2011 New Year’s Resolutions – in February!

“Join our gym and kick off your new year’s resolution to get in shape – joining fee waived for January”

No ta.

Rather than join the hoards of folk who pile into their New Year’s Resolutions with gusto before running out of steam about this time in January, I’ve decided to hold back for 2011. I am busy planning and refining my business goals and strategy for the year ahead.

Ready to kick off in full on 1 February. Care to join me?

10 Year End Tax Planning Tips For SMEs

You have the opportunity to structure your business finances in ways that preserve more of the wealth that you create. This takes advance planning. Don’t miss this opportunity.

To help, here are 10 pre-year end tax planning tips that entrepreneurs should be actively considering to reduce corporation tax, income tax and national insurance costs:

  1. Don’t pay corporation tax at the highest rate of 29.75%. Calculate your full year budgeted profits as soon as possible so that you plan around this rate. If you are a standalone company and your estimated taxable profits exceed £300,000 (but are less than £1.5m) then you fall into what’s called the corporation tax ‘marginal rate.’ This is not a good place to be. This rate is higher than the rate of tax applied to large companies (with profits in excess of £1.5m) who pay tax at 28% and much higher than the 21% rate your company would otherwise pay if you kept profits below the marginal band. If this applies to you, then you need to consider tax planning ideas to reduce your corporation tax payable – see further below.
  2. Make a pension contribution from your company into your (and possibly your spouse’s) pension fund. I am not going to go into the pros and cons of pensions and the detail of the recently introduced (and hideously complex) anti-forestalling provisions that currently apply for ‘super earners’ (broadly those with personal income of £130,000+), suffice to say that pensions can play an important role in year end planning for owner managed businesses. The benefit of pensions is that income tax relief is received at the individual’s highest rate of income tax. Certain restrictions apply for ‘super earners’ and new rules will be coming into force from April 2011, however, where implemented carefully, pension planning allows for a corporation tax deduction in the company and no income tax or national insurance payable by the owner managers. Pensions can also be an important lever in managing the company taxable profits e.g. if hovering above the £300,000 standalone company profit watershed. And don’t forget you must pay the pension contribution by the year end in order for it to be tax deductible in the company in that period – so don’t leave it to the last minute!
  3. Optimise the tax on your remuneration. Generally, a small salary (within the personal allowance – so no income tax or national insurance is due) will have been paid during the year with regular dividends to cover living expenses. Spouses, who ideally take an active role in helping run the business, can receive a small salary and dividends (subject to shareholdings) to maximize the use of both husband and wife personal tax allowances. With the year end approaching, now is the time to consider whether a final bonus or dividend should be awarded depending on available distributable profits, taxable profits and how much needs to be left in the business for future reinvestment etc. There are normally a number of factors to consider in making final awards of cash from the company, therefore it is important to crunch the numbers. Normally, a dividend will be the most tax efficient means of extracting profits for most business owners (up to the £150,000 personal income limit and 50% additional tax rate – see further below). Care should be taken in awarding dividends to spouse shareholders as HM Revenue & Customs still have their eye on husband and wife companies despite having lost a landmark case on this issue related to maximising both spouse’s income tax allowances. Some demonstrable activity in the business by both spouses is therefore recommended to mitigate this risk.
  4. Watch the 60% marginal income tax rate for income over £100,000. Total personal income of £100,000 is a new watershed for business owners as income received between £100,000 to £112,950 attracts a marginal rate of 60%! This is due to the personal allowance being phased out for income above £100,000. So if your total remuneration package is likely to be around this area, you might be well advised to limit your income to £99,999 to avoid this horribly expensive marginal rate.
  5. Watch the 50% additional rate for ‘super earners’. For those successful entrepreneurs with earnings in excess of £150,000, getting the right balance of remuneration is even more important as income tax is levied at 50% on salary or bonuses compared to 36.1% on dividends (a 25% increase in tax on salary income is matched (or not?!) by a 44% increase in dividend tax rate – work that one out?!). So rather than take a dividend from the company beyond £150,000 total income, business owners could consider taking a loan from the company and the company paying the due tax at a rate of 25% on the loan – something akin to what the shareholder would have paid on a dividend. Note that there could also be benefit in kind tax charges where no interest is paid on the loan but this could still work out to be the cheaper overall option.
  6. Optimise the timing of dividend and bonus payments for cashflow and tax rates. Dividends and bonuses are taxed on business owners on a receipts basis. If your income is already high for the 5 April 2010/11 tax year then you could defer paying out a dividend until 6 April 2011 so that it falls within the following year’s tax allowances and limits. Also, you can accrue a bonus in the 31 December 2010 accounts and don’t have to physically pay it until 30 September 2011 but you still receive the corporation tax deduction upfront. This gives a useful cash-flow advantage and the bonus timing is applicable for all employees i.e. not just business owners.
  7. Plan your spend on capital items to get tax relief quicker. Expenditure on computer equipment, desks, chairs etc attracts a write off against tax up to £100,000 spend per year. This reduces to £25,000 from April 2012. Make sure you bring forward any expenditure to reduce your taxable profits especially if the company profits are hovering around the standalone company £300,000 mark.
  8. Get tax deductions now for provisions against stock and debtors etc. Consider the valuation of any stock or debtors at the year end and make specific provisions where the likely recoverable value is less than the original amount recognised. Provisions against specific items (on a line-by-line basis) are tax deductible for corporation tax purposes.
  9. Claim loss carry backs as soon as possible to get refunds. If you have a forecast tax loss then you can carry this loss back to obtain a refund from HM Revenue & Customs of the corresponding amount of tax suffered in the preceding accounting period. You may wish to get your skates on with the year end work so that you can promptly file the accounts and tax return and get the cash back as quickly as possible.
  10. Don’t get time barred from lucrative tax incentives. Review available tax incentives such as R&D tax credits, capital allowances on fixed asset expenditure, loss carry back claims etc as the majority of such tax breaks have a 2 year time limit for you to be able to claim them with HM Revenue & Customs. So, for example,  many available tax incentives for the year end to 31 December 2008 will be time barred from 1 January 2011.

If you would like more ideas for growing your business and structuring your finances so that you keep more of the wealth you create, then please join the mailing list in the side-bar.

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How to get to grips with your business finances

It is easy to get caught up in ‘doing’ rather than ‘running’ your business.

So many business owners find themselves running simply to stand still – finding new customers, taking and fulfilling orders and addressing (hopefully not too many) customer complaints.

Sometimes its difficult to see the wood for the trees:

I’m really busy so I must be making money – right…?

Not necessarily.

Understanding your business finances

It is understandable that, at the end of a busy day working in your business, you would prefer not to review your business finances. But if you don’t understand the numbers that your business is producing then how will you know which bits are working (and profitable) and which bits of your daily work are simply a waste of time and effort?

I frequently recommend that owners of new businesses sit down (at least weekly) with a pencil and journal (yes, that technical!) and write out the week’s sales figures and costs by hand. I find that there is something more insightful about using a pencil and paper compared to an excel or similar spreadsheet – perhaps its the exercise of writing by hand that makes you think more deeply about the figures and how they connect (or not…).

At its most basic, to write out your sales income (ideally split across services or products) and associated costs, will give you a much clearer view of what is profitable work and what is unprofitable – the figures rarely lie. You would be astounded how few entrepreneurs do this simple exercise – and by the number of business owners whose jaws hit the desk when they realise why (or even that!) they are losing money you can tell they wish they’d done this far earlier!

Moving on from pencil and paper to the day-t0-day, I’m a big fan of online cloud accounting packages like Xero as they provide a live dashboard view of the health and performance of your business. Now with live feeds across the majority of UK banks, entrepreneurs can get a realtime view of the health (or otherwise!) of their business. The bank balance is clearly there to see plus debts receivable as are costs payable. Cashflow is absolutely king for all businesses so the ability to see how much cash is in the bank, how much is due in and how much is due out at any one time is crucially important if you are to be in the driving seat in running your business.

Don’t get put off by accountancy mumbo-jumbo, simply by taking the steps set out above on a daily or at least weekly basis, you will be streets ahead of many of your competitors who are ‘busy being busy’ with no clear focus or direction on what works for the future of their business. Try it. Let me know how you get on.

If you are a digital, tech or creative business and you would like some assistance in getting a better grip on your business finances then please drop me a line.

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Avoid a tax hangover from your Christmas office party!

So you’re probably all set for this year’s Christmas work bash? Its worth reminding yourself about the tax rules and how they apply for Christmas office parties.

As you might expect, HM Revenue & Customs aren’t quite as festive as most business owners might like to be in rewarding their team for the hard work put in over the year.

Certain limitations apply for the party to be treated as non-taxable and therefore non reportable (for income tax and National Insurance Contribution purposes) such as:

  • it must be an annual event (it could be a Summer BBQ and / or an Xmas party but a celebration party to mark a major contract win, for example, would not fall within this exemption). This is not an exemption for any work event;
  • the Christmas party must be open to all staff – not just selected employees e.g. directors. Although separate departments or offices are entitled to have their own parties within these limits;
  • a limit of £150 per head applies – this is not per employee so the total cost is divided between the number of attendees (which might include non-employees e.g. spouses);
  • the £150 limit includes VAT and other incidental costs such as transport, hotels, DJ, speakers etc. Aka the whole shebang!

Christmas gifts to staff are not included in the above exemption. HMRC generally don’t like them but in practise are generally prepared to turn a blind eye to trivial benefits such as a bottle of wine, a turkey or bunch of flowers. Anything more substantial (e.g. hampers, cases of wine etc) and you could be landing your employees with an unexpected tax bill. You have been warned.

Ho ho ho! Merry Christmas!

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Why do most companies have a 31 December financial year end?

Most companies have 31 December financial year ends.

Yet you have a choice as to when your company accounting period runs to in the UK – unlike in some other countries – so there is no obligation to follow the crowd. Actually, there are some quite compelling reasons why you should opt NOT to have a 31 December year end:

  • the company tax year runs to 31 March so tax changes are often enforced with effect from 1 April. Companies with 31 December year ends therefore have to tackle complicated in-year hybrid tax rates and calculations compared to say 31 March year end companies;
  • the personal tax year runs to 5 April. Easier to plan your tax affairs for your owner managed business if your company tax year is more closely aligned with the personal tax year end;
  • the end of the calendar year falls into the Christmas and New Year holidays – do you really need the stress of closing your company books for the year end on top of the end of year festivities?
  • your compliance costs. Basic laws of supply and demand apply. If most businesses have year ends around the same time, most accountancy firms will be rushed off their feet between November to March so how much scope do you think they might have to share some cost savings with you…?

So how about having a 31 March company financial year end? Or if you want to be really adventurous you could have a 31 July year end? Wild, huh?

Note that there are Companies House documents to file and certain restrictions can apply in changing accounting periods – check with your accountant first or drop me a line in the contact section (tab at top)

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4 tips to your most productive working week

We’re in the run up to Christmas (plus its the start of the week) so its important that we can squeeze every last second of productivity out of our remaining working time. Here are 4 tips that just might help:

    Focus on your No.1 priority (clue: not Facebook) mousepad
  1. Focus on the 2 or 3 things that really matter. Take a second look at your ‘to-do list’. How much of it really matters and / or are you the right person to be doing much of it? Can you delegate more or simply strike it off the list? Be brave.
  2. Get your head out of your email inbox. Designate specific time to checking email every day but stick to this plan. Don’t be reactive and respond as soon as email arrives. Be in control of your time and task priority. Stick to this plan all week.
  3. Confirm whether you really need all of those internal meetings scheduled in your calendar. Can the issues be solved beforehand by circulating a brief agenda inviting comments? – also rather than clutter yours and others’ inbox further with agendas etc, consider using online tools like Yammer for discussion. Experiment with this.
  4. Clear your desk. Cluttered desk = Cluttered mind. Sweep all printed paper into the recycling – if you need it, you can reprint it (chances are you’ll never need to). You’ll feel much better for it.

Are there any productivity tips that you can share to help us improve our focus on key business needs and avoid distraction?

Earning (accountancy) Bucks in the Digital Age

In collaboration with Pro:ManchesterManchester Digital brought accountancy professionals and digital creative businesses together this evening in Manchester to explore opportunities for us to work together and support each other more effectively.

Shaun Fensom kicked off the session by outlining the key to many Manchester digital businesses’ success i.e. speedy collaboration plus a willingness to share ideas and intellectual property, before Mike Taylor (NW Business Insider) took over in leading the panel discussions in his consistently entertaining and energetic style. I was a representative for Team Accountancy on the panel, initially fearing a bashing similar to that received earlier this year by the lawyers in Earning a Buck in the Digital Age Round 1.

We covered plenty of ground including:

  • differing financial needs of digital and creative businesses – some are lifestyle businesses that are more keen on creating interesting work and developing their people than profit; others grow at a ballistic rate (per Mike Ryan) – I find these businesses normally need help to cover all compliance bases and avoid overtrading (aka running out of cash); others die.
  • is the limited company the right vehicle for creative businesses given that intellectual property is often created almost like bridges between them? A great question by Shaun Fensom that led to much head-scratching from the lawyers in the audience. My own view is that the blind pursuit of intellectual property protection is futile; instead this effort and financial focus is far better directed toward harnessing the free flow of intellectual property. This applies to accountancy firm’s intellectual property as much as digital businesses. A question was raised whether 80-90% of intellectual property could be released into the public (open source / creative commons) and 10-20% retained for profit? Good suggestion. Is intellectual property still the right definition? Who owns it? Not enough time to dig further – I welcome your views in the comments section below.
  • how can accountancy professionals and digital businesses work together more effectively? There was common ground that scary accountancy fee structures, uninviting shiny city centre offices and power suits are not the way to court relationships with small fledging (yet often fast growth) digital businesses. Us accountants need to invest more time in mixing with digital creatives to better understand what makes them tick and build relationships on their turf e.g. tech office clusters, coffee shops and emerging north west initiatives like MediaCityUK and The Sharp Project. We also need to match this with a fee structure that invests in these companies for the future – we for example already hold meetings (for £nil cost) and then offer reduced rates. This is our investment. Please drop me a line for a coffee to discuss further by emailing me or contacting me on Twitter: @stevelivingston.
  • will Manchester ever have a Facebook? Why not?!

Discussions like this fill me with excitement for the future of the accountancy profession. Left as it is, the accountancy profession is staring into the abyss. Yet for those who embrace change, there are huge mutual benefits for both digital and tech entrepreneurs plus forward thinking accountants. A win-win. So change it is.

Please leave your comments for the changes you would like to see implemented for accountants to earn a buck in the digital age.

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Headlines speak for example in effective business presentations

It was a pleasure to once again host a Speakeasy event at our offices in Manchester this evening. Speakeasy as a concept – to assist business owners and professionals craft and deliver their business message – is growing in popularity with 7+ live groups in and around Manchester and international expansion imminent. It is a testament to the hard work and effort invested by its founder, Andrew Thorp.

Alistair MacDonald was an excellent co-facilitator at this evening’s event.

Key learning points in relation to delivering effective presentations for me were as follows:

Start with a headline

Rather than launch straight into the dense detail of your presentation content, start with a teaser headline e.g.

“It was on the 10th January 2010 that my life changed…..I’ll return to the reason for this in a moment but first let me explain how I got there…..”

Think about news programmes and how they craft their message. They always start with short, punchy headlines.  Headlines both frame a story and provide a teaser to pique interest, before returning to flesh out the detail. The same technique can be used with great effect in public speaking.

Tell stories by using the words “for example”

A repeated lesson from tonight’s Speakeasy (in fact from pretty much every decent presentational training event I’ve been to) stressed the need for the presenter to use stories to engage the audience and provide memorable hooks for the audience to take away.

Alistair MacDonald provided a great insight in that he said his ears prick up when he hears a speaker say the words “for example” as he knows a story is imminent. This provides an excellent hook for speakers to remember to use to introduce stories plus it provides a smooth bridge to bring in stories throughout a presentation.

Are there any other tips that you find help turn an otherwise dull, mundane talk into an inspiring and engaging presentation?

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Developing new client relationships drip by drip

You must water your garden every single day.

It is so easy to fall into the trap of focusing on dealing with clients and customers in the here and now. You’re really busy – in fact you’re rushed off your feet – that’s great news, but if you miss one single day of reaching out to new prospects or renewing acquaintances with old clients then you are storing up trouble for the future – a garden that’s either parched or overgrown with weeds!

I was reminded of this the other day when a prospect that I have met with on several occasions (a company that falls within my definition of a ‘dream client’) sent me a LinkedIn invite – let me repeat “sent me” the invite. I realised that a few months had gone by and we had not been in touch. My contact may have been sending a polite reminder that we should get back in touch or more likely was busy forcing himself to tend to his own garden – either way, it was a shot across the bows and made me rethink when and how I had last been in touch with my prospects and clients.

If, like me, you are keen to ensure that you have a steady stream of clients and customers, you must discipline yourself to keep on investing in these relationships each and every day – even if you’re lucky enough to be rushed off your feet right now.

Please subscribe to the newsletter in the sidebar for more business tips and ideas for tomorrow’s business. Today.

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Tomorrow’s Business – 37 Signals, Duct Tape Marketing plus more

The following are links worthy of your attention in running your small-medium sized business:

Interview with Jason Fried of 37 Signals (video) – fascinating insights into productive work, generating ideas and products, improving communication – overall, tips in relation to the effective modern workplace. Great quote about entrepreneurialism and the danger of getting VC funding too early:

“The things you do more often are the things you get good at – so if early on you concentrate on spending money then you’ll get really good at spending money. If you have to concentrate on making money from day one then you get really good at making money – that’s what you have to be as an entrepreneur”

The Fear is Real – Six Pixels of Separation – Mitch Joel encourages businesses to engage in building their communities online via social media ready for when they might need their tribe to support them if the brand comes under attack. The problem is that there is a fear of getting on board – is it really that scary?

Nic Brisbourne at The Equity Kicker covers some great ideas espoused by Astro Teller on innovation including:

“When someone comes with an idea for a project, insist that they also show you nine other ideas they had and discarded.  Partly this is because people shouldn’t just be coming with the first idea they think of, but also because forcing people with one good idea to go through a ‘I’d better think up nine other dumb ideas for my boss’ process, will generate a lot of creativity.  One of the ‘dumb’ ideas might turn out to be the best one”

John Jantsch of Duct Tape Marketing sets out an automated lead generation marketing system – simple when you know how.

Please subscribe to the newsletter in the sidebar for more tips.

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