a family business we look at how to make a smooth transition and why that is so important

The key to a successful business exit often lies in the smoothness of the transition. Early planning and good communication are both vital.

A first and most obvious issue is that the business may be losing one, if not two, of the key people that have been instrumental in its development, who have a lifetime of business experience, contacts and technical expertise.

These retiring family members may be central to the businesses culture and branding so their sudden removal could be disastrous.

Early planning is therefore important to ensure the new owners, or other key employees in the business, gain the necessary qualities and build trust with the various stakeholders.

Often a transitional period works well, where certain tasks or relationships are gradually released, at a pace that is appropriate for the business and the people in it.

This may be slow at first as people learn new roles and responsibilities but if handled well, will allow the new owners and promoted staff to feel empowered in a way that may have not been possible or foreseen and lead to better motivation, innovation and growth.

Again, early planning and good, clear communication helps get new people on board and ready for the challenges and prevents unanticipated shocks to the business.

Usually, a gradual withdrawal helps both the original and new owners get maximum value from the business and leads to fewer problems both for the business and the family.

I have seen occasions when the original owner, even after passing the business onto their children, has struggled to withdraw.

A life in business can be a difficult habit to break and it can be difficult to stop “interfering”. It can prevent the next generation taking full “ownership” of the challenges the business faces. Sometimes a clean break is necessary.

Again, a compromise may be possible with good communication. Larger companies will often have a board of non-exec directors who will not be involved in the day-to-day running of operations or decision making.

They are there to help the management and operational directors keep on track, see the wood-from the trees so to speak, allowing their wider experience and knowledge from other businesses to be of use.

Such a role is often ideal for the outgoing shareholders within a family business because they can enjoy the freedom of retiring from the everyday demands of the business but still offer help to the new owners in the family.

The help is from a trusted source who is less likely to have their own interests in mind, so it can be welcomed.

Next month some of the tax and financing considerations will be discussed.

HMRC tax investigations: Are you covered?

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There is little doubt that HMRC has been ramping up enquiry activity into potential tax avoidance in recent months and that work is going to intensify.

Figures last September showed the number of professional fee insurance claims had increased by 60 per cent over just one quarter as compliance activity increased.

In December, the Financial Times reported that HMRC was under pressure to urgently recoup tax revenue after parliament’s spending watchdog revealed a sharp fall in investigations over the pandemic had cost the government as much as £9bn.

An investigation into your tax return by HMRC is triggered for several reasons: a tip off, paying the incorrect amount of tax, late returns or simply working within a targeted sector to name a few.

The revenue’s ‘snooper computer’ Connect collates data from banks, Land Registry records, Visa and MasterCard transactions, DVLA, council tax, VAT registration documents, Airbnb, and believe it or not even your social media profiles.

The assumption when you’re selected for a tax investigation is that you have done something wrong. This is rarely the case.

Random enquiries into tax affairs can and do happen. Whether you’re an individual taxpayer or business owner, an investigation is possible, and nobody is exempt.

Any taxpayer can be targeted by HMRC, answering all its questions takes time and the enquiries often drag on for months and sometimes take years to conclude.

It can cost a lot to defend you, whatever the result. That is why it as important as it has ever been for you to protect against these costs.

Once HMRC decide to investigate you must comply with their requests. HMRC will check your accounts, request a plethora of documentation, ask lots of questions and may even want to visit you in person.

No additional tax may be due, but you will still be left with enquiry fees which could cost thousands.

Investigations are costly, stressful, and an unwelcome distraction from day-to-day life; whether HMRC initiate a Full Enquiry of your tax history or an Aspect Enquiry into a specific area of your return, you will be liable for the professional costs to bring about a prompt resolution.

Immediate professional representation from your accountant is essential in successfully and quickly dealing with HMRC enquiries, but that comes at a cost, and will not be in your budget.

The good news is there is help available. Tax Investigation Services, like the one WNJ offers its clients, will protect you from accountancy fees associated with an HMRC enquiry, limiting the stress and uncertainty.

As a member of the service we provide, in partnership with Croner-i, you can be safe in the knowledge that we will represent you in the event of an investigation and deal with HMRC on your behalf.

And the service has been boosted to now include access to ‘My Business Hub’ – a valuable online resource which allows you to tap into a taster of the company’s vast business resources.

The ‘digital toolkit’ has been developed by Croner, which has invested heavily to provide valued solutions to thousands of businesses for decades.

The hub delivers advice on subjects including taking on extra staff, health and safety policies and a range of legal matters, including employment law as well as access to expert thinking.

There’s never been a more critical time to have tax fee protection insurance in place or to review your existing insurance arrangements.

• To discuss any issues raised by this article and the insurance policy options available please contact me on 01772 430000

Are you aware of the new VAT penalties and interest payments?

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HMRC is reminding VAT registered businesses to file their returns and pay on time, ahead of new penalties being applied.

It says the new penalties will be “fairer and more proportionate” for businesses who submit their returns or pay their VAT late.

The first monthly returns and payments affected by the penalties are due by March 7.

The late payment penalties and points-based late submission penalties were introduced from January 1 this year, replacing the VAT default surcharge, and apply to accounting periods which start after that date.

The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns. Changes have also been made to how interest is calculated.

Paul Riley, HMRC director of tax administration, says: “Our aim is to help customers get things right before monetary penalties are applied; a points-based system for late VAT returns will not punish the occasional error.

“We are contacting 2.5 million VAT registered businesses about the changes and will continue to support customers to help them manage their tax affairs and payments.”

The changes to VAT penalties and interest payments are:

• Late submission penalties – These work on a points-based system. For each VAT return submitted late, customers will receive a penalty point until they reach the penalty point threshold – at which stage they will receive a £200 penalty.

A further £200 penalty will also apply for each subsequent late submission while at the threshold, which varies to take account of monthly, quarterly and annual accounting periods.

• Late payment penalties – If a VAT payment is more than 15 days overdue, businesses will pay a first late payment penalty. If the VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply.

To help people get used to the changes HMRC will not charge a first late payment penalty on VAT payments due on or before December 31 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.

• Payment plans – HMRC will help businesses that cannot pay their VAT bill in full. Customers may be able to set up a payment plan to pay their bill in instalments.

After December 31, 2023, if a customer proposes a payment plan within 15 days of payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided that they keep to the conditions of the payment plan. Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them increasing.

• Interest calculations – HMRC has introduced both late payment and repayment interest, which will replace previous VAT interest rules. This brings the new regime in line with other taxes.

The deadline for submitting VAT returns online is usually one calendar month and seven days after the end of an accounting period. This is also the deadline for paying HMRC.

For example, for January to March 2023, the quarterly accounting period ends on March 31, 2023. The deadline for submitting the VAT return online, and the payment deadline for that quarter, is May 7, 2023.

For late submission penalties, all HMRC customers will start on zero points. This includes those on a default surcharge. Any who are on a default surcharge will still be liable to pay any associated charges already received.

If the penalty point threshold is reached, businesses can only remove points by completing a period of compliance, submitting all VAT returns by the deadline, and submitting all outstanding returns for the previous 24 months.

Late submission penalties do not apply to a:
• first VAT return if a business is newly VAT registered.
• final VAT return after a business cancels its VAT registration.
• one-off returns that cover a period other than a month, quarter or year.

The first late payment penalty is calculated as:
• Two per cent on the VAT owed at day 15 – for VAT payment between 16 and 30 days overdue.
• Two per cent on the VAT outstanding at day 15, plus 2 per cent of what is still outstanding at day 30 – for payment 31 days or more overdue.

The second late payment penalty is then calculated at a daily rate of four per cent per year on the outstanding balance and charged daily from day 31 until the outstanding balance is paid in full.

For customers using the Payments on Account Scheme, or Annual Accounting Scheme, late payment penalties apply to the balancing payment. They do not apply to instalments or payments on account that are paid by the balancing payment due date.

Late payment interest is charged from the day after the customer’s VAT payment is due until the day it is paid in full. It is calculated at the Bank of England base rate plus 2.5 per cent.

• To discuss any issues raised in this article or any tax issues please contact me on 01772 430000

Get ready for minimum wage hike

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The National Living Wage (NLW) for workers aged 23 and over will go up by almost 10 per cent in April. Are you ready for the increase?

The rate will rise to £10.42. That represents an annual pay increase of more than £1,600 for a full-time worker.

The 92p rise, announced by the chancellor in his autumn statement is also the largest ever cash increase to the NLW.

Changes to the other National Minimum Wage (NMW) rates including percentage rises, can be found here:

HMRC stresses that paying the National Minimum Wage can be more complex than just paying your workers the correct rate. These are just a few of the risks and common causes of underpayment they are keen to highlight:

• Deductions and payments for items or expenses that are connected with the job.

• Unpaid working time for example, team handovers between shifts or time spent passing through security checks on entry and exit.

• Incorrect use of apprenticeship rates. For example, paying the minimum wage apprentice rate when the worker is not a genuine apprentice, or paying the minimum wage apprentice rate before a worker starts their apprenticeship, or after it ends.

To discuss any issues raised in this article please contact me on 01772 430000

Finding the right exit: Why families have to talk

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In the first of our series looking at exiting a business we examine the family complications that might arise and how best to avoid them

You’ve spent time and energy building up your business but what happens when it’s time to take your leave. How do you clear a clear path towards the exit and make sure it is the right journey for you and those around you?

This can be a life-changing event for you and your family, so it is vital to get both the exit and what life will look like once you’ve gone through the door right.

The situations vary enormously depending upon the business types and sectors, individuals’ requirements and positions, and the dynamics of family and other relationships.

But the two main themes which run through the whole process remain constant: Plan in advance and communicate with each other.

In some family businesses, the actual legal ownership is almost irrelevant as the current legal owners almost see themselves as merely the current custodians of a family business that has been passed through the generations and the future owners understand that they are the likely heirs to the legacy.

However, there will be other cases where the current owners need to exploit the full value of their business to maximise their own retirement position.

Typically, it is a combination of the two whereby parents will want to bolster their retirement savings to a satisfactory point but also give their children a good start in running the business without being overburdened financially from the start.

There are a number of problems that can arise because of misunderstandings that develop over a number of years.

A typical case would be when the second, or even third or further generations, have worked in the business for years, and in their mind, they have earned the right to inherit the business, or at least acquire it on favourable terms.

If this is not appreciated by the current owners, or something changes such that expectations of the two generations are out of sync, then there may be conflict, difficult negotiations, and potential family fall out.

The key is clearly communication, and my advice is the sooner and more open those conversations are, the better for everyone.

Family dynamics will usually pre-date the communication style assumed within the business environment so the way in which the family relate to each other in the business is at the heart of these issues and should be addressed before new generations even enter the business.

If there are differences in expectations between parents and children, it becomes even more complex when third generation businesses are liaising with uncles, aunties, and cousins rather than just parents and siblings. Throw spouses in the mix and it is easy to see how expectations may vary.

Again, communication is key.

• To discuss any issues raised in this article please contact me on 01772 430000

Corporation tax rise looms

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The increase to corporation tax rate confirmed in last November’s autumn statement will come into effect from April 1 this year. What will it mean for you?

At the present moment in time all companies, whatever the size of their profits, pay the tax at the rate of 19 per cent.

However, from April 1 a new higher rate comes in for companies with profits over £50,000, The increase is significant with rate rising to 25 per cent.

Smaller or less profitable businesses will not pay the full rate and companies with less than £50,000 profit will not see any increase at all, continuing to pay at 19 per cent.

The introduction of a small profits rate will mean that around 1.4 million businesses continue to pay either no corporation tax or pay at the 19 per cent rate.

Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by a marginal relief. This provides a gradual increase in the effective corporation tax rate.

Who can claim Marginal Relief

Your company or organisation may be able to claim Marginal Relief if its taxable profits from April 1, 2023, are between:

• £50,000 (the lower limit)
• £250,000 (the upper limit)

If your accounting period is shorter than 12 months these limits are proportionately reduced. These limits are also proportionately reduced by the number of associated companies your company has.

For example, if your company has three other associated companies, the limits are divided by four. The lower limit becomes £12,500 and the upper limit becomes £62,500.

You cannot claim Marginal Relief if you’re a non-UK resident company, a close investment holding company or if your profits, including distributions from unrelated, unassociated companies, go over £250,000.

The full amount of corporation tax at the 25 per cent rate will be calculated before marginal relief is deducted. Those calculations are based on offsetting ‘augmented profits’ against the total taxable profits.

These augmented profits are the company’s total taxable profits, plus exempt distributions from non-group companies. They include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities or the repayment of share capital.

• To discuss any corporation tax issues or any tax questions you may have please get in touch on 01772 430 000

Giving a Boost to business

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The leader of Lancashire County Council has issued a call to action to businesses in the county urging them to tap into the funded support services delivered by its Growth Hub, Boost.

The call by Councillor Phillippa Williamson is part of a new Helping Lancashire Businesses campaign, aimed at increasing its support to businesses across the county in 2023.

The county council is the lead body for Boost; Lancashire’s Business Growth Hub, which has supported more than 12,000 businesses since it started in 2013.

Boost provides a range of fully funded support programmes and advice to small, medium and large businesses, including leadership mentoring, peer networks, business planning, sales and startup support.

All businesses, no matter what challenge they are facing, are being urged to talk to the Boost team.

Cllr Wiliamson said: “It’s a brilliant service that has had a positive impact on thousands of businesses but there are many thousands more that we want to help too.

“Some businesses are facing difficult conditions and there are many that are growing and creating jobs. The support available through Boost and the business support eco-system is vast and no matter what stage of the journey a business is at, we have someone who can help. I am urging businesses to talk to Boost to get the support they need.”

Lancashire County Council also leads a specialist service called Two Zero, for high growth scaleup businesses, and has Rosebud Finance and Access to Finance among its business support portfolio.

Since 2013, Boost has helped create more than 3,000 jobs. This support has helped add £100million to the Lancashire economy.

Cllr Aidy Riggott, cabinet member for economic development and growth, pictured here with Cllr Williamson, said: “There are many challenges facing people who run businesses but they don’t need to do it alone.”

Lancashire business owners and managers can get in touch with Boost by calling 0800 488 0057 or visiting the Contact Us page on the Boost website.

Is your data protection up to scratch?

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The Information Commissioner’s Office (ICO) is urging the North West’s 512,000 SMEs to check they have the right data protection practices in place to help sustain and develop their businesses.

In a statement ahead of the annual Data Protection Day in January, the ICO stressed that good data protection practices “project positively” on a company’s reputation.

A recent survey, commissioned by the ICO, revealed that 91 per cent of people worried about having their personal information sold to other companies without their consent, and 87 per cent worried about a company losing their personal information.

Data protection law sets out what businesses should do to make sure that they are looking after people’s personal information properly and fairly.

The ICO says that in addition to the legal requirement, good data protection makes “economic sense”. It saves business owners time and money and shows customers that their information is being treated correctly.

The organisation has a suite of free resources providing advice and guidance on its dedicated SME hub. Its chief operating officer Paul Arnold said: “As we head into a new year, and a tough year for many small businesses, we want to help business owners work confidently and responsibly with the personal information they hold.

“It can be an incredibly valuable asset when held and processed responsibly and can enable hard-working business owners to develop their business, whilst instilling a real sense of confidence in their customers.

“Generally speaking, data protection law applies to all workplaces, business ventures, enterprises, societies, groups and clubs. That includes sole traders, the self-employed and company owners and directors.

“We live in a data-driven world and if used in the right way, data can really help a business achieve greater success.

“Data protection compliance is not a barrier to business success and the ICO is here to help. For example, we want to empower businesses and organisations to ensure their email marketing databases are working as hard as possible to reach the right customers, lawfully, every time.”

The ICO’s top tips for beginners in business:

1. Make a list – Start off by making a list of what personal information you have or plan to collect. You need to be able to account for all of it.

2. Ask why – There’s a balance to be made between what you want to do with people’s personal information, the benefits that brings to them and any harm that might be caused as a result. If you’re holding or using people’s personal information, it must always be fair as well as lawful.

3. Think security – Check your security measures line up with the sensitivity of the information you hold. Put stronger security measures in place if the data poses a higher risk or is sensitive.

4. Be transparent – It’s essential to explain to people: why you hold information about them; what you’ll do with it; and how long you’ll keep it before safely disposing of it. This should also be recorded in a privacy notice.

5. Know about subject access requests – People have the legal right to know what personal information you hold about them. The ICO has a step-by-step guide on how to deal with a subject access request.

6. Have a data breach action plan in place – If you lose personal information and it is likely to result in a risk to the people affected, you’ll need to report it to the ICO. It has produced a guide on how to respond to a personal information breach and the steps to take in an emergency.

7. Check in with the ICO regularly – The ICO website is updated regularly to help you take simple steps towards improving your data compliance