Business Financial Guide 2014/15 by Plus Accounting, Chartered Accountants

Business

Planning & Strategy Guide 2014/2015

T 01273 701200 E info@plusaccounting.co.uk W www.plusaccounting.co.uk

Business Planning & Strategy Guide 2014/15 The economy has started to get back on track in 2014 with steady growth, and ongoing low interest rates and falling unemployment.

CONTENTS

Starting your business

However, the economic recovery is not yet secure and there are still potential pitfalls for new and established businesses alike.

However, with careful planning and clear goals, a business can flourish. This guide provides a comprehensive overview of things to consider when starting, managing or selling your business. It covers compliance and tax information as well as business advice that will help inform your decisions. For more information please contact us directly, we are here to ensure that your business is a success.

Tax and Your Business

Unincorporated Business Owners

Tax & The Limited Company

Owner Director Planning

Reduce Your Tax: Capital Expenditure

It is always important to plan. Talk to us as early as possible to ensure that we can help with a range of business issues, including:

Tax Pointers

• The impact on your tax position and financial results of accelerating revenue and capital expenditure into the current financial year.

Managing Your Business

Funding For Growth

Leaving Your Business

WE CAN HELP.

• Taking profits from your business at the lowest tax cost including timing dividends and bonuses to reduce or defer tax. • Better cash collection strategies. • Improvements to your billing systems and record keeping. • Reviewing general systems to improve profitability and cash flow. • Tax saving employee remuneration packages.

STARTING YOUR BUSINESS Having a good business idea can be an exciting moment.. But before you start making your dreams a reality, you need to realistically appraise your chances of making it a success. Start by considering the demand for the service or product, the effect of the economy on your prospects, funding, your break-even and profit potential and the rate at which you expect the business to grow. It is also important to think about the personal aspects of running a business, including the impact of being the business owner on all areas of your life and the risks involved.

Business plan

Business Structure

A business plan will help you map out the direction of the business. A well-prepared business plan will address:

There are both advantages and disadvantages for each trading structure in terms of control, perception, support and costs.

• The source of your business capital, including your start-up requirements as well as your working capital funding.

The most commonly-used business structures in the UK are:

• Whether the business needs a PAYE scheme • Whether it should be VAT registered • The business structure that will best meet your needs - sole trader/sole practitioner, partnership, limited liability partnership or limited company • The need to provide auto enrolment • The timeline for registering with HMRC.

• Sole trader - you’re personally responsible for the business (and any losses it makes) and after-tax profits belong to you only • Limited company - the business’s finances are entirely separate to your own personal finances and profits belong to the company (after any corporation tax has been paid). The business is run by directors and ‘members’ hold shares in the firm. • Business partnership - you share personal responsibility for the business (and any losses) with a partner or partners. You share the profits and each pay tax on your share individually. • Limited liability partnership - you and the other partners are not personally liable for debts the business can’t pay. Your liability is limited to the amount of money you invest in the business. The choice of business structure can also be relevant in how you extract profit and capital from the company. A limited company is a useful tax shelter but only until you take the money out for personal use. There are different ways of doing this, such as salaries, dividends, loans and rent. We can discuss your options and the implications of each of these with you and help you determine which is most suitable.

The importance of the accounting date for your business It is also important to choose the right accounting date for your business. Factors to consider: • Is there a time of year when it is more convenient to close off your accounting records, ready for the preparation of your financial statement?

• What would be the best time of year for stocktaking? • To what extent is your business seasonal? From a tax viewpoint, the choice of a year-end early in the tax year for an unincorporated business usually means that an increase in profits is more slowly reflected in an increased tax bill. However, this can backfire if profits fall as the reduction in tax is similarly delayed and can leave you with a large tax bill when you retire or scale down your business.

Business funding If you are thinking of starting a business, you will probably need to raise finance. This requires careful planning and good professional advice. It is generally wise to seek finance from a number of sources. This will give you greater options for funding and flexibility in the long term. Some of the more common sources are: • Overdraft

HM Revenue & Customs (HMRC) registration Advising HMRC when you become self-employed may not be very high on your list of priorities in the first weeks and months of a new business. But failure to notify that you are in business can attract a penalty. Most tax registrations and returns are now completed online. If you have any doubts, we can advise you.

• Loan • Mortgage • Selling an interest to a partner • Share issue for your company • Hire purchase • Leasing • Debt factoring • Assistance from government- backed schemes e.g. National Loan Guarantee Scheme, Start Up Loans and from regional authorities • Venture capital.

TAX & YOUR BUSINESS There is a range of tax planning areas to consider when running a business. We discuss some of them in this guide but, for advice and more information, please talk to us directly.

UNINCORPORATED BUSINESS OWNERS Business profits are charged to income tax and class 4 national insurance contributions on the current year basis. This means that the profits taxed for each tax year (ending 5 April) are those earned in the accounting period ending in the tax year. There are special rules which determine the amount of profits taxed for the beginning and final years of a business and for those joining and leaving partnerships. There are an increased number of penalties for not complying with the rules and regulations of government departments. Penalties can be incurred due to: • Late VAT registration • Late filing

• Late payment

WE CAN HELP. PLEASE CONTACT US FOR ADVICE ON HOW TO: • Plan to take account of future reductions in the main rate of corporation tax.

• Errors in returns

• Minimise tax costs, enabling you to keep more of the profit you earn.

• Failing to operate PAYE for subcontractor scheme in the building trade.

• Comply with government regulations and avoid fines, surcharges, penalties and interest.

Although we aim to help you avoid incurring penalties, we need you to play your part by letting us have all the details of your accounts and tax returns in good time. We also need to know about all changes in your business, financial and personal circumstances.

• Time capital and revenue expenditure to maximum tax advantage.

Even if you make an honest mistake on your tax return, HMRC may argue that you have been careless. You will need to be absolutely sure that you tell us everything that may be relevant to your tax liability for a year. You should ensure that you meet any tax and other legal requirements for your particular business.

• Improve your invoicing and debt recovery systems. • Manage debt and cash flow. • Develop a plan for tax efficient profit extraction. • Improve profitability. • Protect your business from financial disaster. • Identify and value unpaid bills and unbilled work at the year end. • Deal with administrators or liquidators. • Get in touch with patent and intellectual property law specialists.

Self employed

For the self-employed, the timetable of tax payments is relatively straight forward: • 31 January in the tax year: first 50% payment on account • 31 July after the tax year: second 50% payment on account • 31 January after the tax year: balancing payment The payments on account are made based on the previous year’s tax liability and are your ‘down payments’ towards the current year tax bill.

CASE STUDIES

Example 1

You make your full 2013/14 balancing payment by 2 March 2015. HMRC will add a 5% (of 2013/14 tax due) late payment penalty, or £300 if greater, in addition to interest charged from 1 February 2014.

Reducing your payments on account Payments on account are normally equal to 50% of the previous year’s net liability. A claim can be made to reduce your payments on account if you expect your tax liability to fall from one year to another. However, interest will be charged if your actual liability is higher than you expected. Please do not wait until it’s too late - keep us informed of any factors that might change your tax liability. We can only suggest business solutions if you tell us in good time about issues facing your business. There is also a system of interest and surcharges to penalise late payment.

Example 2 You delay payment until after 31 July 2014. HMRC adds the 5% (of 2013/14 tax due) penalty for paying more than 30 days late and a further 5% penalty (of 2013/14 tax due or £300 if greater) for being 6 months late. Interest is charged on outstanding penalties, as well as unpaid tax and NICs.

TAX AND THE LIMITED COMPANY If limiting your liability is important, a limited company may be the right solution. However, bear in mind that banks and other creditors often require personal guarantees from directors for company borrowings, so the owners or directors of the business may in fact bear the liabilities of the business out of their personal assets. Trading through a limited company can be an effective way of sheltering profits as the rates of corporation tax on profits are generally lower than those applying to unincorporated businesses, which can be 47% (including 2% class 4 national insurance contributions) or more. Although profits paid out in the form of salaries, bonuses, or dividends will normally be taxable at top rates (in addition to national

insurance contributions), profits retained in the company are taxed in 2014/15 at 20%. The tax rate increases when taxable profits exceed £300,000. Retained profits can be used to buy equipment or to provide for pensions, both of which should be eligible for tax relief.

TAX & YOUR BUSINESS OWNER DIRECTOR PLANNING INCREASE YOUR NET INCOME Reducing national insurance costs

Although leaving profits in the company can be tax-efficient, you need money to live on, so you should consider the best ways to extract profits from your company. A salary will meet most of your needs but don’t overlook the use of benefitsin-kind, which may save income tax and could also result in a lower national insurance bill. The total tax and national insurance can be as much as 70.8%, or even higher in certain circumstances. There are many matters to be considered when deciding whether directors should be paid by dividend or salary and bonus. In practice, a combination of each is usually an appropriate course. Remember that dividends are usually payable to all shareholders. If you have outside shareholders who are not involved in the day to day running of the company then you will need to consider your dividend strategy carefully. Although it is possible for shareholders to waive their entitlement to dividends, this can result in tax complications.

Six strategies to save NICs

• Increase the amount the employer contributes to company pension schemes • Operate share incentive plans (shares bought out of pre-tax and pre-NIC income)

A better option may be to have different classes of share, on which different rates of dividend can be paid. However, if this technique is used as part of a scheme to avoid tax or NICs for employees, it may not be effective and could result in an even higher tax liability. Finally, you may need to consider the effect regular payment of dividends will have on the valuation of shares in your company. Consider how much you might save if, as an owner-director, you wanted to extract the £10,000 profit your company makes in 2014/15 as a dividend rather than a bonus. We assume that you are paying 40% higher rate tax, so your earnings exceed the so-called ‘upper limit’ for NICs; this means that employee NICs are charged at 2% rather than 12%. The below calculation assumes the £2,000 Employment Allowance has already been used against other Employers’ NIC.

CASE STUDY - Bonus or Dividend?

Bonus £ Dividend £

Profit to extract

10,000

Employers’ NIC

-1,213

Gross bonus

8,787

10,000

• Disincorporation as a company and instead operate as a sole trader or partnership

Corporation tax @ 20%

2,000

Dividend

8,000

• Paying a significant one-off bonus -

Employee’s NIC

-176

Income tax @ 40%

-3,515

instead of more salary - to reduce employee contributions (this will not work for directors) • Pay dividends instead of bonuses to owner- directors • Provide free childcare or childcare vouchers.

Additional tax Net amount extracted

-2,000 £5,096

-6,000

As you can see, the net amount withdrawn is increased by more than 15% by opting to declare a dividend. But be sure to discuss this with us before you act as this is a very complex area of tax law.

REDUCE YOUR TAX: CAPITAL EXPENDITURE Capital allowances

Energy saving equipment

Capital allowances is the term used to describe the deduction we are able to claim on your behalf for expenditure on business equipment, in lieu of depreciation.

A 100% first year allowance is available for investment in:

For expenditure on business equipment, including vans and fixtures in buildings but not cars, you may claim a full 100% deduction of up to £500,000 against your profits. If your accounting period is less than 12 months long, or spans the commencement date, the £500,000 limit is scaled down proportionately. Where you have an accounting period of longer than 12 months, the period must be split and the allowance considered separately for each period.

Enterprise Zones

If your business is a new economic activity located in an Enterprise Zone it is entitled to a 100% deduction on all expenditure qualifying as referred to above. The allowance is available for each enterprise if you run more than one, provided these businesses are not controlled by the same person and either occupy the same premises or carry on the same business activities.

Property

The flat renovation allowance is available until 2017 and is also subject to other conditions. Speak to us if you wish to claim either of them. If you rent out residential property, you may be able to claim a 10% wear and tear allowance to cover the replacement of assets if the property is “fully furnished”.

Goodwill If you turned an unincorporated business into a limited company (as often happens), you should consider how you treat goodwill. This can provide a useful means by which you can receive money from the company tax-free, and where the company can reduce its tax by 4% of the goodwill figure. Such arrangements must be structured correctly at the time, so please seek our early advice.

• Designated energy saving plant and machinery • Plant and machinery to reduce water use and improve water quality • New unused cars with official emissions of up to 95g/km. Otherwise, most plant and machinery qualifies for an allowance of 18% on a reducing balance basis. There is a lower rate of 8% for: • Long-life assets • Fixtures integral to buildings • High emission cars • Thermal insulation.

Industrial & agricultural buildings It is no longer possible to claim allowances for industrial or agricultural buildings. However many items that may seem to be part of a building may actually be regarded as plant or as features integral to a building, and may therefore qualify for a capital allowance deduction of 8%. As capital allowances are based on qualifying expenditure in the accounting year, you might consider buying plant and machinery before the end of the year, rather than just after, in order to obtain an earlier deduction.

TAX & YOUR BUSINESS TAX POINTERS Research and development Tax relief at varying rates is available on qualifying research and development (R&D) expenditure. These reliefs are for more than the amount spent and so represent a form of government grant. The relief is particularly generous for smaller businesses. However, the relief is only available to businesses that operate as limited companies. This may be a critical issue to consider when forming your business. Maximum rates of relief for this tax year: • For small and medium-sized companies paying tax at 20%: 45% (that is a tax credit of 225% of the expenditure) • For small to medium-sized companies not yet in profit: 14.5% (as a tax credit) • For larger companies paying tax at 21%: 27.3% (a credit of 130% of the expenditure) Larger companies and SMEs that have received grant funding towards their R&D can claim a 10% taxable addition to profit in respect of qualifying R & D costs. Companies can choose which form of relief they would prefer until April 2016, after which ‘above the line’ relief at 10% will be the only form of R & D tax relief for large companies. The tax credit is payable in full to companies which have losses. This is no longer subject to a minimum spend. SMEs that can’t claim SME R&D tax credit because they receive some other form of state aid for the same project can claim the large company R&D tax credit. This means they will qualify for relief on 130% of their expenditure. If your company exploits a patent, you may be able to benefit from the ‘patent box’. This is an arrangement that reduces the effective rate of corporation tax to 10% of the income from exploiting the patent. Transitional rules will phase the benefits in, with 70% of the rate reduction being available from 1 April 2014 and the full rate reduction applying in 2017.

Unpaid bills & unbilled work It is a feature of the tax system that businesses must include in their turnover for the year a value for incomplete work, work you have completed and billed, but not yet been paid for, and work completed but not yet billed, all as at the end of the year. Service businesses are also required to have accounting records that enable them to bring into account the sales value of incomplete contracts at the end of the year. This is an aspect of your business that requires careful planning so please discuss this with us. For unpaid bills, you may be able to claim relief for an identified bad debt, but you cannot claim relief for a general provision based on expectations of how many customers will not pay. Claiming bad debt relief does not stop you trying to obtain payment. Smaller businesses may account for VAT on a cash balance and may soon be able to do so for income tax also. These cash accounting systems provide bad debt relief at source.

Make the most of your expenses You will pay tax on your taxable profits (which will differ from the profit shown in your accounts), so it is essential to claim all business related expenses. You can claim a proportion of your household running costs and a proportion of your home telephone bills if you maintain an office at home. You can also claim for the cost of travel and accommodation when you are working away from your main place of business, subject to specific rules. You must keep adequate business records - including a log of business journeys - as these records may be requested by HMRC. You must keep your business records for six years. Make sure that they are kept safely and not exposed to damp. It is important to ensure that computer records are properly backed up.

Some possible tax deductions

In order to attract a deduction computing the profits of a trade or business any expenses must be incurred wholly and exclusively for the purpose of the trade. Capital expenditure is not an allowable expense (capital allowances are claimed on these costs), and certain other expenses are barred by statute. However, there are a number of expenses which, while deductible, also enjoy relatively favourable tax treatment. Annual party: Exempt amount per head (incl. VAT)

£150

Long service awards: Minimum term of service Value of gift

20 years £50 per year

Suggestion schemes: Encouragement award Payment in relation to 1st year benefit Payment in relation to on going benefit Maximum period for on going benefit Overall Maximum

£25 50% 10% 5 years £5,000

Household expenses contribution: Per week amount

£4

Customer gifts: Limit per gift

£50

Childcare provision: Weekly limit

Up to £55

File on time – or else It is one thing accepting that tax has to be paid but quite another when you find out that someone is seeking to charge you a penalty and interest because you filed or paid late.

File your self-assessment tax return one day late and you will find a penalty notice on its way to you for £100 -and this is a penalty that increases the longer filing is delayed. You will need to submit a tax return even if you don’t owe any tax or have already paid it. As your accountants it is our role to submit returns and your duty to pay on or before the due date. But in order for us to play our part in the submission of your returns we need your cooperation in providing information when requested. We will work with you to ensure that you pay the minimum in business tax and we commit to doing our part to ensure that your business avoids filing penalties.

If you find any of these of interest, please discuss with us the detail of the arrangements, as some are quite restrictive.

MANAGING YOUR BUSINESS You are successfully running your business, but getting to the next stage can be challenging. Knowing who to employ can be difficult, whether you employ members of your family, contractors or full time staff there are alternative tax planning opportunities. You may also need outside investment for that extra funding boost – we take a look at just some of the options available.

EMPLOYMENT MATTERS Involving the family

You can employ family members in your business, provided the salary and other benefits are commercially justifiable. You can remunerate family members with a salary, and perhaps also with benefits - such as a company car or van. However, before buying a vehicle through the business you should discuss this with us as it is likely that a personal tax will arise on the use of the vehicle. Other options include medical insurance and there is an obligation to make payments for auto enrolment either now or in the near future.

definition of employment or self-employment. The consequences of making an incorrect decision can be very serious indeed. You may be liable for not only the employer national insurance contributions (NICs), but also the amounts of tax and NICs that would normally be borne by the employee if you incorrectly treat someone as self-employed. In particular, it is not possible for an employer and employee to agree that someone is not an employee. If the work has the nature of employment, that is how it should be taxed.

Partnerships

Because large amounts of tax and national insurance contributions can be at stake, HMRC can take a firm line, so obtaining advice specific to your business is essential. However, you need to seek advice before you engage workers, so that we can advise on the best strategy and engagement terms to suit your business circumstances.

Be aware though that taking family members into your business may put the family wealth at risk if, for example, the business were to fail. HMRC may challenge excessive remuneration packages or profit shares for family members, so seek our advice before you make any decisions.

You should remember that employees are entitled to receive the national minimum wage, have at least 5.6 weeks paid annual holiday, and have various other employment rights. For new employees there is an opportunity to provide shares in exchange for reduced employment rights.

You can also take family members into partnership, thereby gaining more flexibility in profit allocation. In fact, taking your children into partnership and gradually reducing your own involvement can be a very tax efficient way of passing on the family business.

If you operate your business through a limited company, under current tax law you can pass shares onto other family members and thus gradually transfer the business with no immediate tax liability in many cases. However, a tax saving for the donor usually impacts on the recipient and you also need to steer clear of the anti-avoidance rules known as the settlements legislation, so again, seek our advice first.

PLEASE CONTACT US FOR ADVICE ON:

Employed or self-employed?

• Minimising employer and employee NIC costs

When you hire someone, you will need to determine whether they are an employee or self-employed. This is a complex area because there is no statutory

WE CAN HELP. • Involving family members in the business

• Finding investors • Trading during tough economic times

EMPLOYEE SHARE SCHEMES Share incentive plans

These plans provide three core elements which can be combined by companies in a number of ways depending on what best suits their business (limits are per employee): • Free shares up to a limit of £3,600 in any tax year • Partnership shares (purchased out of pre-tax and NIC salary) up to £1,800 in any tax year (or 10% of overall salary, whichever is less). There may be a minimum limit of up to £10 on any occasion. Shares may be purchased annually rather than monthly. • Matching shares provided by the company to match employees’ purchase of partnership shares, up to a limit of two for each partnership share purchased. There is an overall limit of £3,600 of free or matching shares in any tax year.

Enterprise management incentives (EMI)

Under EMI, certain small higher-risk trading companies (quoted or unquoted, with gross assets of no more than £30 million) can grant options over a maximum of £3 million worth of shares at any one time. The limit is currently £250,000 per employee. The options are normally free of income tax and national insurance charges on grant and on exercise (providing the grant price is paid). Entrepreneur’s relief may also be claimed, providing the granted EMI options have been held for one year. The requirement to hold 5% of the ordinary share capital and voting rights to qualify for entrepreneur’s relief no longer applies to the disposal of EMI shares. There are various conditions on the eligibility of the company and employee, although generally these are quite flexible.

The plan must be made available to all employees, but the company may set a qualifying period of up to 18 months. The only ways that an award of free shares can be varied from employee to employee are on the basis of remuneration, length of service, hours worked or performance.

FUNDING FOR GROWTH

Participants must not have a material interest in (i.e. owning or controlling more than 25% of the ordinary share capital of) the company.

• The Enterprise Investment Scheme allows income tax relief (30%) and capital gain tax deferral, plus a tax exemption for any increase in the value of the investment after an initial three-year retention period.

There has to be a holding period of between three and five years for free and matching shares. During this period, employees are contractually bound to keep these shares in the plan. Shares may be dividend shares and the company may choose to make dividend reinvestment compulsory or optional. The holding period for dividend shares must be five years, and cannot be longer than this. Shares have to come out of the plan when employees leave their job. Companies can decide that employees lose their free shares if they leave within three years.

Investors

There are several schemes under which tax reliefs or tax deferrals are available for investment in new and growing businesses:

• The Seed Enterprise Investment Scheme offers income tax reliefs of 50% provided the investment is in a qualifying company and the shares are held for three years from the date of issue. Gains reinvested also qualify for 50% capital gains tax relief. The scheme is for those willing to invest in very young companies. • Venture Capital Trusts offer income tax reliefs (30%) and the opportunity to pool investment with others looking to invest in qualifying companies.

Continues Overleaf 13

LEAVING YOUR BUSINESS

(Investors Cont...) The rules and tax breaks for each scheme are different and change from time to time so please discuss the options with us if you are thinking of attracting outside investors. The tax exemption for trading companies and groups on the sale of shareholdings of 10% or more in trading companies may also encourage corporate investors. If you are aiming to bring new investment into your company, you will need to have a very clear idea of why the investors should choose your company, and what they can expect to get out of it. You will need to have a comprehensive business plan, with supporting financial forecasts to put before potential investors or lenders.

WE CAN HELP. PLEASE CONTACT US FOR ADVICE ON: • Identifying successors in the family • Minimising the tax on gifts or sale of the business • Identifying successors within the business • Identifying possible purchasers • Valuing your business • Grooming the business for a sale • Preparing the business for success without you • Timing the sale • Maximising the sale price • Minimising the tax on a sale • Planning your transition to your next business • Providing succession options through your partnership or shareholders’ agreement • Providing for a smooth transfer of your business interests at your death

WHAT IS YOUR EXIT STRATEGY? Every business owner should have a personal exit strategy. We sometimes refer to this as a ‘starting with the end in mind’ strategy. Key issues to consider include: • Passing on your business to your children or other family members, or a family trust • Selling your share in the business to your co-owners or partners • Selling your business to some or all of the workforce • Selling the business to a third party • Public flotation or sale to a public company • Minimising your tax liability • What you will do when you no longer own the business • Whether the new owners will need or desire your involvement after the sale • Winding up. A fall in the value of your retirement funds and the value of property may influence your decision as to when you are able to retire. Whatever thoughts you have concerning the sale of your business, we know from experience that careful planning and the right advice is essential. Indeed, creating and putting into practice appropriate strategies at each stage of your business life is essential if you are to obtain the maximum reward for taking the risks inherent in being in business.

SELLING YOUR BUSINESS If you consider your business to have a market value, or if you are looking to your business to provide you with a lump sum on sale, it is essential to start planning now how you will realise that value. This is particularly important if you envisage selling your business within the next 10 years. Selling your business represents a major personal decision and it is essential to plan how you will maximise the net proceeds from its sale. When might you sell? Who are the prospective purchasers? What are the opportunities you have to reduce the tax due on the sale? Let us help you maximise the potential from your final sale.

Maximising the value of your business

Whoever buys your business will want to be clear about the underlying profitability trends - is your profitability on the increase or decrease? Up-to-date management accounts and forecasts for the next 12 months will be close to the top of the list of the information which you should be prepared to make available to prospective purchasers. The value attributable to many businesses is driven by the historical profits and therefore a rising trend in profitability should result in an increase in the business’ value.

Maximising profitability

Increasing profitability is always important but no more so than in the years leading up to the sale. So, what is the range of values for your business? Although you may think you can make an educated guess, a professional valuation gives you more solid ground. Assess your position today and then work with us to see how you can make your business more valuable. These are the sorts of questions a potential purchaser might ask:

• Will your company’s products and processes be outmoded in the near future? • Does your company use up-to-date technology and have a well-developed research and development programme? • How competitive is the market for your company’s goods or services? • Does your company have to contend with extensive regulation?

• Are your company’s products and services • Are sales flat, growing only diversified? at the rate of inflation, or exceeding it? • What are your competitors doing that you should be • Is yours a service business doing, or could do better? with limited fixed assets, or are stock and equipment a • How strong is the large part of your company’s staff that would company’s value? remain after your sale? • To what extent does your business depend on the health of other industries or of the economy? • What is the outlook for your line of business as a whole.

• How does your company ‘fit’ with the purchasers? You need to weigh up the factors which might influence the right time for you to sell your business.

LEAVING YOUR BUSINESS Personal factors

Business factors

• Have your life goals changed?

The following questions may assist in assessing the climate for selling the business:

There are many personal factors that are likely to influence your decision with regard to when to sell your business. You may need to think about:

• When do you want to retire? • If you are selling within the family, when will you sell and how will this transfer/sale be funded? • Has your health begun to deteriorate? • Do you still relish the challenges of running your business? • Does your business have an heir apparent? • Will your income stream and wealth be adequate after the sale?

External factors can also be important in timing your sale. If you can time your business sale to coincide with a period of economic growth, when buyers outnumber sellers and will pay premium prices, you will most likely secure the best price.

• What is the effect of the current state of the stock market? • To what extent is your business ‘trendy’ or at the leading edge? • Is your business forecasting increases to the top and bottom lines? • Is your business doing better than other similar businesses? • Is your business at, or near, its full potential? • Are there prospective purchasers?

TAX AND LEAVING YOUR BUSINESS Minimising the capital gains tax (CGT) Taxes are one of the necessary realities of the business person’s life. When you raise that final sales invoice and take the proceeds from the sale of your business, you should be completing one of the last steps in a strategy aimed at maximising the net return by minimising CGT on sale.

CGT basics

As a basic principle, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, reduced by such amount of your annual CGT exemption as has not been set against other gains. However, CGT is one of the most complex taxes we have, so there may be a number of other factors affecting the final tax payable on a disposal.

CGT reliefs may be very valuable

Entrepreneurs’ relief applies to the sale of a business and can reduce the rate of tax paid from 28% to 10%. It is essential if you want to maximise your net proceeds that you consult with us about the timing of a sale, and the CGT reliefs and exemptions, which you might be entitled to claim.

Entrepreneurs’ relief This generous relief applies to sales of a whole business or part of a business. This relief does not apply to the disposal of assets. There are specific circumstances under which the relief can apply to such a disposal, but these are related to the disposal of the business in which the asset is used. Entrepreneurs’ relief has a lifetime limit of £10 million for a reduced rate of CGT. The effective tax rate remains at 10%, so the maximum tax saving is £1,800,000. As this is a lifetime limit each disposal uses up relief which would otherwise be available for subsequent disposals. The types of disposal which attract relief are: • The sale by a sole trader of his or her business as a going concern (including incorporation) • The sale of chargeable assets which were used by a sole trader in his or her business, which has ceased trading within the last three years. • The disposal by a partner in a partnership of his share in the firm, or of part of his or her share, and • The disposal of shares and securities in a company, to which further conditions apply. Where the business disposed of is run through a company, the disposer must own at least 5% of the ordinary share capital of the company which must entitle him or her to 5% of the votes; he or she must be an officer or employee of the company, and the company must be carrying on trading activities, and to no substantial extent any other activities. This requirement about the company’s activities, is the same test as previously applied under taper relief, so if your company qualified for business asset taper relief, it also qualifies under the new rules. There is also relief available on the proceeds of winding up or dissolving a former trading company, provided this is done within three years of ceasing trading activities. EMI shares may attract entrepreneurs’ relief even where the owner has less than 5% of the shares in the company, and the period of time when the EMI shares were held as options counts towards the ownership period on sale, so that EMI shareholders can usually benefit from the relief as soon as they convert the options into shares, provided they are held for 12 months as options.

LEAVING YOUR BUSINESS

CASE STUDY

Rebecca, a higher rate taxpayer, is a director of a company which she formed many years ago. She owns all of the ordinary share capital, and has been a director of the company throughout. The shares are now valued at £300,000, and they cost her £100 when the company was set up. Her gain, and the related entrepreneurs’ relief, from the disposal on 24 June 2014 will be: £

Proceeds

300,000

- Cost

100

-Net gain

299,900

Annual exemption

11,000

Taxable

288,900

Tax at 10%

28,890

Lifetime Limit

10,000,000

Used in 2014/15

288,900

Carried forward

9,711,100

There is also relief available on what are termed ‘associated disposals’. This would allow Rebecca to sell an asset which she owned personally, but which had been used by her company (or a partnership in which she was a partner), around the time of the disposal of the shares. The relief is only available once she has withdrawn from the business by selling the last shares, and is also restricted if the property has not been used by the company throughout the time she owned it. There is a further and quite difficult restriction of relief if the property has been provided to the company in return for rent, as this will also restrict the relief on the eventual sale. Deciding whether to own property personally or in a company is a difficult balancing act between the various taxes, which may apply to both the purchase and sale of the property. We can advise you of the most tax efficient solution to your particular circumstances.

Holdover relief This relief generally applies to gifts of business assets and will normally reduce the tax payable to zero. It works by treating the donor’s gain as if it were attached to the asset - effectively passing on the donor’s gain to be added to any gain realised later by the recipient of the gift. Holdover relief must be specifically claimed by both the donor and the recipient of the asset.

Rollover relief

This relief applies to the replacement of business assets and is intended to allow the seller to reinvest all the proceeds of the disposal in a replacement asset, which he would not be able to do if he had to pay a tax liability. It normally works by reducing the cost of any new asset by some or all of the gain realised on the disposal of the old asset.

EIS investments

A gain on any disposal can be deferred by investing in shares under the EIS scheme. This delays the tax due on the original disposal, but does not eliminate it. However, the CGT treatment of gains on EIS shares themselves is very advantageous, and this might be an area worth considering.

Eliminate CGT altogether?

CGT may not be chargeable if you are not resident in the UK. However, you should seek advice from us before seeking to avoid CGT by leaving the UK. No CGT is payable for businesses or other assets that pass on your death. They may be subject to inheritance tax instead, where they may qualify for generous business property relief. There is also an exemption from CGT on gains realised in 2013/14 or 2014/15 where the gain is reinvested in the Seed EIS scheme in 2014/15. Up to half of the amount invested can be exempt from CGT as a result.

INHERITANCE TAX AND YOUR BUSINESS Lifetime transfers

For the business owner, the vital elements in the inheritance tax (IHT) regime are the reliefs on business and agricultural property of up to 100% of the value, which continue to afford exemption on the transfer of qualifying property, or a qualifying shareholding. Ask us to check whether your assets come within this exemption.

Transfers on your death Do not overlook your business when you draw up your Will. Reliefs may mean that there is little or no IHT to pay on your death, but your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders’ agreement. If we can help you with any of the information provided in this guide please get in touch.

Business Planning & Strategy Guide 2014/2015 If we can help you with any of the information provided in this guide please get in touch. Call 01273 701200 www.plusaccounting.co.uk