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Alphabet Shares 

Last week I mentioned Alphabet Shares in my tax tip. 

All shares of the same class must receive the same dividend. For example, if you have 100 ordinary shares and vote a dividend of £10 per share then each shareholder must receive £10 for each of their shares. These dividends should be paid into an account in the shareholder’s name. 

If you wish to pay different shareholders at different rates, then you will need to have different share class. These are often, rather unimaginatively, called A shares, B shares, etc and usually referred to as alphabet shares. Each class may also have different rights (voting, distributions on winding up, etc) It is simplest if these different share classes are created at incorporation.  

Alphabet shares need to be structured correctly to minimise any challenge from HMRC. Definitely not one to do yourself. 

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I hate DLAs! 

Many of our small business clients make a reasonable profit but still get into financial difficulty because they don’t thoroughly track their DLA (directors’ loan account) throughout the year. Well, it isn’t really that. Often they track the amounts they’re taking out but they don’t track how much they SHOULD take out.  

When we get to the year end and work out the actual profit we find that they have taken too many ‘dividends’ and the DLA is overdrawn. There are many reasons for this. 

  • They have taken a ‘salary’ without a PAYE scheme so we have to choose between setting up a late payroll and the associated penalties or reclassifying these as DLA 
  • They kept their books up to date but forgot to allow for tax before seeing how much profit was left for dividends  
  • They’ve taken the same amount of salary and ‘dividends’ as in previous years but forgotten that their income and profit are lower this year 
  • They put excessive personal transactions through the business that need to be reclassified as DLA 
  • Paying their personal tax from their business 
  • They haven’t even bothered to do their bookkeeping each month but taken whatever money was in the bank without any thought of taxes due 

The year end situation, with all the bookkeeping up to date and the appropriate accounting and tax adjustments, shows that there are not enough profits to cover the withdrawals or ‘dividends’. The clock is ticking and the client has nine months after the year end to repay the overdrawn amount (and not replace it with another loan from the DLA!) If they are continuing the pattern into the next year this is not often possible. 

This means a penalty tax (under Section 455) of 33.75% 

This is on top of the normal corporation tax which means that the company has even less cash for the business activities.  

The best clients pull their socks up and reduce their spending to stay within their available profits AND repay the DLA. But they still can’t reclaim that penalty tax until 9 months after the end of the tax period the DLA is repaid.  

So, after all that doom and gloom, how do we prevent this? 

  1. Educating our directors. When setting up a business there is no training given to directors so we run two courses on ‘Finance for Directors’ and ‘Directors Responsibilities’ 
  2. Regular bookkeeping (easy with modern software) 
  3. Bespoke reports that estimate the after tax profits available for dividends 
  4. Encouraging directors to take regular salaries rather than dividends (now that the NI and corporation tax benefits of low salaries are negligible). This means that the personal tax is paid each month 
  5. Prompt year end accounts so that the director time has time to repay any overdrawn amounts 

In tough times, when business is hard, these systems will allow business owners to react and avoid further penalties. 

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Give your adult kids some shares  

As your kids head off to university or out into the big wide world you may gift them some of the shares in your business. Alternatively, they can buy into the business themselves, and you can deduct this payment from their first dividend.

They might have the same class of share or a different class (see Alphabet shares which I’ll cover next week) so that you have more flexibility over the dividends that they receive. Paying them dividends would allow them to take advantage of the tax-free limit (currently £500) and any unused personal allowance.

They do not need to work in the business in order to receive shares. 

Save NI and maybe lower rate of personal tax.

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What skills does a modern accountant need? 

With AI taking over the duller bits of our jobs, what skills does a modern accountant need? 

Communication – reading between the lines as to what clients (and HMRC) actually want/need 

Patience – chasing information from clients or hanging on the phone to HMRC (listening to the message that tells us to try the website first, as if we wouldn’t try that first!) 

Tech/AI guru – because we want to get the most out of it. We’re accountants with tech, not versus tech 

Judgement – reviewing AI (and other) generated information to apply it to the particular business/tax position of this client which requires a thorough understanding of the business (see communication) 

Counselling – we’re often the only person able to truly understand the rollercoaster emotions that come with running a business 

Cheerleading – motivating our clients on down days (not the acrobatics bit!) 

Clairvoyance – for the most accurate forecasting and tax planning 

 What other skills do we need? 

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Pay your spouse a salary

This is a favourite bit of advice from ‘Dave at the pub’ and he may well be right as it reduces the corporation tax that you pay. If your spouse works in your business, then it would be right and fair to pay them for that work. The bit that ‘Dave’ forgets is that all expenses must be ‘wholly and necessarily for the purposes of business’ so, if your spouse doesn’t actually work in your business, it could be fraudulent.

We always ask our clients to provide a realistic job description (if we do your bookkeeping then you can’t include this as one of their tasks! Nor can you claim diary management if you trade from a mobile phone and book all your own appointments) and an estimate of the number of hours worked. This should show that the salary is reasonable for the work they do. You should pay them at least minimum wage and deduct relevant employment taxes.

Please don’t try to claim that minor children are working in your business! There is separate legislation covering minors in the workplace and you will need to get authorisation from their school and the local council as well as your insurance company.

Save corporation tax, pay PAYE/NI

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£15,000 of bookkeeping errors! £3k of tax errors! 

That’s what happened when a small business client set themselves up on software and let the AI and their own inexperience guide them. 

Usually we set up the software and provide training videos but this client slipped through and decided to do their own thing. Fortunately, before we start the year end work, we run a few bookkeeping healthchecks and full balance sheet reconciliations to pick up any major discrepancies.  If the client had submitted their own tax return the company would have underpaid nearly £3k of tax. (Unfortunately all the corrections increased their tax bill, but at least they will withstand a tax investigation so the client can sleep at night.) 

A timely reminder that AI can help accountants, but can’t replace our professional judgement (yet!) 

As a bonus, with the time that we save using technology in our business we are able to advise clients on how to grow their businesses. Clients on full business advice packages get the best value but even our no-frills clients receive general advice and reactive telephone/email support. 

How are you using technology in your business? Reducing costs or providing more value for the same fee? 

If you’d like to discuss our business growth packages just drop me a message. 

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Salary or dividends? 

If you are a director or working in your business, you can pay yourself a salary. If you are a shareholder, you can pay yourself dividends (provided that there are sufficient profits). In owner managed businesses it is common to take a slightly lower salary and higher dividends.  

Salaries are good because they will reduce your corporation tax. The company will need to pay employers’ national insurance (which may be offset by Employers Allowance) whilst the individual will pay PAYE and employees’ national insurance. Provided that the salary reaches the necessary limit, the employee will also qualify for certain benefits such as state pension. 

Dividends are good because there are no national insurance contributions to pay. They are paid out of post-tax profits so there is no corporation tax saving. Dividends can only be paid out of profits so, if the company is making a loss, there is nothing to pay out.  

Each year we calculate a tax efficient salary for our clients. For decades the most tax efficient route has been to take a lower salary and pay the balance in dividends but it’s not just tech that is changing as these days it is often better to take a higher salary so do check with your accountant. 

NB when selling your business any prospective buyer will adjust any salary to market rate when calculating the business profits. 

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Building a business that works for you 

When I take on a new client, whether for Minerva Accountants or for coaching, I always start with WHY they started their own business. They usually fall into one of three categories: 

  • Freedom 
  • Flexibility 
  • Control 

A few want to make a difference to the world. Only once have I taken on a client whose primary motivation was financial. But somewhere along the line they have lost this in the business of making a living. They might be growing, but they’re growing in the wrong direction. 

After founding five businesses and successfully exited two, as well as coaching numerous business leaders, I’ve found that the measures of success are different for everyone. For some it is time with their family, for others it is the freedom to travel, and there are some who just want a few luxuries without killing themselves working long hours. 

There’s no single blueprint but there are definitely principles that work across all sorts of businesses.  

I’m fortunate to have a space to share this in my books and from stages around the world but I particularly enjoy coaching owners and nurturing individual businesses where I can see the results of my advice and support. 

The best business isn’t always the biggest one, it’s the one that works for you.  

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Paperwork required to take money out of your business 

Paperwork (or the digital equivalent) is important.

If you are running a limited company, it is important that you don’t take any money out of the business without the correct paper trail. The company is a separate legal entity from the director/shareholder. It’s a bit like taking money out of your mother’s purse without permission.

The sort of paperwork you would need is: 

  • Salary needs a payslip 
  • Dividends need a minute and a tax voucher (contact us if you need a template) 
  • Interest payments (if appropriate) need a form CT61 filed with HMRC 
  • Expenses should be accompanied by receipts and a mileage log 
  • Pension payments should be paid directly to the pension provider

Get in touch if you’d like our template minutes and dividend voucher

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How I won my first clients and what I’d do differently today

Looking back on when I first set up my first business I didn’t have a clue about marketing.  

I’d read all the books (okay, maybe not ALL of them) and even taken a few courses but reality is very different when you start day one of your business. Running a business is a real roller coaster of fear and exhilaration and nobody is there to guide you. 

I found my first clients for Hudson Accountants (my second business) by hand delivering a mailshot to local businesses on the High Street and a local trading estate. They were individually addressed as I’d walked down the road making a note of the business names. I’d even included a reply paid card. When I received the first (and only) one of those reply paid cards we celebrated with a glass of bubbly. 

Networking was another terrifying experience. These days it comes much more smoothly as I enter a room where people often know me from social media or other connections and I even bump into clients at some events. But my first Chamber of Commerce lunch in Manchester in 2009 I didn’t have a clue what to say!  

As you can see, I’ve survived, moved the business from Bolton to Bristol and then sold it. I now run three other fully remote businesses including Minerva Accountants. 

For business owners looking to avoid the same learning curve, the 30 Day Start Up course provides practical guidance on the key skills needed to build a successful business, while Minerva Accountants helps entrepreneurs stay on top of the financial side as they grow.