eSmart Tax issue 5 by Steve Wright

eSmartTax THE DIGITAL BUSINESS AND WEALTH MANAGEMENT MAGAZINE

The credit crunch, how did it all begin? A knock-on effect for credit markets and the wider world economy

Companies Act 2006

your questions answered

Research and development tax credit

new rules hinder SMEs ability to claim

October / November / December 2008

UK businesses still remain ambitious

annual survey shows more focus on increasing cash balances and paying down debt

Government takes action to help small businesses through exceptional economic times steps to improve the flow of finance

PLUS: TAX FACTSâ&#x20AC;Ś COMPLETING YOUR TAX RETURN... A WAKE UP CALL FOR BRITAIN...FACTORING...

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Contents

05 06 07

Inside this issue credit crunch, how 05 The 12 UK enterprise did it all begin? A knock-on effect for credit markets and the wider world economy

Banking bail-out £500bn underwritten and guaranteed by the Treasury

for small 07 Help businesses through the economic slowdown

initiatives are a welcome breakthrough

07 08

Three-part financial rescue package

12 Factoring

securing faster creditor payments

new measures come into force next April

wake-up call for 13 ABritain other European countries offer a more favourable tax regime

13 New homes

Completing your tax return

Manufacturing gloom deepens on falling orders and output sharpest single quarter fall in manufacturing confidence for 28 years

October / November / December 2008

of the UK’s 15 Some largest businesses

paid no corporation tax during 2005/06 HMRC to pursue companies that avoid paying tax

to a million landlords 12 Up 15 National targeted by HMRC minimum wage

reducing the effects of the credit crisis on the UK economy

tax doesn’t have to be taxing if you don’t miss the deadline

good environmental practices could reduce operating costs

developers may have to pay back VAT

One in three companies are considering moving operations abroad executives seek to access a more competitive tax structure

business 14 Green practices

rates applying from 1 October 2008

are 16 Companies taking longer to settle their debts bringing in the money

17 Maintaining your credit score during difficult economic times

keep a close eye on those customers who owe money

and 17 Research development tax credit new rules hinder SMEs’ ability to claim

environmental taxes discourage damage to the environment

Contents

Inside this issue takes 18 Government action to help small businesses through exceptional economic times

steps to improve the flow of finance

New business regulations more red tape for small firms

19 Compulsory government pensions… employers could see large increases in payroll costs

Lean accounting

Fair value accountancy rules

a lack of understanding still exists

greater global consistency

management 20 Fund services changes to the VAT exemption

21 Small businesses

late-paying customers are forcing increases in bank borrowing

Small businesses burdened with higher price rises economic climate almost doubles the official inflationary figure

tough on 25 Getting businesses that avoid corporation tax

report urges improvements of investigations into compliance

businesses still 26 UK remain ambitious annual survey shows more focus on increasing cash balances and paying down debt

your 28 Getting business into the

a successful exit requires planning

30 Tax facts

income tax rates and allowances

30 Tax calendar tax dates for your diary

to review 31 Pressure Savings Directive… report identifies problems and the potential solutions

32 Corporate matters your questions answered

businesses in 34 Small the UK could lose

out on up to £200m in tax relief

ten tips to survice the credit squeeze

your questions answered

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

only half have submitted claims

getting your finances fighting fit

best possible shape

CORPORATE 21 Corporate housekeeping 34 THE CREDIT CRUNCH Companies Act 2006

28 34 October / November / December 2008

CREDIT CRUNCH

The credit crunch,

how did it all begin? A knock-on effect for credit markets and the wider world economy As financial institutions globally announce varying degrees of difficulties and losses caused by toxic assets and bad debts held on their balance sheets and with the share prices of some of the UK’s largest banks falling to unprecedented levels, the word ‘subprime’ has become synonymous with these historic events. The beginning of the subprime mortgage crisis can be traced back to 2001. During this year the US economy was first hit by the dotcom bubble crash, which was then followed by the events that took place on September 11th. In the wake of this, the US Federal Reserve dropped interest rates to 1 per cent, making borrowing cheap as the US housing market began to boom. Many mortgage lenders thought they saw a particularly lucrative market by lending to adverse credit subprime borrowers, because they would be able to charge higher interest rates to their higher-risk customers. As house prices continued to increase until 2006, refinancing these mortgages through homeowner loans or remortgaging was relatively easy. However, house prices had increased sharply along with interest rates, and by the end of 2006 house prices began to deflate. Soon the US housing bubble popped and house prices slumped, leaving many people in a position where they found it difficult to refinance due to negative equity in their property. People began to default on their mortgages, and this became even more apparent during 2007 and 2008 with many more properties being repossessed as a consequence.

October / November / December 2008

A considerable number of mortgage lenders who lent to subprime borrowers repackaged their debt as mortgage-backed securities (MBS). The cash flow of these had been backed by the principal and monthly interest payments of the mortgages. Because of the boom in the US housing market, many banks and hedge funds saw MBSs as good investment opportunities. However, when the cashflow on them stopped due to borrowers defaulting, the securities lost their value, resulting in huge losses for those that had invested in them. As a result these events have had a knock-on effect on credit markets and the wider world economy, and are the root of the current financial crisis we are experiencing.

A considerable number of mortgage lenders who lent to subprime borrowers repackaged their debt as mortgage-backed securities.

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NEWS

BANKING BAIL-OUT £500bn underwritten and guaranteed by the Treasury The Prime Minister, Gordon Brown, announced on 8 October 2008 that he would make available hundreds of billions of pounds to underwrite banking debts that would be underwritten and guaranteed by the Treasury. This unprecedented action was taken in an attempt to underpin the financial markets, prevent a complete collapse of the system and stave off a deep recession. Taxpayers could end up becoming liable for this £500bn bail-out and some banks are likely to become partially nationalised as a result. On the same day a number of world banks, including the Bank of England, also cut their interest rates in a coordinated attempt to bring some reassurance to the global financial markets.

issued preference shares in these banks, and the government has set a three-year period to recover this money. Banks will also be able to borrow higher levels from the Bank of England for short-term loans, offering credit of £200bn under its special liquidity scheme.

The Bank of England’s Monetary Policy Committee (MPC) cut the base rate by 0.50 per cent to 4.5 per cent, the biggest cut for seven years. This was subsequently followed by some of the biggest mortgage lenders reducing their variable and tracker rates. Millions of homeowners should benefit from the 0.50 per cent cut to interest rates, as the Halifax and Bank of Scotland, owned by HBOS, Lloyds TSB and Woolwich, the mortgage arm of Barclays, announced they would all pass on the full rate cut to homeowners on their standard variable rates. The new rates come into force on 1 November 2008.

The Chancellor, Alistair Darling, also announced that the 300,000 UK retail Icesave savers with £5bn deposited in the Icelandic internet bank would have their deposits guaranteed even if the deposits were worth more than £50,000. Commenting, Alistair Darling said the implications for the public finances of the ‘essential’ measures were ‘exceptional and mostly temporary and will protect taxpayers by ensuring stability in the economy now.’

Under the terms of the emergency rescue announced, the UK government will raise up to £50bn to buy stakes in at least eight banks. Taxpayers will buy specially

This was followed by warnings that more than 100 local councils, police authorities and fire services could lose up to £1bn currently held in Iceland’s bankrupt system. Charities, including children’s hospices, have also warned they could be at risk of losing £25m.

Taxpayers could end up becoming liable for this £500 billion bail-out and some banks are likely to become partially nationalised as a result.

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October / November / December 2008

NEWS

Three-part financial rescue package Reducing the effects of the credit crisis on the UK economy

Help for small businesses through the economic slowdown Initiatives are a welcome breakthrough On 21 October the Federation of Small Businesses (FSB) welcomed new government proposals to help small businesses through the economic slowdown, describing them as ‘going along the right lines.’ The FSB has campaigned for more support to help small businesses improve their cashflow and is pleased to see pledges by ministers to extend government guarantees to pay invoices within ten days to the wider public sector as well as commitments to employee training and free business health checks.

Responding to the proposals by Skills Secretary, John Denham, to prioritise training for small businesses in England under the Train to Gain scheme, Mr Wright said, ‘Small firms need all the help they can get when it comes to training their staff. It is crucial that training is appropriate and affordable for the smaller employer.

Commenting on proposals for all councils, public sector bodies and NHS trusts to pay small firms within ten days, FSB National Chairman, John Wright, said, ‘These initiatives are a welcome breakthrough and set an example to the private sector by paying as early as possible. We have already written to most local authorities urging them to copy the example of Brentwood Borough Council which, thanks to FSB lobbying, has committed to paying on 20 days. This new proposal to move everyone to ten days should help small businesses with their cash flow.’

‘Small businesses are often impeded by lengthy administration and the costs of providing training, so must be made aware of support available. We welcome these measures, which should lead to greater uptake of the government’s “train to gain” scheme.’

October / November / December 2008

Mr Wright concluded, ‘The government is going along the right lines. The proposals should now be coupled with a mechanism to ensure the banks start releasing money to small firms on reasonable terms, and other ideas from the FSB and other parties should also be given serious consideration.’

By taking the action of bailing out the banks, the government is attempting to reduce the effects of the credit crisis on the UK economy. The government also wants to stop cash flowing out of the UK to other countries, many which have guaranteed the safety of deposits in their banks. By guaranteeing loans and securing the future of UK banks through partprivatisation, the government hopes the banks will start lending to each other again. The effect of this would be that both individuals and UK businesses should start to benefit from future rate cuts in the cost of borrowing. The three-part package includes committing up to £50bn of taxpayer funds for a partial nationalisation of the struggling banks, and this is in return for a stake in them. As many of the banks’ share prices are trading at their lowest levels for nearly two years, this could mean that taxpayers eventually make a profit in the long term if the government’s stake is sold at a higher price once the banks have recovered. The terms of each deal will be decided on an individual basis. This was followed on 13 October, by an announcement that the government would provide up to £37bn of taxpayer funds to help the UK banking system. This will be paid for by increased public borrowing, and political strings will also be attached that include reining in executive pay. In addition, the Bank of England is to pump at least £200bn into the money markets under its existing Special Liquidity Scheme. The government is also making a further £250bn available for banks over the next three years to guarantee medium-term debt to help restore confidence and get banks lending to each other again. At the time of going to print, it was unclear whether the government would have to increase taxes or make cuts in public spending.

Did you know? The taxpayer will fund the total $700bn US bailout, the plan which was almost derailed several times as the House of Representatives voted against it. The $700bn will be used to buy bad and toxic debts from struggling banks to clear up their balance sheets.

SELF-ASSESSMENT

Completing your tax return

Tax doesnâ&#x20AC;&#x2122;t have to be taxing if you donâ&#x20AC;&#x2122;t miss the deadline The deadline for those wishing to complete paper tax returns for the 2007/08 tax year was brought forward to 31 October this year. Although the later deadline of 31 January still remains, this is now only available to those who complete returns online.

October / November / December 2008

SELF-ASSESSMENT

If you are one of the 9 million people required to complete a tax return, it is possible to make the whole process stress free if you are prepared. One of the prerequisites of this is to be organised and make sure that you have all the relevant papers, forms and information together. First you need to establish whether you are required to complete and file a tax return. If you believe you have to file a tax return but haven’t received a form from HM Revenue & Customs (HMRC), you should take action immediately. It is important to gather together all of the information you will need to complete your tax return. This will include: n

n n n n n

The self-assessment form SA100 (additional forms are required for more complicated tax matters, such as income from abroad and income from letting property) Details on all income (including accounts if self-employed) P60 and P11D forms from employers and pension providers Interest statements from bank/building societies Information on dividends from trusts and shares Life insurance policy payments; and details on anything you can deduct (pension contributions, gift aid)

It may seem obvious, however be aware that a form that is not completed correctly may be rejected by HMRC. Don’t forget to sign and date the form, and make sure you fill in all the October / November / December 2008

boxes that apply to your particular situation. If there are any significant changes on your return to last year, tax inspectors would want to know why. An explanation should also be included on the form. It is also a requirement that records of all information used to complete tax returns must be kept for 22 months after the end of the tax year, or for five years and 10 months for those carrying on a business or who have income from letting out property. There is a maximum penalty of up to £3,000 for each tax year for which records have not been kept. You should also keep a photocopy of your tax return in case it goes missing in the post and for future comparisons. If you are planning on submitting your tax return to meet the 31 January deadline, it would be prudent to start preparing now. Contact your accountant to avoid unnecessary delays and hassle next year. n

If you are one of the 9 million people required to complete a tax return it is possible to make the whole process stress free if you are prepared.

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NEWS

Manufacturing gloom deepens on falling orders and output Sharpest single quarter fall in manufacturing confidence for 28 years Orders for UK-made goods have fallen at their fastest rate since 1999, as both domestic and overseas orders are hit by the global economic slowdown, a CBI survey revealed on 21 October.

October / November / December 2008

NEWS

The latest quarterly CBI Industrial Trends survey shows that declining demand for manufactured goods, coupled with a sharp fall in output, has resulted in the sharpest single quarter fall in manufacturing confidence for 28 years. In the last three months, 16 per cent of manufacturers reported a rise in new orders while 46 per cent said they had fallen. The resulting balance of -30 per cent signalled the fastest quarterly fall in total new orders since January 1999. Much of this was driven by weak domestic demand. A balance of -38 per cent of firms reported falling domestic orders, the sharpest fall since January 1992. But export orders, which in previous surveys had been supported by the depreciation of sterling, also fell (a balance of -19 per cent) as the global economic slowdown suppressed demand. Firms’ perceptions of their total order book levels deteriorated over the quarter with a balance of -39 per cent reporting levels below normal, the lowest since October 2003. Manufacturing output fell at the fastest rate in ten years, with a balance of -29 per cent of firms recording a drop in the last three months. Manufacturers see no let-up in the coming quarter with output (-31 per cent), domestic orders (-42 per cent) and export orders (-21 per cent) all expected to fall further. Falling orders and output appear to be weighing heavily on manufacturers’ sentiment. Four per cent were more

optimistic about the general business situation than three months earlier against 64 per cent who were less so. The resulting balance of -60 per cent represents the fastest fall in confidence since July 1980. The survey reveals that more difficult lending conditions following the global credit squeeze are acting as a brake on manufacturers’ investment plans. The balances of respondents planning to reduce capital spending on buildings and machinery over the next twelve months are the highest since the early 1980s. Sixteen per cent of firms cited the availability of external finance as a constraint on investment, well above the four per cent recorded in July and the highest figure since the question was first asked in 1979. The cost of finance is also increasingly seen as a constraint, cited by 8 per cent in the past three months, up from 5 per cent previously. However, firms increasingly view uncertainty about future demand as the most important factor curtailing investment plans (58 per cent is the highest level recorded since July 2003). Nine per cent of firms said their output was likely to be constrained by credit or finance in the coming quarter, the highest figure since 1975. The number of job losses during the quarter was not as steep as firms had predicted in the previous quarterly survey, with a balance of -15 per cent cutting staff. However, more jobs are expected to go in the next three months with a balance of -33 per cent predicting

October / November / December 2008

they will reduce employment. Based on the survey results, the CBI forecasts 23,000 manufacturing jobs will be lost in the third quarter, rising to 42,000 in the fourth quarter. Price pressures have softened over the last quarter, and are expected to ease further in the face of slower growth in unit costs and weaker demand. Domestic price inflation eased (a balance of +21 per cent down from +27 per cent in July) and is expected to fall back even more sharply over the next quarter (a balance of +10 per cent). Meanwhile export price inflation in the three months to October was, with a balance of +19 per cent, similar to that of earlier in the year, but is expected to slow slightly in the next three months (balance of +14 per cent). The CBI said: “This survey was conducted during a period of exceptional economic turbulence, so it is unsurprising that confidence has taken such a hit. However, the sharp falls in orders and output show that the slowdown in the UK economy is now spreading to sectors previously resilient to the weakness in the banking and housing markets. ‘It is also of serious concern that constraints on capital now appear to be affecting manufacturers, in a way that had not been the case earlier. ‘We can but hope that the recapitalisation of banks and the cut in interest rates, which took place just as the survey closed, will prevent a further credit squeeze over the winter.’

In the last three months, 16 per cent of manufacturers reported a rise in new orders while 46 per cent said they had fallen.

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ENVIRONMENT

DEBT FACTORING

UK enterprise

Factoring

Good environmental practices could reduce operating costs If you run a small or mediumsized business, adopting good environmental practices could lead to reduced operating costs. By doing so, UK enterprises collectively saved £58m last year. Rather than handling waste inefficiently and incurring fines, taking a greener stance could save your business thousands annually. A third of small businesses don’t have environmental policies in place, according to the research by netregs.gov.uk, a free online government service set up to help small businesses gain a better understanding of environmental law, which in turn gives them an edge over their competition. When you consider the £2.4m in fines paid last year by businesses that broke environmental laws, it is clear just how helpful NetRegs could be.

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Securing faster creditor payments In the current economic climate an increasing number of businesses are turning to other ways of speeding up the process of securing faster creditor payments. One solution is debt factoring, which involves selling your invoices to a third party. In return they will process the invoices and allow you to draw loans against the money owed to your business. Essentially, these companies provide a debt collection and ledger management service. This facility is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies. Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cashflow. Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders. Factors can be independent or subsidiaries of major banks and financial institutions. Whatever their background, they will want to meet you, visit your business, review your financial situation and study your business plan to evaluate your suitability for a factoring facility. Credit limits might be required – if so, you must agree how they will operate. After signing the agreement, the factor will typically agree to

advance up to 85 per cent of approved invoices. Payment is usually made within 24 hours. Usually all sales go through the factor. It’s important to find out the notification period, as most factors require three months’ notice to end the service, but some require longer.

When an invoice is raised n You raise an invoice, which has instructions to pay the factor directly, and send it to the customer. Send a copy of it to the factor. n The factor pays an agreed percentage of the invoice to you. n The factor issues statements to the customer on your behalf. It typically operates credit control procedures, including telephoning the customer if necessary.

When an invoice is paid by the customer n T he customer should pay 100 per cent of the invoice directly to the factor. n The factor pays the balance of the invoice to you. Fees and interest will be deducted from the payment.

When an invoice is not paid n If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement, either recourse factoring or nonrecourse factoring.

Up to a million landlords targeted by HMRC New measures come into force next April As part of a drive to track down tax evaders, up to one million landlords could be subject to investigation from HM Revenue & Customs (HMRC), signaling an intent to pursue persistent tax evaders. HMRC is targeting landlords in an effort to track down those who could be liable to pay extra tax on their buy-to-let rental income. HMRC have written to landlords warning

them of the new measures, which will come into force next April. There are at present more than one million buy-to-let mortgages in the UK, compared with 120,000 in 2000, reflecting the huge rise in popularity of this type of investment over the past decade, prompting many landlords to buy two or three properties for renting out to supplement their retirement income.

October / November / December 2008

ENTERPRISE/VAT

A wake up call

for Britain

Other European countries offer a more favourable tax regime The UK is no longer in the top three countries for favourable tax regimes, according to a report on 27 European countries’ tax regimes. The study, by the European Private Equity & Venture Capital Association (EVCA) in collaboration with KPMG, compared the tax and legal conditions across the 27 states for limited partners and fund management companies. Britain was forced out of the top three by France, Ireland and Belgium, who achieved the overall highest score. EVCA said that amidst the current financial turmoil, the need for a strong private equity and venture capital market is ‘more crucial than ever.’

‘Several European countries have shown good progress in the past two years in improving the environment for private equity capital. But those countries slipping down the rankings should take this as a wake-up call that their long-term economic health is in jeopardy.’ Belgium in particular has risen up the ranks after making changes to its pension fund environment and new R&D incentives. The results also show that the gap between Europe’s most and least favourable tax regimes and legal environment has widened substantially.

New homes

Developers may have to pay back VAT

House builders unable to sell properties due to the housing market downturn could face a considerable tax bill if they decide to rent out new homes, HM Revenue & Customs (HMRC) has warned. Advice published by the government body warns that developers may have to pay back VAT they have reclaimed due to the different treatment of VAT on selling and letting properties.

October / November / December 2008

HMRC claims that many house builders will not be affected, as there are exemptions for small amounts of tax involving temporary lets. But some property developers could be liable for repayments before any rental income has been accrued, as the trigger for repayment was the intention to rent.

TAX

One in three companies considering moving operations abroad Executives seek to access a more competitive tax structure A recent survey has revealed that one in three UK-based companies are considering moving operations abroad. The results of the YouGov poll showed 38 per cent of the 629 participating executives at medium and large companies said they had discussed moving operations offshore in order to access a more competitive tax structure. The results also revealed that 39 per cent said they thought the tax was ‘inefficient’ and should be reformed, and 37 per cent think the time and cost burdens of corporation tax have increased over the last five years. The poll, commissioned by BDO Stoy Hayward, commented that it’s a critical time for the Treasury in reconsidering its corporate tax policy, which could include considering options such as a much lower fixed rate of tax or even the abolition of corporation tax altogether, to be replaced with a regime that focuses on prescribed distributions to shareholders.

ENVIRONMENTAL TAXES

Green

business practices Environmental taxes discourage damage to the environment Environmental taxes are designed to encourage businesses to use resources efficiently and discourage business practices that damage the environment. For instance, if you invest in environmentally friendly equipment, you could receive tax breaks. Energy-efficient machinery, for example, qualifies for a 100 per cent tax allowance in the first year that you buy it. This allows businesses to offset the costs against taxable profits.

October / November / December 2008

NEWS

Some of the UK’s largest businesses paid no corporation tax during 2005/06 HMRC to pursue companies that avoid paying tax

Switching your current cars to run on liquefied petroleum gas (LPG), bioethanol or biodiesel could almost halve the rate of fuel duty you pay. Using company cars for your business operations may be convenient but it comes at a cost to your business and the environment. Before considering the cost of maintaining a car, you should take into account the charges for getting it on the road in the first place, such as vehicle excise duty (VED) or road tax, fuel duty, congestion charging and road pricing. However, there are ways in which you can reduce this burden by opting for greener methods of running your cars and changing the way you use them. VED and the company car tax system are now based on the amount of carbon dioxide emissions a car produces, not its engine size, as was the case previously. The lower the emissions, the less tax you will pay. You could also claim up to 100 per cent first-year allowances on the expenditure on a new car, according to its emissions. Before buying a new car, check the fuel consumption, emissions and VED with the Vehicle Certification Agency (VCA). Switching your current cars to run on liquefied petroleum gas (LPG), bioethanol or biodiesel could almost halve the rate of fuel duty you pay. You should be aware that cars using LPG and biofuels are less fuel efficient than

October / November / December 2008

A quarter of the UK’s largest businesses paid no corporation tax during 2005/06, according to the Commons public accounts select committee. The committee of MPs has called on HM Revenue and Customs to pursue companies that avoid paying tax more robustly and criticised the variations in the amount companies paid. In total, 181 of the largest companies paid no corporation tax in 2005/06 while 50 companies accounted for two-thirds of the £24bn total paid in 2006/07. Many companies use legitimate tax relief and avoidance schemes but the committee wants to see a more uniform system. petrol-consuming cars, but the reduced cost of fuel and reduction in emissions are worth considering. The overall environmental benefits of biofuels are also in debate as a lot of energy is needed to grow and transport the biofuel crops.

HMRC claims to have improved the manner in which it targets companies suspected of underpaying corporation tax in the past three years. ‘We have cut the number of open inquiries by over 50 per cent since April 2007,’ said a spokesman.

While there is currently only a congestion charge for driving into central London, other local authorities are looking into its potential to reduce congestion. There is also research being conducted into the viability of road pricing on a national scale. You might want to review your use of company vehicles, noting how often they are used, at what times and whether they are used to drive into towns and cities.

National minimum wage

Avoiding using company cars where possible will not only improve the environment but could save your business money. For example, you could replace face-to-face meetings with telephone calls, online discussions or video conferencing, and by trying to use public transport where possible. There is also a Low Emission Zone throughout inner and greater London. The charges for vehicles travelling through the zone apply first to lorries over 12 tonnes. By 2012, vehicles including lorries over 3.5 tonnes, buses, large vans and minibuses will be covered by the scheme.

Rates applying from 1 October 2008 The national minimum wage (NMW) rates increased from 1 October 2008. In addition to your full-time staff, you need to include homeworkers, part-timers, casual workers, agency staff and employees on short-term contracts. Exceptions to the wage include apprentices, the self-employed, voluntary and Job Centre Plus Work Trial workers. The national minimum wage, previously set at £5.52 an hour, is now £5.73 an hour. This is the main adult rate, for workers aged 22 and over. The development rate of the minimum wage for 18-21 year olds has increased from £4.60 an hour to £4.77 an hour. The development rate for 16-17 year olds is up from £3.40 an hour to £3.53 an hour. The accommodation offset rises to £31.22 a week (or £4.46 a day).

ENTERPRISE

Companies are taking longer

to settle their debts Bringing in the money

Research produced by Bacs confirmed what many small business owners already knew: that the economic downturn has increased the number of companies taking longer to settle their debts. The organisation revealed that 30 per cent of small companies have seen the late payment problem exacerbated in recent months, with 28 per cent saying they now spend even longer having to chase outstanding debt. But as well as being among the worst affected, small businesses and sole traders are also a major cause of the problem, the survey revealed, with 44 per cent blaming individuals and 41 per cent pointing to small businesses. This compared with just 34 per cent saying large corporates were to blame. Bacs offers the following tips for small businesses on bringing the money in: Encourage all trading partners to pay invoices by Bacs Direct Credit. Include your sort code and account number on invoices along with the message â&#x20AC;&#x2DC;pay me directâ&#x20AC;&#x2122;. This small

You are legally entitled to add statutory interest to overdue invoices and can also claim reasonable debt recovery costs if it gets to that stage. step can save time on payment reconciliation and queuing at the bank to pay in a cheque, which in turn can have a positive effect on cashflow. Late payment legislation has been in place for over ten years, so why not use it? You are legally entitled to add statutory interest

to overdue invoices and can also claim reasonable debt recovery costs if it gets to that stage. Save your own suppliers time and money by paying them using Bacs Direct Credit. Once you have a reputation for paying late, your suppliers may not be so keen to work with you next time around. Arrange to pay your regular business bills by Direct Debit. This way youâ&#x20AC;&#x2122;ll know that the payment is being made each month, reducing the risk of incurring your own latepayment charges. If you have prompt payers, why not reward them so they continue exercising good practice? Consider offering early-payers discounts encouraging them to keep the money flowing in. The research also revealed that over half (58 per cent) of small companies had been affected by the economic downturn, although 45 per cent of small firms in the north of England said they had seen no visible evidence of the slowdown. October / November / December 2008

ENTERPRISE

Maintaining your credit score during difficult economic times Keep a close eye on those customers who owe money In these difficult economic times, it is important that businesses maintain their credit score when it comes to paying suppliers and keeping a close eye on those customers who owe money.

n Businesses need to do everything possible to ensure their own credit rating is kept as positive as possible, and this means making sure that none of their customers fall behind with payments.

It is also worth considering that your own suppliers will be keeping a close watch for any evidence that all may not be well in their customer base.

Equifax, the credit information provider, offers the following tips to ensure you retain a good business credit score and a low risk profile during the economic downturn: n

n n

ay bills on time, as P businesses will be looking for early signs of difficulty Monitor your own business credit profile File accounts on time, as any delays look as though you may have something to hide

void County Court A judgments, as any firm monitoring your status will view this as an early sign of financial trouble Conduct credit checks on all new accounts Implement data-sharing systems to monitor customers for signs of financial stress Look for early warning signs, such as prompt payers suddenly falling behind on payments If you suspect a customer or supplier is in trouble, run a credit check and reassess your relationship if necessary Set strict deadlines on accounts that are continually overdue. Don’t let unpaid invoices mount up

In this tough economic climate small businesses are the most vulnerable. It’s crucial that they do everything possible to ensure their own credit rating is kept as positive as possible, and this means making sure that none of their customers fall behind with payments

October / November / December 2008

C onduct ongoing monitoring of all customers and key suppliers to quickly identify potential bad debt and act swiftly to prevent it B eware customers who switch to new suppliers at the point they reach their credit limit with you. This is often a sign of problems looming

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Research and development tax credit New rules hinder SMEs ability to claim A recent legislative change has seen an increase in the number of companies that can claim a cash rebate in the form of research and development tax credit, but under a legal ‘catch 22’, the companies that need it the most are the ones struggling to obtain it. In order to claim a cash rebate, those businesses applying must be unprofitable and qualify as small or medium-sized enterprises. In August the size limits for what constituted a business as an SME were doubled. The new rules state that to qualify as an SME, a company should have fewer than 500 employees and either turnover of no more than €100m (£77.6m) or gross assets on the balance sheet of less than €86m. Those SMEs with taxable profits can still claim R&D tax relief but it comes in the form of reduced tax payments as opposed to a cash rebate. Current legislation states that if a business is reliant on R&D tax relief in order to remain a going concern, it is excluded from claiming the benefit. The reasoning behind these rules is that Europe does not want tax rebates propping up struggling enterprises. Companies should make sure that they claim these valuable tax benefits.

ENTERPRISE

Government takes action to help small businesses through exceptional economic times Steps to improve the flow of finance Commenting on the government announcement made on 21 October about measures to assist small businesses, the Confederation of British Industry (CBI) business group said: ‘Small businesses will be glad that the government is now taking action to help them through these exceptional economic times, through a range of short, medium and long-term measures. ‘Steps to improve the flow of finance to small firms, especially money needed for investment, will be very important for those feeling the squeeze on credit. ‘And speeding up payment times beyond central government will improve the cash flow lifelines on which businesses depend, particularly as many work with local authorities, RDAs and NHS trusts. ‘Given the economic circumstances, small firms will be evaluating their training decisions much more carefully. So we welcome this greater flexibility in the publicly funded skills system. In particular, firms will value funding for shorter units of training that are more focused on the skills they need and will be easier to fit around the day-to-day running of their business. ‘We look forward to further action being taken in the pre-Budget report which supports small and growing firms.’

NEW BUSINESS

REGULATIONS More red tape for small firms

A raft of new business regulations introduced on 1 October will create more red tape for small firms, business groups have warned. New rules brought in on the October ‘common commencement date’, one of two days in the year when government departments introduce new business regulations at the same time, included amendments to health and safety legislation, company law and consumer protection. One of the biggest changes is the increase in the national minimum wage, which rose from £5.52 to £5.73 an hour for an adult aged 22 and over. For workers aged 18 to 21, the rate increased from £4.60 per hour to £4.77 per hour. The British Chambers of Commerce (BCC) called the minimum wage rises ‘modest and sensible’ but pointed out that many businesses will struggle to cope even with small cost increases in the current economic climate. A BCC spokesman said, ‘As the UK moves into uncertain economic times and credit is squeezed, businesses will be operating on much tighter margins. It’s

important that the Low Pay Commission ensures fair pay, but it must continue to balance this against the ability of employers to cope with the additional financial burden.’ Other rules effective from 1 October included a minimum age of 16 for company directors, and the abolition of court approval for private limited companies wishing to reduce the amount of their share capital. Annual returns of private companies made up to or after 1 October 2008 need only include the names, but not the addresses, of shareholders. The Federation of Small Businesses (FSB) said that some changes might reduce paperwork for firms, but others place the burden of enforcement too heavily on business owners. A FSB spokesman said, ‘We’re concerned that small businesses are being asked to provide too many things. The fact that Energy Performance Certificates, for example, are now required by

all businesses will add to the many hours a week that business owners already spend on complying with regulations.’ The Chairman of the FSB claimed the volume of legislation threatened to overwhelm small firms, who will be expected to tackle around 20 new regulations. This goes against government pledges to cut back. In these tough times, it is important for small businesses to remain economically active rather than spending their time filling in forms.

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October / November / December 2008

PENSIONS

ACCOUNTING

Lean accounting A lack of understanding still exists

Compulsory government pensions

Employers could see large increases in payroll costs

From 2012 employers that do not currently offer a pension scheme will have to contribute to compulsory government pensions. This will also be accompanied by increases in employers’ National Insurance (NI) contributions from 2012. Those companies that do not offer a pension scheme by April 2012 will have to enrol employees into the new government plan. In addition, there will be a requirement for employers to contribute up to 3 per cent of band earnings. It may be prudent for those companies not currently offering a pension arrangement to consider introducing phased pension benefits over the next few years. This will enable companies to prepare and plan for the increase in payroll costs from 6 April 2012. If you are an employer, it may be prudent to review your current scheme and consider how the current contribution rates compare with the proposed new arrangements. If they are significantly better, you may need to consider whether you can or should introduce additional less generous bands,

so that you could automatically enrol employees into this part of the pension scheme to avoid an unnecessarily large increase in your payroll costs. However, you may also need to consult with employees if you wish to apply this to existing pension scheme members. If you only offer pensions to a particular section of your workforce, consider the impact of a new less generous arrangement, and determine whether this presents an opportunity to have one scheme offered to all employees and whether better terms can be agreed with the current provider. Finally, it’s also worth investigating whether your current provider is likely to be able to offer any form of autoenrolment in compliance with the proposed legislation.

October / November / December 2008

Only 14 per cent of UK manufacturing companies have adopted the principles of lean accounting, according to a study by BDO Stoy Hayward and The Manufacturer. The biggest barriers to implementation were a lack of understanding. Some 60 per cent of those studied did not understand the approach of lean accounting, while 51 per cent had a lack of understanding of the benefits of the system. A further 42 per cent said that company culture was a barrier preventing lean accounting. However, a quarter of manufacturers questioned planned to introduce lean accounting into their business within the next couple of years and 42 per cent said they would consider it in the long term. BDO Stoy Hayward commented that lean accounting, which provides strong support to the lean manufacturing process, has not been widely adopted, meaning that manufacturers are not using the right financial metrics in measuring and monitoring their improvements under lean manufacturing.

Fair value accountancy rules Greater global consistency The move to work towards a convergence of international accounting standards has been supported by the International Federation of Accountants (IFAC). The International Accounting Standards Board recently made the move to bring greater global consistency to fair value accountancy rules. IFAC says that although it accepts the decision to remove the differences in the application of fair value, it strongly opposes the suspension of the use of fair value without adequate due process. In fact, the Federation believes that making changes that exacerbate reporting differences would only confuse the financial markets and result in a lack of confidence in them, which would have the opposite to the desired effect. The IFAC president said: ‘Reducing transparency is not the answer and it will not serve the interests of investors.’

FUND MANAGEMENT

Fund management services Changes to the VAT exemption HM Revenue & Customs (HMRC) has issued Revenue & Customs Brief 48/08 regarding changes to the VAT exemption for fund management services with effect from 1 October 2008.

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A revised Order – The Value Added Tax (Finance) (No. 2) Order 2008 – has been introduced as a consequence of representations and consultation with stakeholders. The new Order aims to modify and clarify the scope of Group 5 of Schedule 9 to the Value Added Tax Act 1994 in its application to the management of special investment funds. The amendments from the previous version concern fund management services in respect of ‘recognised overseas schemes’, which are collective investment schemes established outside the UK but are ‘recognised’ by the Financial Services Authority in order for them to be marketed within the UK. For funds that are constituted as ‘umbrellas’ containing a number of distinct sub-funds, it is now only management services provided in respect of each sub-fund marketed to UK investors that are exempt. A de minimis provision is also introduced, whereby the management of a recognised overseas scheme (or each sub-fund if an umbrella), which is not for the time being marketed in the UK, and has never been marketed in the UK, or has less than 5 per cent of its shares or units held by, or on behalf of, UK investors, falls outside the VAT exemption.

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The effect of the Order is to exempt the management of:

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n a n authorised unit trust scheme within the meaning given in section 237(3) of the Financial Services and Markets Act 2000 (c. 8) (‘FSMA’);

n c ertain collective investment schemes or sub-funds of umbrella schemes which are recognised pursuant to sections 264, 270 or 272 of FSMA or to an order made pursuant to section 409(1)(d) or (f ) of that Act. The management of such schemes or sub-funds is excluded from the exemption if they have never been marketed in the United Kingdom or are not for the time being marketed in the United Kingdom and less than 5 per cent of their shares or units are held by, or on behalf of, investors who are in the United Kingdom; n a n authorised open-ended investment company within the meaning given in section 237(3) of FSMA; n a closed-ended collective investment undertaking as defined in Note (6) by reference to an undertaking’s investment objectives and official listing and trading of its shares or equivalent units. n H MRC has also prepared draft guidance and an explanatory memorandum to the Order, which has been made as a consequence of the ECJ’s judgment in JP Morgan Fleming Claverhouse Investment Trust plc and the Association of Investment Trust Companies v The Commissioners of HM Revenue and Customs (Case C-363/05).

October / November / December 2008

ENTERPRISE

Corporate housekeeping Getting your finances fighting fit

SMALL BUSINESS Late paying customers are forcing increases in bank borrowing Late-paying customers are forcing small businesses to increase their bank borrowing to maintain cashflow, according to the Federation of Small Businesses (FSB). The FSB was commenting on figures from the British Bankers’ Association (BBA), which revealed that bank lending to small firms (those turning over £1m or less) increased by 11 per cent in the 12 months to June 2008. The FSB commented that lending is growing not because people are growing their businesses, but because small businesses are not being paid on time by the customers they supply. Businesses are having to go to the bank to pay their rent, rates and other bills.

The BBA figures also highlighted that in the 12 months to June 2008, small firms’ overdraft borrowing increased by just three per cent, to a total of £9.2bn. The reassuring thing is that small businesses are using term loans and taking a long-term view rather than increasing their overdraft facilities. In the slowing economy that we’re experiencing, small businesses are utilising all the cash that they are generating. Whereas they would draw on their resources or deposits for cashflow in previous years, they’re now not able to do that to the same extent, the BBA commented.

Small businesses burdened with higher price rises Economic climate almost doubles the official inflationary figure Research detailing the costs faced by small businesses in an increasingly difficult economic climate found inflation for small businesses stood at an average of 9.9 per cent, almost twice the 4.7 per cent reported in the Consumer Prices Index by the Office for National Statistics. The research from Warwick Business School also showed that the average annual rate of inflation for small businesses is almost double the official figure. Rising fuel, energy,

October / November / December 2008

raw material and labour costs were the main culprits, the research said, with the manufacturing sector particularly badly hit. There were also strong regional variances, with companies in the north experiencing an average of 11 per cent while those in Scotland had the lowest rate, at 8.5 per cent. The study was done in conjunction with More Th>n Business.

1. Put cashflow and financing on the agenda for every management meeting. 2 Regularly update cashflow forecasts. 3. If there is a conflict between profitability and cashflow, take the cashflow option. 4. If you have a term loan or overdraft, be aware of any covenants and constantly monitor how close you are to breeching them. 5. Prepare thoroughly if a review is coming up on any of your financing facilities. 6. If limits might be threatened, ‘think the unthinkable’ regarding the sale of assets. 7. Talk to current financiers before you get into difficulties. Otherwise you devalue future forecasts. 8 Make sure that all types and sources of finance have been fully considered. 9. Invest time talking to new sources of finance. You might need them if your current providers prove difficult. 10. If you are ‘cash rich’, draw up a list of ways you could use surplus cash for the longer-term benefit of the business. Source: Ten tips to survive the credit squeeze - ICAEW.

Taxpayers encouraged to file online Taxpayers are being encouraged to file online by HM Revenue & Customs (HMRC) with the phasing out of pre-paid tax envelopes. HMRC said the move followed the example of other private and public sector organisations that no longer issue pre-paid envelopes.

LEGAL

Companies

Act 2006 Your questions answered

October / November / December 2008

LEGAL

Q: What provisions of the Companies Act 2006 came into force on 1 October 2008? A: The following provisions came into force: Objection to Company Names – Sections 69 to 74 Trading Disclosures – Sections 82 to 85 Corporate directors and under-age directors – Sections 155 to 159 Provisions relating to the directors’ ‘conflicts of interest duties’ – Part 10 Share capital reduction through the solvency statement route – Sections 641 to 644 Control of political donations and expenditure, provisions relating to an independent candidate – Sections 362 to 379 Power of court to grant relief in certain cases – Section 1157 Restoration for personal injury claims of companies dissolved prior to 16 November 1969 – Section 1295 of the 2006 Act, and Schedule 16 (repeals) Q: Were there any other changes that came into force on 1 October 2008? A: The following changes came into force: n Repeal of the restrictions on financial assistance for acquisition of shares in private companies – Sections 151 to 153 and 155 to 158 (1985 Act) n Changes to the requirements of annual returns (1985 Act) n Limited Liability Partnership changes to bring accounts content in line with the company regulations. Q: What is the current position regarding share capital reduction through the solvency statement route – Sections 641(1) (a) & (2)-(6), 642 to 644? A: As an alternative to passing a special resolution and obtaining court approval, private companies will have the option of reducing the amount of their share capital by special resolution supported by a solvency statement made by the directors. The resolution and solvency statement, a memorandum of capital showing the alteration in the company’s share capital and an additional directors’ statement will have to be submitted to Companies House. October / November / December 2008

Please note, for solvency statements made between 1 October 2008 and 30 September 2009, a memorandum of capital (as defined in The Companies Act 2006 (Commencement No. 7, Transitional Provisions and Savings) Order 2008) must be sent to Companies House. For solvency statements made on or after 1 October 2009, this memorandum must be replaced by a statement of capital as defined in section 644(2) of the Companies Act 2006. Q: What is the purpose of introducing the solvency statement route? A: The solvency statement route provides a simpler and cheaper means for a company to reduce its share capital. Q: How is the form and content of the solvency statement to be determined? A: Companies House cannot give advice on the content of the solvency statement required by section 643 of the CA 2006. The statement must be produced by the company for its members and the content is governed by s643. The form of the solvency statement is governed by regulations – The Companies (Reduction of Share Capital) Order 2008. Q: Why did this requirement not come into force with the rest of Part 17 of the Companies Act 2006 on 1 October 2009? A: Business supports the solvency statement introduction at the earliest opportunity, as it’s a procedure that will provide benefits in terms of ease and cost. Therefore these provisions came into force on 1 October 2008, while the bulk of Part 17 will come into force on 1 October 2009. Q: In the absence of the court overview, what safeguards exist against abuse of the solvency statement route? A: If company directors make a solvency statement without having reasonable grounds for the opinions expressed in it, and the statement is delivered to the Registrar, an offence is committed by every director who is in default. The offence is punishable by a fine

or by a maximum period of imprisonment of two years or both. Q: Is this new process also available to public companies? A: No, the solvency statement is only available to private companies. Both private and public companies will continue to be able to reduce their share capital by special resolution confirmed by court order. N.B. Please note that the ‘memorandum of capital’ that is required for filing at Companies House as part of this process (under the new 644(1) b) is a separate and distinct document from the memorandum of association of the company. The seventh commencement order states what this memorandum of capital should contain: ‘The memorandum must show with respect to the company’s share capital as reduced by the resolution: (a) the amount of the share capital, (b) the number of shares into which it is to be divided, and the amount of each share, and (c) the amount (if any) at the date of the registration deemed to be paid up on each share.’ Q: Are private companies to be prohibited from giving financial assistance for the acquisition of their own shares under the Companies Act 2006? A: The Companies Act 2006 will not prohibit a private company from giving financial assistance for the acquisition of its own shares (although if it has a subsidiary which is a public company, the public company may not assist the acquisition of shares in the private holding company). The Companies Act 1985 prohibits private companies from giving financial assistance for the acquisition of their own shares unless certain conditions are satisfied. The prohibition was repealed in October 2008: for assistance given on or after 1 October 2008.

LEGAL

Q: When will the rules change that govern the giving of financial assistance by private and public companies for acquisition of shares in themselves or their holding companies? A: The rules changed for private companies on 1 October 2008. The rules will not change for public companies. Q: Why are the changes in the financial assistance provisions not coming into force with the rest of the share capital provisions in October 2009? A: Although financial assistance is part of the share capital provisions of the Act, it is a simple matter to abolish the prohibition for private companies, and ‘whitewash’, separately from those provisions, which is why that abolition came into force in October 2008. Business welcomes the earlier commencement of these provisions. Q: How will the changes to the rules that govern financial assistance for acquisition of shares, brought in by the Companies Act 2006, affect private and public companies? A: The Companies Act 1985 prohibits a company from granting financial assistance (for example by means of a non-commercial loan) for the acquisition of shares in itself or its holding company: but one exception is that private companies may grant such assistance by going through a complex and expensive procedure, often referred to as ‘whitewash’. Under the Companies Act 2006, the prohibition on granting financial assistance will be wholly lifted for private companies but will remain in place for public companies. Q: Do these implementations have any effect on Companies House forms? A: These changes mean that where financial assistance is given on or after 1 October 2008,

companies will no longer need to file the following forms: 155(6)a – Declaration in relation to assistance for the acquisition of shares 155(6)b – Declaration by directors of a holding company in relation to assistance for the acquisition of shares 157 – Notice of application made to the court for the cancellation of a special resolution regarding financial assistance (for the acquisition of shares) Q: What changes apply to the Annual Return requirements (1985 Act) for Annual Returns with a made up date on or after 1 October 2008? A: Sections 116-119 of the Companies Act 2006 were brought into force in October 2007 which allowed companies to restrict access to their register of members. To facilitate this, annual returns made up to a date on or after 1 October 2008 will contain reduced information on the company’s shareholders. The information provided on the annual return will depend on whether or not the company has any of its shares admitted to trading on a regulated market (traded company). Private and non-traded public companies are only required to provide names of shareholders, not addresses. Traded public companies are required to provide names and addresses for those shareholders holding at least 5 per cent or more of any share class. Q: Why is the annual return form changing? A: The form has changed so only the appropriate shareholder details need to be completed depending on whether or not the company is a traded public company. This means that no company is required to include the addresses of all its shareholders.

Q: Can I use the new annual return form if the made up date of my return is before 1 October 2008? A: No, the legislation only applies to annual returns to a made up date on or after 1 October 2008. You must continue to use the current versions of the annual return form for any annual return made up to a date prior to 1 October 2008 irrespective of when it is filed. Q: What is a traded public company? A: A traded public company is one any of whose shares have been admitted to trading on a regulated market. A private company would not have any shares admitted to trading on a regulated market unless the company was previously a traded public company. Q: Why do traded public companies have to make the extra disclosure? A: Traded public companies are subject to the shareholding disclosure regime of the Transparency Obligations Directive (2004/109/EC). These companies are required to notify the Financial Services Authority when certain proportions, starting at 5 per cent, of the total voting rights of any class of its shares are held by a shareholder. Q: Are any traded public companies exempt from this disclosure? A: Public companies that trade on AIM are not subject to the Transparency Obligations Directive, so do not need to disclose their shareholder’s addresses. They should complete the annual return as a non-traded public company showing their shareholder details in schedule A. Q: Does this only apply to public companies traded on a UK regulated market? A: No. A regulated market means a market which appears on the list drawn up by an

October / November / December 2008

NEWS

EEA State pursuant to Article 47 of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments.

a traded public company, these will still be made available to the public. Any annual returns that contain shareholders’ addresses will be rejected if the company is not a traded company.

Q: What happens if the public company has shares traded on a regulated market and shares that are not. Do both schedules have to be completed? A: No, only schedule B. If any shares are traded on a regulated market during the period of the annual return, then the ‘traded’ box must be ticked and schedule B completed for all share classes, whether or not that share class is traded.

Q: Will it be possible for a company to take advantage of this before their next annual return is due? A: Yes, a company may simply submit an annual return made up to a date on or after 1 October 2008 in order to take advantage of the reduced disclosure requirements. A company can make its annual return up to any date it chooses, as long as it isn’t later than the anniversary of the previous annual return (or the date of incorporation in the case of a company’s first annual return).

Q: What does a traded public company show for shareholders who hold less than 5 per cent? A: No details are required for shareholders who hold or continue to hold less than 5 per cent of any issued share class. Q: What will happen if a private or nontraded public company enters shareholders addresses on the annual return? A: Annual returns for these companies will be rejected for the extra information to be removed. However, our WebFiling system will not allow shareholders’ addresses to be entered for private or non-traded public companies. Q: Why can I not choose to file the extra shareholder information? A: The annual return is placed on the public record. This means that it must not include any information about shareholders that is not required by statute; otherwise the annual return would be in breach of the Data Protection Act. Q: Will members’ or shareholders’ addresses still be available from Companies House? A: Where addresses have been provided to Companies House as part of the annual return of

October / November / December 2008

Q: Will there be Limited Liability Partnership changes to bring accounts content in line with the company regulations? A: New Limited Liability Partnership regulations will be made applying parts 15, 16 and 42 of the Companies Act 2006. There will also be separate regulations on the form and content of accounts, in line with the Companies Act regulations. These came into force for accounting periods starting on or after 1 October 2008.

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Getting tough on businesses that avoid corporation taxATION Report urges improvements of investigations into compliance MPs have urged HM Revenue & Customs to get tough on businesses avoiding corporation tax and improve its investigations into compliance. In its latest report into corporation tax, the House of Commons Public Accounts Committee says the tax paid by large businesses is ‘heavily skewed’ towards a small number of businesses. Of the 700 largest businesses in the UK, 50 paid two-thirds of the tax raised in 2005/06 while 181 paid none. The committee, chaired by Edward Leigh, adds that businesses can legitimately reduce their corporation tax payments by claiming a range of reliefs and allowances. In some cases, the liability may reduce to zero, even though the businesses have made profits. Leigh said: ‘The department aims to complete enquiries within 18 months, but 42 per cent have been running for two years or more. Because of the delays, the companies affected cannot determine their final tax bill.’

CREDIT CRUNCH

UK businesses

still remain

ambitious

Annual survey shows more focus on increasing cash balances and paying down debt

October / November / December 2008

CREDIT CRUNCH

Despite the last 12 months being a period of economic instability driven by the credit crunch, increased raw material costs, changes in oil prices and fluctuating consumer demand, UK businesses show they are not willing to give up but are continuing to fight. According to the latest annual UK Enterprise Survey Report 2008 from the Institute of Chartered Accountants in England and Wales (ICAEW), UK businesses remain ambitious.

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The survey paints a detailed picture of how UK businesses of all sizes, in all regions and all sectors, as well as their counterparts across the globe, have felt the impact of the more than a year-long credit crunch before the last few weeks of extreme economic turbulence in the international financial services sector. It shows that while nearly two-thirds (65 per cent) of UK businesses confirm the credit crunch has had a negative effect on their organisation, 83 per cent say that business growth is still one of their main objectives. Their growth plans are, in fact, quite similar to those before the credit crunch hit (average annual growth target this year is 12.4 per cent among businesses planning to grow, compared with 13.4 per cent last year). Micro and small businesses lead the growth in the UK economy, and the number of micro businesses planning growth of over 6 per cent per year is even higher this year than in 2007. Medium and small-sized businesses have slightly less ambitious growth plans, however, as do start-ups.

October / November / December 2008

While the survey shows that the credit crunch has made it harder for businesses to plan (72 per cent), as well as creating increased short-term (64 per cent) and long-term (53 per cent) borrowing costs, there are positive outcomes to the economic turbulence. Just over half of UK businesses (51 per cent) see some benefit in weakened competitors and nearly one-third (32 per cent) say it has increased their opportunities for business acquisitions. Another effect of the credit crunch is that UK businesses are now putting more focus on increasing their cash balance and paying down debt than in last yearâ&#x20AC;&#x2122;s pre-credit crunch survey. UK businesses also continue to embrace globalisation, despite difficult times. Nearly two-thirds (64 per cent) of UK businesses are engaged globally, either through having customers or operations abroad or through outsourcing outside the UK, a small increase on last year. More than 42 per cent see globalisation as having a positive impact on their business and just over half (51 per cent) are planning to continue to enter new markets or expand market share outside.

UK businesses do, however, face several barriers to business growth, and one key area highlighted by more than half is the UK regulatory and taxation environment. More than half of UK businesses (53 per cent) do not think the regulatory and taxation environment is business friendly, and it is the smaller businesses who struggle the most with red tape. Nearly double the amount of micro businesses state business taxation as a critical or strong barrier to growth this year compared with last year. Singled out as particular business hindrances are employment legislation and employment tax together with business tax, with 38 per cent of the respondents saying that regulatory change and enforcement represents a critical or strong barrier to their future growth.

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ENTERPRISE

Getting your business into the best possible shape A successful exit requires planning

Many owner-managers put in a lifetime of hard work building their business only to throw away some of the rewards by failing to consider properly how they will exit from the business, both financially and as a manager.

October / November / December 2008

ENTERPRISE

It is vital to begin planning an exit at an early stage if it is to be a success. In an ideal world, you would have possible exit routes in mind when you first set up the business. But at the very least you should start planning a few years ahead. Planning lets you get your business into the best possible shape for an exit. Identify a particular year, level of sales or other objective (e.g. if you plan to retire at 60, you might want to start considering your exit at 55. You can always change your plans later if you need to). You also need to think carefully about your aims and consider your objectives as a shareholder, your objectives for the business and your objectives as a manager. Many owner-managers have an inflated idea of the true value of their business. If you cannot think of a good reason why someone would buy your business, you are likely to struggle to sell it. As a shareholder, you may want to exit to gain financial security and minimise risks. This is the major goal for many shareholders who want to retire and need a pension. The sale must succeed, so you need more than one potential option, and you must be prepared to accept less than the best achievable price. You will probably prefer payment in cash, not the shares of a company buying you. This may not always be possible. Deals often involve a combination of the two. You may also get a better theoretical price if you are willing to accept shares. You may want to maximise the price you get and accept the risk the exit may fail. You may want to pass on the business to a family

member. You may prefer to sell it to a management team you have worked closely with. Consider how you want the business to develop, and if an exit would help you meet these goals. You may need capital for growth, for example, to allow you to expand your product range or exploit your intellectual property more effectively. You may want to improve your market position by taking advantage of a better distribution network, enter new markets in different sectors or in new countries and draw on economies of scale by becoming part of a larger company. In addition, you may want to give employees better job security or career development prospects or even end your management involvement. Some exit routes may require you to stay with the business for some time. A float usually only provides a partial management exit. Management buy-outs (MBOs) may include rollover arrangements that require you to stay involved for a set period. If you sell more than 50 per cent of a company, you will no longer have control over it, so it may be a bad idea to stay involved. Sound management over several years will also add value to your business and allow you to start an exit relatively quickly when the time is right. Aim for a year-onyear increase in profits. Reducing profits to cut corporation tax liabilities may make short-term sense, but it could harm your business’ perceived value. Make sure accounts are in order and up to date, and give a true picture of the business. It pays to be ready for any due diligence

October / November / December 2008

you may have to go through later. Check you comply with employment, health-and-safety and other legislation. Look to expand your range of customers, as an over-reliance on a few key customers could undermine your business’ value. Aim to tie key customers, suppliers, staff and managers to long-term contracts. Consider your business property – you might want to sell any freehold property you hold before exiting, to allow you to realise it as a personal asset. Maximise a new relief for capital gains tax (CGT), which took effect from 6 April 2008 alongside the CGT reform programme announced at the Pre-Budget Report. You may be able to claim entrepreneurs’ relief, reducing the effective rate of CGT from 18 per cent to 10 per cent on up to £1m of gains. Gains in excess of £1m will be charged at the normal 18 per cent rate and substantial holdings in investments also could disqualify you from this relief. Consider the possible exit routes open to you. These may include: n n n n n n

Trade sale Management buy-out or MBO Family succession Management buy-in or MBI Stock-market flotation Merger

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You do not have to be in distress to liquidate a business. This may be the only option if you cannot find a buyer. You do not have to be in distress. Simply sell your assets, surrender your lease and stop trading. Businesses with limited earning potential are likely to have net assets as a value benchmark. A trade sale is usually the best way to get a good financial exit from a small firm, particularly if you have several competing buyers. You need to identify possible buyers who might benefit from acquiring your business. Your market knowledge should mean you have a fair idea of who they might be. Work to develop characteristics buyers will really want. They may be seeking to gain access to a new market, get rid of a competitor, or get hold of a particular product, portfolio or contract you have. Buyers may also want to get access to your staff and skills, obtain synergies and cost-savings, or cross-sell their existing products or services to your customer base. It’s important to put a good management team in place. If the business is too reliant on your own skills, its value to a trade buyer could be damaged. Or you may have to stay involved longer than you might wish.

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TAX

Income tax rates and allowances Income tax allowances Type of allowance

Earnings for 2008/09

Personal allowance

£6,035

Personal allowance (aged 65-74) (1)

£9,030

Personal allowance (aged 75 and over) (1)

£9,180

Income limited for age-related allowances

£21,800

Tax rates and bands for the tax year 2008/09

Married couple’s allowance for people born before 6 April 1935 (1) (2)

£6,535

Tax rate

Tax band

Married couple’s allowance - aged 75 or over (1) (2)

£6,625

Basic rate: 20 per cent

£0-£34,800

Higher rate: 40 per cent

Over £34,800

Income limit for age-related allowances

£21,800

Minimum amount of married couple’s allowance

£2,540

Blind person’s allowance

£1,800

(1) - These allowances reduce where the income is above the income limit by £1 for every £2 of income above the limit. They will never be less than the basic Personal allowance or minimum amount of Married Couple’s allowance. (2) - Tax relief for the Married Couple’s allowance is given at the rate of 10 per cent.

From 2008/09, there is a 10 per cent starting rate for savings income only, with a limit of £2,320. If an individual’s taxable non-savings income is above this limit then the 10 per cent starting rate for savings will not apply. There are no changes to the 10 per cent dividend ordinary rate or the 32.5 per cent dividend upper rate.

Tax dates for your diary November 2008 Saturday 1st Deadline for submitting P46 (car) for employees whose car/fuel benefits changed during the quarter to 5 October 2008. Wednesday 19th PAYE/NIC due for month to 5/11/2008. Sunday 30th Deadline for submission of all relevant documentation to BRAL VAT (non EU traders).

December 2008

Friday 19th PAYE/NIC due for month to 5/12/2008.

January 2009 Wednesday 14th Payment of any tax due in respect of CT61 for the quarter to 31 December 2008. Company CT61 return for the quarter to 31 December due. Monday 19th PAYE/NIC due for the month to 5/01/2009.

Saturday 31st Deadline for submitting 2007/2008 Self Assessment return on line (up to £100 penalty if your return is late).

March 2009

Saturday 31st Balance of 2007/2008 Income Tax & Capital Gains Tax due, plus first payment on account for 2008/2009 tax year (interest will run on any payment due and not paid).

Sunday 5th End of 2008/2009 tax year.

February 2009

Monday 2nd Deadline for submitting P46 (car) for employees whose car/fuel benefits changed during the quarter to 5 January 2009. Thursday 19th PAYE/NIC due for month to 5/02/2009.

Thursday 19th PAYE/NIC due for the month to 5/3/2009.

April 2009

Monday 6th Beginning of 2009/2010 tax year. Tuesday 14th Payment of any tax due in respect of CT61 for quarter to 31 March 2009. Company CT61 return for the quarter to 31 March due. Sunday 19th PAYE/NIC due for month to 5/04/2009 (interest will run on any unpaid PAYE/NIC for the tax year 2008/2009).

Saturday 28th 5 per cent penalty surcharge on any 2007/2008 outstanding tax due on 31 January 2008 still remaining unpaid.

October / November / December 2008

NEWS

Pressure to review Savings Directive Report identifies problems and the potential solutions The European Union put in place the Savings Directive in the middle of 2005 and paying agents must, in the main, exchange information with Member States when interest is paid to a resident of another Member State. While the majority of Member States opted for this exchange of information, a limited number apply a withholding tax to such payments, which began at 15 per cent and will rise to 35 per cent before being replaced at some time in the future, at a date to be agreed, with the exchange of information arrangements. The European Council of Ministers has been putting pressure on the European Commission to pursue the review of the Savings Directive with considerable vigour. A report was submitted on 15 September 2008 by the Commission to the European Council of Finance Ministers (ECOFIN). There is also a summary presentation, which is easy to follow and sets out very clearly the identified problems and the potential solutions. The report itself indicates that progress has been made but the coverage of the scheme is not as wide as had been intended when the project was approved back in 2000. The report recommends amendments to the scheme in the following areas: n Beneficial ownership; n Definition of paying agents; Treatment of financial instruments which are the equivalent of those that are already explicitly included in the scheme; and

October / November / December 2008

n Some procedural issues.

The procedural issues relate to: n t he identification of beneficial owners (Article 3); n some procedural elements of the definition of interest payment (Article 6); n the information reporting by the paying agent (Article 8); n the exceptions to the withholding tax procedure (Article 13), and n some changes to Article 18 (review) concerning statistics from Member States.

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The European Council of Ministers has been putting pressure on the European Commission to pursue the review of the Savings Directive with considerable vigour.

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TAX FACTS

CORPORATE

MATTERS Your questions answered Q: What is corporation tax? A: Corporation tax is the tax paid by companies on their profits. Unincorporated organisations (such as clubs and societies) also pay corporation tax if they have taxable income. Partners in both traditional and limited liability partnerships and sole traders pay income tax instead.

Q: What is corporation tax payable on? A: Tax is levied on all the profits made during an accounting period. Profits can arise from several sources. They have to be calculated separately and totalled at the end. n T rading profits, income from your companyâ&#x20AC;&#x2122;s trading activities less allowable expenses.

n C apital gains, the profits made from selling certain company assets. n Income from letting out land or buildings. n Interest on any money held on deposit. Unlike individuals, companies generally receive interest without tax having been deducted. n Most other forms of income or capital gain.

Q: When are companies taxed? A: Companies are taxed on the profits made in an accounting period, normally their financial year. The end of an accounting period can also be triggered by the company going into liquidation or ceasing to trade. Tax rates are set for the tax year, which (for corporation tax purposes) runs from 1 April to 31 March.

Where the companyâ&#x20AC;&#x2122;s accounting period and the tax year do not coincide, the profits must be time-apportioned to decide which rate should apply. The geographical basis for the tax charge depends on where the company is resident for tax purposes.

Q: Who pays corporation tax? A: Companies resident in the UK pay corporation tax on their worldwide profits. Companies resident elsewhere normally pay corporation tax only on their profits from a UK branch or agency. Non-UK profits are generally taxed (often at higher rates) elsewhere.

Q: What is the rate of tax payable? A: The rate at which corporation tax is paid

October / November / December 2008

TAX FACTS

depends on the level of the company’s profits, with lower profits taxed at a lower rate. But there are provisions to prevent companies from splitting themselves up to reduce tax charges. There are two corporation tax bands in the tax year 2008/09: n P rofit (£) 0 - 300,000 tax rate 21 per cent n Over 1,500,000 tax rate 28 per cent

Corporation Tax on profits Rates, limits, fractions for financial years starting 1 April

2008

Main rate of corporation tax

28%

Small companies’ rate (SCR)*

21%

SCR can be claimed by qualifying £300,000 companies with profits at an annual rate not exceeding Marginal small companies’ relief (MSCR) lower limit MSCR upper limit MSCR fraction Special rate for authorised investment funds – unit trusts and open-ended investment companies

£300,000

£1,500,000

Q: When is corporation tax payable? A: Most companies have to pay corporation tax within nine months and one day of the end of their accounting period. This rule applies to small and medium-sized companies (i.e. those with profits of up to £1.5m).Tax must be paid in full at the due date, whether or not HM Revenue & Customs (HMRC) is challenging the figures shown on the return. Interest is charged on late payments. Larger companies have to pay the tax due in quarterly instalments. The first instalment has to be paid six months and 14 days after the end of the preceding accounting period (i.e. halfway through the accounting period to which the payments relate). Two further quarterly payments then have to be made, with the balance payable within three months and 14 days of the end of the accounting period.

Q: Are companies required to complete a corporation tax return? A: All companies have to notify HMRC of their profits by submitting their corporation tax return. The corporation tax return must be made within 12 months of the end of the accounting period. There are penalties for failing to file on time.

7/400 20%

* For companies with ring fence profits SCR on those profits is 19% with an MSCR fraction of 11/400 for the 2008 financial year starting on 1 April 2008. Ring fence profits mean the income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf.

If HMRC disputes any of the figures shown on the corporation tax return, the company may face an enquiry or a demand for extra tax. The Inspector normally has 12 months from the filing deadline to make enquiries into a return.

Q: Can losses be used to reduce a corporation tax bill?

The main rate of corporation tax applies when profits (including ring fence profits) are at a rate exceeding £1.

A: Sometimes losses can be used to reduce the corporation tax bill. However, their use is subject to strict rules, to prevent tax evasion. Trading losses can be offset against any other profits (including capital gains) made in the same accounting period. They can also be carried back against profits made in the preceding accounting period.

Where there are several companies under common control the above limits will be split between them, unless it can be proved that they are not carrying on a trade or business. Companies are responsible for assessing their own liability to corporation tax and for ensuring that all the money which is due is paid on time.

Alternatively, they can be carried forward and set off against future profits from the same trade. But they cannot be carried forward if the company changes hands and there is a major change in the business. So there is no point in buying or selling companies purely for the sake of their tax losses.

October / November / December 2008

Q: Can companies within the same group make use of the company’s trading losses? A: It may be possible for other companies within the same group to make use of a company’s trading losses. To qualify, at least 75 per cent of the shares must be owned by the parent company There are other restrictions. For example, when a company joins or leaves the group Capital losses can only be offset against capital gains. They cannot be offset against trading income. However, they can be carried forward indefinitely, so they should always be recorded, even if they cannot be used immediately. Increasing profits is generally more important than avoiding tax. However, you may be able to reduce unnecessary tax payments.

Q: Is it appropriate to consider limiting the number of subsidiary or associate companies? A: Yes, it is appropriate to consider limiting the number of subsidiary or associate companies, because the top limit on the tax band applying to each subsidiary will be split according to the number of companies within a group. Profits above that limit will be taxed at the marginal rate applying to the next band. So the existence of small companies within a group could have a serious impact on the amount of tax paid. If you must set up subsidiary or associate companies, it may be appropriate to spread profits evenly between them. It may be possible to use inter-company management charges to do this, although HMRC could disallow them if they are not on a commercial basis.

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ENTERPRISE

Small businesses in the UK could lose out on up to £200 million in tax relief Only half have submitted claims Small businesses in the UK could lose out on up to £200m in tax relief, the Department for Communities and Local Government (DCLG) has warned.

THE CORPORATE

According to the DCLG, some local authorities are following outdated central government guidance by imposing an earlier deadline for small business rates relief claims.

CREDIT CRUNCH

In 2006 the department introduced an updated timetable that ensured applicants had a three-year deadline to apply for small business rates relief.

Ten tips to survive the credit squeeze

This meant that small businesses had until 2010 to apply for tax relief for 2007/08, which can be worth up to £1,100 per individual business. A number of council websites and application forms state that those businesses that missed the deadline would not be able to claim for this year. The rebate was first issued in 2005 and almost 900,000 UK firms are eligible, although the Local Government Association revealed that only half of this number have submitted claims.

News of the three-part package to bail out the banks in an attempt by the government to restore confidence in the financial markets and encourage them to lend to each other again will come as welcome news to many business owners. But until the credit lines start flowing again, it is prudent for businesses to keep a close eye on their financial positions. Here are ten tips to surviving the credit squeeze. 1. Put cashflow and financing on the agenda for every management meeting. 2. Regularly update your cashflow forecasts. 3. If there is a conflict between profitability and cashflow, take the cashflow option. 4. If you have a term loan or overdraft, be aware of any covenants and constantly monitor how close you are to breaching them.

5. Prepare thoroughly if a review is coming up on any of your financing facilities. 6. If limits might be threatened, ‘think the unthinkable’ regarding the sale of assets. 7. Talk to current financiers before you get into difficulties. Otherwise you devalue future forecasts. 8 Make sure that all types and sources of finance have been fully considered.

9. Invest time talking to new sources of finance. You might need them if your current providers prove difficult. 10. If you are ‘cash rich’, draw up a list of ways in which you could use surplus cash for the longer-term benefit of the business. Source: ICAEW 2008

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