Minerva Accountants Bristol and Somerset
Fully digital Xero accountants for consultants & service businesses
If you have put money into your limited company that has not yet been repaid then you can pay yourself interest on this loan. This can be a tax efficient way to take money out of the company BUT you would need a CT61 form completed for HMRC each quarter.
If, on the other hand, you have borrowed money from your company then you may face a higher tax charge and even a personal tax charge.
I’ve lost track of the number of accountants who describe themselves as “proactive” on their websites.
According to Cambridge English Dictionary:
Proactive = taking action by causing change and not only reacting to change when it happens
For an accountant to ‘cause change’ they would need to be actively advising a business on how to change their numbers. This is a very different offering from completing tax returns once a year. It’s not even the same as completing management accounts once a month.
In order to ‘cause change’ you need a starting point:
Up to date bookkeeping, management accountants, KPIs, etc
You also need to understand those numbers:
Analysis, commentary, a management review
Then the real work can begin. The expertise of knowing how to change those numbers. And the action plan and accountability to ensure that it happens.
Most accountants don’t deliver on their proactive promise because their clients do not pay enough for this premium service, or because the basic numbers aren’t available in time to take action. With technology to speed up processes this is easily changed so that more business owners can benefit from truly proactive accountants.
If you would like to find out more then you can book a Clarity review with us to drive your business forwards, get in touch to find out more.
We want accountants to make a real difference to business owners, so let’s do better business together.
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.
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.
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?
In tough times, when business is hard, these systems will allow business owners to react and avoid further penalties.
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.
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?
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
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.
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.
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:
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.