Buy to let: still an attractive proposition?

If you’re someone who rents out residential property – or you’re considering it – it’s important to take stock of some important changes in the July Budget, writes Tracy Henson of chartered accountants Barnett & Turner. ‘Buy to let’ tend to be the three little words to make investors go weak at the knees. For a number of years now, becoming a landlord has been seen as a clever ploy. Indeed, people purchasing property with the aim of renting it to tenants have almost certainly been playing a significant part in the recent property boom.

The Chancellor’s announcements in the July Budget, however, mean that the financial calculations will be a little more complex. Higher-rate tax payers may have particular cause for concern, because there are now going to be restrictions on the amount of tax relief applicable to mortgage interest.

The changes will be phased in from 2017/18 and the following four years, allowing time for landlords to adjust. In the first year, 75% of the interest can be relieved at the higher rate, while the remaining 25% is allowed at 20%, which will come off the person’s net liability as a tax reducer. The tax reducer may also be restricted by some limitations. Any excess finance costs may, however, be carried forward in certain circumstances.

In 2018-9, the ratio becomes 50/50. That means that 50% of the interest is relieved at the higher rate and the other 50% at the 20% rate. The year afterwards, the percentages are 25/75 and by the time we reach the tax year 2020-1, there is no higher-rate relief at all.

There’s another issue which you may want to discuss with your accountant too.

From April 2016, the ‘wear and tear’ allowance for landlords will be abolished. This straightforward system previously meant that when a property had been let fully furnished, the landlord could claim 10% of the rent as a deduction in profit – in lieu of white goods and furnishings supplied to the tenant. This could happen each year as a matter of course, regardless of the actual state of the furnishings. Under the new rules, you’re only allowed the cost of actual replacement of goods – a new fridge freezer, for example.

If you’re planning on becoming a landlord on a smaller scale, however, and are just intending to rent out a room in your home, there’s some good news. Whereas previously only £4,250 of the annual rental income was tax free, the figure is rising to a more realistic £7,500. An incentive perhaps from the government to help solve wider issues in the housing market.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Start planning for the future with your accountant

Accountants do a lot more than simply crunch numbers, writes David Wilson of Barnett & Turner. They can be trusted partners who’ll help you draw up a compelling business plan. When I started out in the accountancy profession, business planning was not an essential part of life. The small businesses we dealt with didn’t recognise the importance of looking forward and planning for the development of their company.

Times have changed and, today, business planning is very much an essential part of corporate life. Why the transition? Well, the most common reason to prepare a plan is to explain your business priorities, capabilities and ambitions to an external lender, such as a bank. In an era of reduced access to finance and the application of rigorous lending criteria, a professional approach is absolutely essential.

A business plan is, however, important at other levels too. It is an essential business management tool which provides a structure and guidelines for the running of your business.

From my own point of view as a professional advisor, assisting clients with the preparation of their plans is an ideal way of developing a close relationship with them and their staff.

The preparation of a business plan naturally involves financial information, but it also enables us as accountants to show that we are business advisors with commercial awareness, rather than simply number crunchers. A well-written plan will get behind the numbers. It will include comments on the aims and objectives of the business, as well as the personal ambitions of the owners. We will make reference to the key people in the organisation, the state of the company’s assets and planned capital expenditure.

A good plan will include observations on marketing strategies and risk management – the latter being an essential part of today’s business life. Working with clients to produce a business plan is therefore a highly rewarding and fulfilling exercise. It is also an excellent way to demonstrate how chartered accountants are trusted business partners for their clients.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Why trusts are giving way to Family Investment Companies

For people with significant wealth, Family Investment Companies are now a more fashionable way of planning for the future, argues David Wilson of Barnett & Turner Accountants. Trusts have for many years been an option when looking at tax-efficient ways of planning for the future and helping children and grandchildren. Recent changes, however, have limited what you’re able to put into trust – in most cases to £325,000 in a seven-year period. This is one of the reasons we’re seeing more and more interest in Family Investment Companies (FICs) today, despite the fact that the concept has actually been around for many years.

To start with, just think of a FIC as a company, into which you can build different shares, rights and restrictions. It doesn’t have to trade. It can just hold different assets as an investment and it might be possible to transfer an existing portfolio of investments into your FIC, depending on whether this creates any tax charges.

So why bother? Well, assets can grow and income then becomes taxable within the company at 20% rather than at the higher rate of income tax. With certain investments – dividends from most other companies, for instance – no tax is payable at all within the FIC. You can choose then whether you want to take some income from the FIC, which shares dividends are declared upon, or perhaps you simply “draw down” some of the loan you used to set it up.

There are, of course, some downsides. You have the costs and administration associated with setting up a limited company and, in theory, your accounts are a matter of public record, which anyone is free to inspect. It could be that in the longer term, if the company pays tax on gains and you then take that out as a dividend, that you could pay more tax overall, and obviously tax rules can change in future.

So setting up a FIC isn’t necessarily an obvious and straightforward decision. I recommend doing the due diligence beforehand, and sitting down not only with your accountant, but also a financial adviser and a lawyer. There may, for instance, be implications for your will and you do need to decide when setting the FIC up who you want to be shareholders, and what benefits you want each person to get in future. By and large, however, savings in income tax will often outweigh the potential risks, and there can be longer-term inheritance tax savings too.

Here are some frequently asked questions:

How do I fund an FIC?

If you create a large director’s loan account, the company founder should be able to withdraw funds in later years with no tax implications. You may want to partly fund by loan and partly fund by share capital.

How does the tax position compare between assets I hold myself and in an FIC?

Corporation tax is currently 20% (income tax up to 45%) and there’s no tax on UK dividends received in a FIC. There are some other benefits that companies can take advantage of, as well as the differing tax rates.

How is a FIC structured?

A lot depends on what you want to achieve – one of the great aspects of FICs is they are flexible. You may have a founder shareholder, for example, who keeps tight control over the FIC, and then different classes of shares for each family member, allowing flexibility over dividends and future asset growth.

You could also still use a family trust – many FICs have trusts as shareholders. As noted earlier, there is a great deal of choice when setting up a FIC.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Free up your time with professional, strategic support

Many professional services firms – including accountants – employ a ‘practice manager’ to oversee and co-ordinate their work. Plenty of companies in other sectors could benefit from exactly the same kind of approach, writes Jono Wilson of Barnett & Turner. An increasing number of accountancy and legal firms now employ a Practice Manager to look after the day-to-day running of their own business. It’s a recognition that it’s very difficult to focus on the priorities of clients and to deliver a seamless service, unless you have someone working behind the scenes to make sure that everything is running efficiently internally.

In simple terms, the Practice or Operations Manager makes sure that whatever the business and its clients need, the structures and processes are in place to make it happen. This could involve anything from recruitment of staff through to creation of a robust IT infrastructure, management of front-of-house reception and the preparation of disaster recovery plans.

The sheer importance and variety of the role makes it highly strategic. How do we respond to regulatory requirements, for instance? What is our tolerance level for risk? And how can we make sure we manage our finance, insurance and facilities in the most effective way possible?

If you’re choosing a manager to oversee operations in your own business, my recommendation would be to ensure that they are an inquisitive person. Someone who looks at numbers and is able to see the underlying trends behind them. Perhaps they may come from an accountancy background and will have real attention to detail, along with an almost instinctive ability to spot opportunities to reduce costs.

Remember, if you’re working too much ‘in’ the business, you’re not working enough ‘on’ the business. It’s a scenario which is repeated across many growing firms. Eventually, this is likely to translate into poor profitability and low cashflow. That’s why an investment in an operations manager can make sense for any expanding company.

Is there a magic threshold or size at which you decide to act? Not necessarily. One company with a £2m turnover might be very different from another. I would make your judgement on the basis of the complexity of your business. Once the demands of running the firm efficiently are starting to undermine your ability to focus on your core role, then it might be the ideal moment to find someone who can take a lot of the burden off your hands and help give you real peace of mind.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Prepare to share

Before May’s election, many businesses were uncertain about whether they would pursue shareholder status for key employees. Now, observes Tracy Henson of accountancy firm Barnett & Turner, there’s a definite flurry of interest. One initiative of the Coalition government back in 2013 was the introduction of ‘employee shareholder status’ or ESS. With Labour signalling that it was likely to scrap the provision – which allows staff to trade employment rights for equity – there was relatively little take-up. But with the election of a majority Conservative government in May 2015, companies now have a reasonable degree of certainty that the policy is here to stay.

The essential idea is that a business owner may want to tie in employees by giving them shares. The new regime allows employers to do this in a tax advantageous manner.

For example, you might want to reward a particularly impressive Finance Director and ensure that she stays for the long term. You issue new shares to her and she pays nothing for them, as the ‘consideration’ in legal terms is created by giving up certain employment rights (see below).

These shares must be worth a minimum of £2,000. If that’s all you choose to offer, no income tax is payable by the recipient, although if you offer more, tax is due straight away on the amount above the £2,000 threshold. (While this charge obviously belongs to the individual, it’s perfectly legitimate to offer a bonus that would help to compensate the employee for the upfront bill.)

If the amount you offer is worth more than £50,000, there are restrictions on the tax advantages. There is no tax on sale at exit up to this cap, but if the shares were worth, say, £100k when they were first offered, only half would be tax free on disposal.

Although valuation is obviously a very difficult issue in many businesses, it is possible to agree figures with HMRC up front to avoid any potential dispute. It’s important to work closely with your accountants, who will be able to make the calculations – there is a prescriptive process to go through with HMRC in order to get this agreed.

A tax-free exit can seem very appealing and the owner may be looking to part with fewer shares than they would otherwise have to. It’s worth bearing in mind that entrepreneurs’ relief only applies if someone has 5% of the company, whereas under ESS they can have a smaller % and pay 0% on an exit, not 10% under entrepreneurs’ relief.

What rights does an employee give up as ‘consideration’ for shares?

• Unfair dismissal rights (unless the dismissal is related to discrimination or health and safety)
• Statutory redundancy pay
• The statutory right to request flexible working (with the exception of the two weeks after return from parental leave)
• Certain statutory rights to request time off to train

Other rights, including statutory sick pay, paid annual leave and maternity/paternity leave, remain in place.

So it’s not for everyone, and clearly as an employer you are giving away equity if you do this, but one advantage of ESS is that it is very flexible and there are not the restrictions over which type of company can do this, which there are with a number of other tax favoured schemes such as the enterprise management incentive scheme.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Worried about auto-enrolment? Here’s a ten-point plan.

Don’t panic about your pension responsibilities, writes Jono Wilson of Barnett & Turner. Start planning ahead. If you’re running a small business, the chances are you will have heard from the Pensions Regulator by now about your staging date for auto-enrolment. Although SMEs have been given extra leeway, the time is now fast approaching when you’ll need to spring into action.

The process starts by nominating a primary point of contact (usually a partner, director or someone else in a senior position) and a secondary contact who’ll handle the day-to-day operation of the scheme.

It’s important to remember that penalties can eventually rise to as much as £50 a day or more if you’ve failed to act, so there’s a strong incentive to start making preparations.

Here’s my 10-point action plan, which should see you through the initial process and ongoing administration.

1. Define and set-up your scheme.
2. Assess your workforce for eligibility.
3. Send letters to all your workers, providing details of the scheme, the contributions that will be made and the start date.
4. Enrol all workers into scheme.
5. Manage opt-outs and timely refunds.
6. Enrol new starters as well as postponements.
7. Calculate and pay over contributions.
8. Complete an auto-enrolment declaration of compliance, within five months of the scheme starting.
9. Keep up-to-date records.
10. Auto re-enrol all eligible job holders every three years.

To be ‘eligible’ in the eyes of the Regulator, an employee must be over 22, but under the state pension age, and earning more than £10,000 per year. It is possible, however, for other people to choose to join the scheme and, as an employer, you may still have to make contributions.

If you have between 30 and 49 employees, your staging date will be between 1^st August and 1^st October 2015. If you have fewer than 30 staff, the date will depend on your PAYE reference, but can range from 1^st June 2015 to 1^st April 2017. Whatever your own situation, get the ball rolling by speaking to your accountants and find out exactly what support they’re able to give you.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

A holding company? There may be no reason to hold back.

If you thought the formation of a corporate group structure was just for big multinationals, it’s time to think again, suggests David Wilson of accountancy firm Barnett & Turner. It’s a serious option for much smaller businesses too. When a limited company has built up a significant amount of wealth on its balance sheet – perhaps three quarters of a million pounds or more – and it has a large value of fixed assets, the option of creating a holding company becomes something worth exploring.

Although the formation of a ‘group’ is something you’d more normally associate with large, blue-chip corporations, there’s certainly no reason in principle why smaller companies can’t take advantage of the structure too.

When you create a holding company, you can move ‘spare’ cash and fixed assets into it from your trading company. The holding business can then rent the fixed assets back to the original company, buying any new assets itself.

Each year, dividends can be paid to the holding company, which is allowed to set up its own directors’ payroll scheme and pay your executives, while charging the trading company for its services.

There are a number of potential benefits to this approach.

First of all, the business owner’s wealth, which has been built up over the years, is protected from a potential disaster, such as losses from under-insurance. Creditors can generally only come after the trading company. You may also be able to maintain greater privacy over directors’ remuneration and possibly qualify for a less arduous audit regime.

It’s worth noting too that the creation of the new holding company gives you an opportunity to bring in new shareholders and buy existing ones out.

But do watch out. The new company structure will involve an increased admin burden in relation to year-end accounts, VAT, insurance and so on. And if you end up reducing your trading company’s balance sheet, there may be a short to medium-term hit on your credit rating. But, if you do have spare cash and are paying your creditors on time, this might not be such a big deal.

As with most planning, there are likely to be pros and cons of a new structure, so the best thing is to talk the options through with your professional advisers. They will be able to look at your specific circumstances and give you appropriate guidance.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Blowing the whistle on a key employment judgement

Jonathan Wilson at accountancy firm Barnett & Turner, has a warning for employers about the consequences of a recent test case. Back in 1998, the Public Information Disclosure Act was introduced to provide comprehensive protection for whistleblowers. If someone believed their employer to be guilty of wrongdoing – theft, for instance, or a failure to comply with legislation – the idea was that they should be able to come forward without fear of victimisation.

Although the statute was good in principle, it was widely felt to be ambiguous and there was a distinct lack of detailed guidance. This left a lot of room for interpretation.

Following the case of Parkins v Sodexho Ltd (2002), employees were able to bring ‘backdoor’ unfair dismissal claims, founded simply on the basis that a breach of their own employment contract could be subject to ‘protected disclosure’ under the 1998 whistleblowing act. In other words, if they had an individual dispute with their employer over the terms of their contract, they could claim it was an issue which was covered by the whistleblowing legislation.

The Enterprise and Regulatory Reform Act of 2013 helped to tighten the law as it stated that workers would be protected only if they had a ‘reasonable belief that the disclosure was in the public interest’. The first major test of this clause came in a case involving estate agency Chesterton Global Ltd and its employee Mr Nurmohamed, who claimed the company was relying on misleading accounts to reduce the bonus or commission that managers received. The practice not only affected Nurmohamed himself, but also around 100 other managers within the business.

Nurmohamed argued that with 100 people involved, the public interest test applied and that he had been unfairly dismissed for raising his concerns. An employment tribunal agreed, but Chesterton appealed.

In the appeal judgement, Nurmohamed prevailed again – a decision which sends a strong signal to employers that issues affecting only a relatively small group of individuals may satisfy the notion of ‘public interest’. Critically, the Employment Appeal Tribunal also stressed that it was the employee’s ‘reasonable belief’ that was important. Even if the person concerned had interpreted the situation incorrectly, the fact that their belief was objectively reasonable gave them protection in law.

So it would appear to be that the hurdle for establishing ‘reasonable belief’ does not appear to be very high. In the case of Chesterton, the fact that it was a private company and a relatively small number of people were impacted by the behaviour of the firm, did not form an adequate legal defence.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

How to Create a Marketing Strategy

Jono Wilson, Managing Partner at Barnett & Turner, explains the importance of marketing and how you had better take an active part or risk losing out to your competitors. What was it that drew you into your current profession? I would hazard a guess that marketing, business development or sales were not high on the list of attributes or duties you considered important. However, these key skills are now paramount in the success of your company and will become ever-more critical as time goes by.

This means that if you don’t have a dedicated team or department devoted solely to this important function, then you, as the business owner or leader, usually have to develop the skills and ability to source and bring in work yourself.

Whilst everyone knows you should have a business plan, many business leaders do not put much importance or time into a workable marketing plan which focuses on winning and keeping clients and customers.

A good, workable and flexible marketing and business development strategy highlights all the tools and actions you need to develop and implement to achieve your sales goals. It is your plan of action, outlining what you will sell, who will want to buy it and the tactics you will use to generate leads and to turn prospects into customers.

So what is a Marketing Plan?

In simple terms, marketing plans are detailed documents that summarise the market knowledge you possess and the strategies needed in achieving set objectives over a particular period of time.

Listed below are four essential areas that must be covered in your marketing plan before you proceed with any specific marketing activity.

1. Consolidation – Assess your current situation.

• What resources do you have available?
• Analyse and summarise where you are in your specific market.
• Do a SWOT Analysis – internal strengths and weaknesses; external opportunities and threats.
• Assess your competition – what they are doing and where, along with their prices and exposure.
• Are there other factors that may cause future opportunities or challenges in terms of social, economic, political or technological issues?

2. Develop your marketing strategy, including the development of:

• Your business mission and vision.
• Your business objectives.
• Your marketing objectives.
• A comprehensive description of your target market and customers.

3. Develop your marketing programme. The 4Ps

• Your product messaging.
• Your pricing strategy.
• Your promotion plans.
• The ‘place’ or channels you will communicate across.

4. Determine your controls, benchmarks and measurement process

• Budgets and resources.
• Critical success factors.
• Key performance indicators.

Remember, you don’t create a marketing plan just to put it away, never to see the light of day again. It should be a workable, dynamic, measurable and flexible document to which you refer on a regular basis and which is updated and amended as conditions or situations change.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Banking on the right decision

Jono Wilson of Barnett & Turner argues that you need heavy-hitters on your side when you approach a bank with a view to getting finance for investment. When a client needs to persuade a bank to make a substantial investment in their business, I always recommend that they get their professional advisers involved at the earliest possible stage. Unless you have your accountant on board and get some support in presenting your case, there’s a danger you may end up shooting yourself in the foot.

Banks can be notoriously difficult to impress and can fall back on a tick-box mentality when it comes to deciding on finance. They’ll look at the recent figures and overheads, but can fail to take into account the bigger picture and the great opportunities that can come with investment.

In my own practice, we had a client with a good track record, but they’d been through three or four tough years for perfectly explicable reasons. This family business was looking to make a substantial investment in state-of-the-art technology. The loan was going to be large, but we could demonstrate the payback in terms of efficiency and the halving of labour costs over time.

Even with our involvement, the process of convincing the bank isn’t always easy. Different potential funders often ask for information in varying formats. Sometimes banks – despite the preparation of a detailed business case – seem as if they don’t quite ‘get’ it.

As well as a paper analysis of where the business is heading, you may need to support your pitch in other ways – a video that demonstrates the advantages of technology, for instance, and tours of the current facilities.

It’s also important to set out your stall right at the beginning. Ask the bank’s local representatives whether they are actually able to make a decision. If you know the green light will have to come from someone further up the hierarchy, politely request that they come down to your client’s site and have a face-to-face meeting.

At the end of the day, a successful request for funding is going to come from a partnership. On the one hand, there’s your expertise and knowledge about your business and market place. On the other, there’s the guidance and advice of your accountants and other advisers, who know from experience the best strategies to employ during the negotiations.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk