The creation of the Office of Tax Simplification should have made tax… well, a little simpler. When it comes to allowances, however, Mark Hjertzen FCA of HW Associates Chartered Accountants based in Hitchin, Herts says that things have actually become more complicated.
The Office of Tax Simplification (OTS) was set up in 2010 and became a permanent independent office of HM Treasury in the summer of 2015. In theory, it provides Government with advice on the areas of the UK tax system which are overly complex and collects evidence with a review to reform.
In the eyes of many accountants, however, there seems to be more complexity than ever in terms of the issues confronting many of our clients. Before we can answer a straightforward question on their tax liability, we have to wade through a whole checklist of allowances. Even calculations for lower earners have become problematic, when traditionally they were usually pretty straightforward.
Put simply, allowances reduce the amount of tax you have to pay. Some give you full relief and allow you to earn a certain amount of money before paying any tax. Others give restricted relief and reduce your tax bill by a tenth of their nominal amount.
Today, in tax year 2016/17, these are the specific allowances available:
Personal Allowances – taper at £100,000
Married Couple Allowance – only for those born before 1935
Marriage Allowance – only for basic-rate taxpayers
Personal Savings Allowance – £1,000 or £500 or £0
Savings Rate of Income Tax – 0% on the first £5,000
Dividend Allowance – £5,000
Micro Trading Allowance – £1,000
Micro Property Allowance – £1,000
Rent a Room Allowance – £7,500
In fact, there are two types of undergraduate loan, explains Mark Hjertzen of Chartered Accountants and Business Advisors HW Associates of Hitchin, Herts. And from 2019, postgraduates may be paying back debts of their own. It’s potentially a recipe for confusion.
Most of us are familiar with the basic idea of student loans. You borrow money at the outset of your degree course and start repaying it when you’re working, once your income exceeds a certain level. The outstanding sum will get written off eventually if it’s not repaid within 30 years.
The system up until now has been relatively straightforward for employers on the administrative side, but there are now some potential complications. It all stems from the launch of a new type of loan back in September 2012.
Loans issued before this date are known as the ‘Plan 1’ type and continue in Scotland and Northern Ireland. Those taken out after this point are referred to as ‘Plan 2’. The first cohort of people with Plan 2 loans graduated last year, so they’re now due to start paying back what they owe.
So what are the differences between Plans 1 and 2? Well, the repayment thresholds are the main issue. With Plan 1, you start to repay at 9% once you’re earning over £17,335, whereas the figure is £21,000 for Plan 2. A decision has been taken, following a consultation process, to freeze this latter figure for all borrowers.
If you’re an employer, you’ll need to know which type of loan the student has. Finding out is fairly straightforward, but you can’t necessarily rely on your employee knowing. To them, it was just a loan. And what if they have both types? The rules say that the Plan 1 loan should be paid off first. But as things stand at the moment, there is no intention to issue a stop notice for it. You will, instead, have to rely on the start notice for the Plan 2 loan.
Of course, many employers will want to think they can handle this, but there is the potential for an administrative error leading to a double deduction being made. Payroll systems should take the two schemes into account and the HMRC PAYE Basic Tools package is being updated too, as you might expect. But is everything going to be watertight?
There’s then a further complication. From August this year, the Government is making postgraduate loans available to anyone under 60, which will become payable from April 2019. Although the threshold matches the Plan 2 at £21,000, the rate of repayment is 6% rather than 9% above this point. Imagine the confusion when these debts are being repaid alongside Plan 1 or Plan 2 loans.
The message here is to be prepared. Although there is nothing intrinsically complex about the arrangements, the room for administrative hiccups is going to get bigger and bigger over time.
Mark Hjertzen BA (Hons) FCA
Company cars are only going to make financial sense in the coming years if they’re very low or zero-rated on CO2 emissions, writes Mark Hjertzen FCA of Hitchin, Hertfordshire based chartered accountants and SME business advisors HW Associates. Personal car allowances and personal contract hire may be the way forward.
It’s true to say that the company car was a nice perk in the past, but as benefit calculations have become more and more aggressive over time, its attractiveness started to wane.
Regardless of the amount you actually pay, it’s the new vehicle list price, inclusive of optional extras, that is important for tax purposes. In addition, the CO2 emissions, fuel type and HMRC benefit multiplier are required to calculate the value of the car benefit in kind. For diesel vehicles, there is an additional 3% added to the benefit multiplier percentage.
So the calculation is then pretty straightforward as shown below:
|Car||List price||HMRC||Company car taxable benefit for the year ended…|
|Including extras||benefit multiplier||5 April 2016||5 April 2017||5 April 2018||5 April 2019||5 April 2020|
|Value of car benefit in kind||3,780||4,140||4,500||4,860||5,400|
|Tax due on car benefit||20%||756||828||900||972||1,080|
|Tax due on car benefit||40%||1,512||1,656||1,800||1,944||2,160|
|Annual increase in tax payable||9.5%||8.7%||8.0%||11.1%|
The problem is that the HMRC benefit multiplier is set to increase quite dramatically in the coming years, which may pose challenges for businesses and their employees. (The ostensible justification for the rises is the green agenda of reducing polluting vehicles, but we are already in the position where fully electric cars are being taxed, so there’s some room for debate over the true motivations.)
A company that contract hires its fleet may well be locked into an arrangement they can’t escape, which will leave workers out of pocket. In 2016-17, the tax due at basic rate on our Ford Focus would be £828. And it keeps rising year-on-year until 2019-20, when it reaches £1,080. Higher-rate tax payers would find themselves shelling out £2,160.
It seems likely that many businesses may choose to move to a car allowance instead, encouraging their staff to buy or hire a vehicle themselves – perhaps with an instruction that it needs to be less than five years old for the sake of reliability and appearance. Personal contract hire is now easier than ever. Big deposits are no longer required and it’s possible to pick up a car for a competitive price per month, particularly where the user has low annual mileage.
It’s worth bearing in mind that the figures in the table above completely exclude fuel. You have an additional calculation to make if an employee is getting free petrol or diesel.
The long and the short of it is that things are getting tougher and traditional company car arrangements are becoming progressively less attractive. It may be time for you to think ahead.
Imagine you’re about to proceed with an important deal, when a surprising and rather alarming obstacle gets in the way. Credit reports can sometimes be inaccurate, writes MARK HJERTZEN FCA of Hitchin based chartered accountants and business advisors HW Associates. And when they are, that spells real trouble…
It’s usual, when new contracts are being signed, for there to be a standard due-diligence process. After all, it’s important for customers to establish the financial health of the business that’s about to become a significant supplier. Credit agencies are likely to be their first port of call. But can you always be certain the information they’ve supplied about you is correct?
Many accountancy firms will be familiar with horror stories from their clients, in which a purchasing company has called up and said that they couldn’t proceed with a substantial piece of business. The reputation of the supplier has been compromised or even severely damaged by information that is inaccurate or just plain wrong. As a result, they have fallen outside the purchasing company’s criteria, as they are seen as ‘above average risk’, when they were perhaps ‘low risk’ just six months earlier.
One of my own clients found themselves in this position, despite four years of consistent growth and a very healthy year-end bank balance.
How do such situations arise?
Well, to be quite honest, it’s usually just a straightforward error with the inputting or interpretation of data. A profit figure can be listed as a loss, for instance. Given the huge volume of data that credit agencies handle, it’s perhaps inevitable mistakes occur and there’s no way of telling how commonplace they are. But they can have a devastating effect on individual businesses when they do.
The good news is that it’s usually possible to challenge data which is incorrect. Go back to the credit agency promptly and ask them to correct the error and they normally will. At the very least, they should offer you a chance to add your own note to the file.
Sometimes it might be advisable to get your accountant to do this work on your behalf. If you monitor what the big agencies say about you and are prepared to challenge incorrect or misleading statements, you’re taking an important step towards maintaining the healthy reputation of your business.
How much do your customers value what your business has to offer? Mark Hjertzen FCA of Hitchin based accountancy firm HW Associates talks us through the process of pricing.
Putting a price on what you sell can be one of the biggest challenges for any business. It’s not only going to play a critical role in your marketing strategy, but also potentially determine the viability and profitability of your company.
The first thing to establish is whether your product or service is considered a commodity. If it’s, say, a mobile phone or even a driving lesson, the band in which you’re operating is going to be pretty narrow and largely outside your own control.
Many businesses do, however, have greater flexibility. You need to understand the perceived value of what you have to offer and work how to quantify it to a customer. Clearly, if something costs you £12 to produce, but its perceived value is only £10, you have an insurmountable obstacle in front of you. If, on the other hand, its perceived value is £100, you’ll see a lucrative market opening up.
My strong advice is not to give away years of experience or know-how for free. Be confident in the value you’re able to provide and communicate this clearly to the purchaser. And remember, you are selling benefits to them, rather than just features. (Parking sensors on a vehicle are merely a feature. It’s the way they help you avoid bumping your car when parking that’s the actual benefit.)
It’s worth bearing in mind that once you have invested work or effort in creating a product or service, it may be that it becomes more valuable to you. That’s because the next time you sell it, you’ve already done the groundwork.
Here are five additional tips, which you may want to apply:
- Break down the cost of any project work. If you give each component a separate price, it helps with recognition of the overall value.
- Agree price and performance criteria up front. You don’t want to be negotiating at a later stage and will also have some benchmarks in place if you need to increase the price at any point.
- Bill in a timely fashion. You want your customer to value and remember the work that you have done, so invoice when the project is fresh in their mind.
- Avoid adding bells and whistles the client doesn’t want or need. You don’t want your profit margin eroded by setting a five-foot high jump for a three-foot price.
- Speak to your client about price. If circumstances have changed and your cost of delivery has increased, be frank and speak to the customer at the earliest possible stage.
The green way to cost savings
If you thought recycling was just about saving the planet, you may be in for a surprise. It also has the potential to influence the bottom line.
Most of us are now used to doing our bit for the environment at home. We’ll happily separate recycling from other rubbish and increasingly take our own bags to the supermarket. Small steps, but ones that make us feel we’re achieving something positive at a time when climate change and the environment have a higher profile than ever.
It’s easy to overlook environmental initiatives in the workplace, but even small and medium-sized enterprises can generate potentially large amounts of waste. Many companies see the advantage of demonstrating their environmental credentials to potential customers from a public relations point of view. Others may have a very strong conviction that they should do something positive for the planet. But how many actually think about the cost savings?
If you recycle effectively, you can often keep the price of waste collection down, but it requires some real discipline. Here are some tips worth bearing in mind:
- GET THE INFRASTRUCTURE RIGHT
Take advice from your waste collector about the different bins that you’ll need within your office or premises and make sure that they’re easily accessible.
- AVOID COSTLY MISTAKES
You may not realise it, but you’ll soon be penalised if inappropriate items end up in the recycling. If your bins are full of chewing gum and paper clips, you could end up paying more. Even coffee cups that still have coffee inside or the remnants of a pre-packed sandwich can mean that your waste will be rejected. You’ll have to ask your employees to take simple steps, such as rinsing out tin cans.
- MAKE SURE TO COMMUNICATE
It’s vital to have all your staff on board. They need to understand what you’re aiming to achieve. It may also be worth holding a face-to-face briefing meeting to demonstrate exactly what can – and what can’t – go into the recycling bins.
If you get the approach right, you may soon be demonstrating your support for the environment to staff and customers, while also making significant savings.
Taking the pain out of payroll
Outsourcing your payroll run can help reduce errors, says Usha Duggal of Hitchin-based accountancy firm HW Associates. At the same time, it can ensure you comply with ever-more complex regulations.
If you run a small business and manage your own payroll, the chances are that you’ve already seen at first hand some of the problems that can inevitably arise. It’s a time-consuming and increasingly complex process as regulations change. After all, we now live in a world of auto-enrolment and realtime reporting. There are significant risks to your business if you’re unable to keep up with the latest rules.
Errors aren’t just inconvenient and potentially costly. They also have a human consequence, as your members of staff are depending on seeing their salary move seamlessly into their bank accounts once a month. There are mortgages and gas bills to pay, which means morale can dip very quickly if there are glitches in the system.
So what are your options? You can battle on with one of your staff members handling payroll in-house – perhaps combining the job with another important accounting role – or you can choose to outsource the function to your accountant.
Of course, there are costs involved in any decision to outsource, but when you factor in both the internal cost savings and the time your own staff save, it can really start to make sense.
What if you’re able to free someone up a day or two a week, for instance? How might that additional productivity within your accounting function help your business? There may also be savings on payroll software, which needs to be constantly upgraded to keep abreast of the latest changes in tax and national insurance.
By using your accountant, you can be sure of a reliable service that won’t come to a halt just because an individual is off sick. You won’t have to worry either about keeping your own staff constantly trained and updated. At the same time, you can reduce any potential risk to the business which can arise from unfortunate errors and remain compliant with HMRC.
Although outsourcing isn’t right for every business – and you have to make a judgement based on your own particular circumstances – it’s certainly worth starting the discussion with your accountant. Too often, inertia and inaction can be an obstacle to real savings in time and cost.
Start your business by the book
You’ve launched a new business and are optimistic about the future. Perhaps you want to focus on the development of your product or service, or on marketing it to prospective customers. Unfortunately, however, day-to-day book-keeping is an essential part of every successful start-up. You ignore it at your peril argues Mark Hjertzen of Hertfordshire Chartered Accountants and SME specialists HW Associates.
If you’re a budding entrepreneur with big ambitions – or simply someone who has decided to branch out with your own micro-business – the chances are that you will have some kind of particular skill or talent. Perhaps you’re an expert consultant, a technological genius or a retail guru. But there’s no reason to suppose you’ll have any knowledge of the financial legwork that’s so important for any company.
It’s important that you catch up fast, as accurate tidy records are not only a legal requirement, but also essential for helping your business to grow – providing you with vital information whenever you need it.
In reality, there are many different ways that a business can keep its books and your choice will probably be dictated by your size, your predicted growth and the kind of market you’re in. If you see yourself becoming a household name within a year and are planning on opening offices around the globe, a manual system isn’t really going to cut it. On the other hand, if you are running, say, a small childminding business, it probably won’t make a lot of sense to splash out £1,500 or more on a computerised system.
Costs vary widely, of course. A basic Sage 50 package, for instance, might be £200 up front or £10 + VAT a month, although that figure climbs considerably – to £75 + VAT per month – if you opt for their Accounts Pro version. Sage One and Xero can also be chosen with different functions as well, designed to fit your pocket and the needs of your company.
An accountant can certainly advise you and help you to analyse the various options. If truth be told, however, a well-kept spreadsheet or manual cash book can still work just as effectively sometimes if you’re a small start-up.
After talking to your accountancy practice, you might decide to let them take the whole book-keeping issue off your hands entirely. Although this involves an additional expense, it will allow for the production of regular management accounts and these can actually prove to be an invaluable tool, whether your business is struggling initially or starting to grow.