Archive for July, 2014

Seed Enterprise Investment Scheme

Wednesday, July 30th, 2014

The Enterprise Investment Scheme (EIS) has been in place for a number of years and provides tax relief for individuals prepared to invest in new and growing companies. Investors can obtain generous income tax and capital gains tax (CGT) breaks for their investment and companies can use the relief to attract additional investment to develop their business. A junior version of EIS known as Seed Enterprise Investment Scheme (SEIS) has been introduced from 6 April 2012 and is expected to be available for five years.

Key features

The key features of the new relief can be summarised as follows:

  • a qualifying investor will be able to invest up to £100,000 into qualifying companies in a tax year
  • they will receive income tax relief of up to 50% of the sum invested
  • unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year
  • the maximum amount that a company can attract in investment qualifying for SEIS is £150,000 in total
  • the company must not have net assets of more than £200,000 before any SEIS investment
  • an individual who makes a capital gain on another asset and uses the amount of the gain in making a SEIS investment will not pay tax on that gain in 2012/13 and 50% of the liability for 2013/14 subject to certain conditions
  • there is a huge amount of anti-avoidance legislation to prevent exploitation for tax avoidance purposes.

 

Who can invest?

The official term is a ‘qualifying investor’. The primary requirement is that the investor or someone who is associated with them must not be an employee of the company in which the investment is being made. They can however be a director. They must also ensure that they do not have (directly or indirectly) a substantial interest in the company. This is defined by reference to holding more than 30% of any of the following (in either the company itself or a 51% subsidiary of the company):

  • ordinary shares
  • issued shares
  • voting rights
  • assets in a winding up.

 

Which shares qualify?

The shares must be ordinary shares which have been subscribed for wholly in cash and are fully paid up. They must be held for a three year period from the date of issue. The company must have issued the shares for the purpose of raising money to fund a qualifying business activity which either involves the carrying on (or preparations to carry on) a new trade. Using the funds to meet the costs of research and development intended to create or benefit a new qualifying trade will also be acceptable. The money must be spent within three years of the date of issue of the shares. The anti-avoidance requirement is that there must be no pre-arranged exit for the investor involving the purchase of the shares, or the disposal of assets.

 

Which companies qualify?

The rules are intended to benefit new companies. The basic requirements are that the company must be unquoted. The trade must be a ‘new’ qualifying trade. This is one not carried out by either the company or any other person for longer than two years at the date the shares are issued. The company must exist wholly for the purpose of carrying out one or more qualifying trades throughout the three year period from the date of issue of the shares. If the company goes into receivership or administration or is wound up during this period, this will not prevent the relief being given provided there was a commercial justification for the action.

The other main conditions relating to the company can be summarised as follows:

  • the company must have a permanent establishment in the UK
    • the company must be effectively solvent at the date of issue of the shares
    • the company may have a qualifying subsidiary
    • the company must not be a member of a partnership
    • immediately before the investment, the gross assets of the company plus the value of any related entity (one that holds more than 25% of the capital or voting power in the issuing company) must not exceed £200,000
    • there are less than 25 full-time employee equivalents in the company and any related entity
    • the company must not have had EIS or Venture Capital Trust (VCT) investment before the SEIS shares are issued
    • the company can seek EIS or VCT investment after it has received SEIS investment but must show that it has spent at least 75% of the money received under SEIS, and
    • the total amount of investment made under SEIS in the company must not exceed an aggregate of £150,000.

 

Which trades qualify?

The primary requirement is that the company must carry on a genuine new trading venture. There may be a problem if the same activities had been carried on as part of another trade. Basically any trading activity will qualify unless it is an excluded activity within the definitions used for EIS. This means that activities such as property development, retail distribution, hotels, nursing homes and farming will not qualify. The trade must be carried out on a commercial basis.

 

How is relief obtained?

The relief is given as a reduction against the total tax liability for the year but cannot turn a tax liability into a tax repayment. In that situation the individual would be able to carry back the unused relief to the preceding tax year for use if there was any tax unrelieved for that year. HMRC have indicated that no carryback to 2011/12 will be allowed for shares issued in 2012/13, as 2012/13 is the first tax year of the scheme.

Examples

Samantha invests £60,000 under SEIS in 2012/13. Potentially her tax relief is 50% of her investment which is therefore worth £30,000. As her tax liability for the year is £45,000, the maximum relief is available to reduce her tax liability to £15,000.

Richard is also planning to invest £60,000 under SEIS but not until 2013/14. His forecast tax liability for 2013/14 is only £20,000 so the claim to relief under SEIS will be limited to £20,000 for that tax year. However, Richard can in addition make a claim to carry back the unused relief of £10,000 (£30,000 less £20,000 relieved in 2013/14) to the preceding tax year 2012/13.

The relief must be claimed and requires a certificate from the company issuing the shares. This is a critical point in relation to the validity of any claim as the relief can only be claimed when the company has spent at least 70% of the money raised by the share issue on qualifying business activities.

 

Can the relief be withdrawn?

The short answer is ‘yes’ if certain events happen within three years of the date on which the shares are issued. The most obvious event is the disposal of the shares in that period. There are complex rules that will cause the relief to be withdrawn if the investor receives ‘value’ from the company during this period.

 

What about the CGT position?

Where shares are sold more than three years after the date on which they are issued then any resulting gain is free of CGT. Shares sold within three years would be chargeable but may qualify for the 10% rate of CGT under Entrepreneurs’ Relief if the various conditions are met.

Where a disposal is exempt for gains purposes, this would normally mean that a loss would not be allowable for CGT purposes, but an allowable loss is available under the scheme. Where SEIS income tax relief has been obtained and is not withdrawn then the capital loss is reduced so that tax relief is not duplicated.

Example

Murat invests £25,000 in SEIS in 2012/13 for which he will receive £12,500 relief against his income tax liability of £35,000. If 4 years later the company is unsuccessful and is liquidated with no value returned to the shareholders then his allowable capital loss will be £12,500 being the amount invested of £25,000 less the income tax relief obtained of £12,500.

Clearly investors will hope that they are not in a capital loss position but where this does happen, the allowable loss qualifies for relief against either gains or income. The facility to use a capital loss against income is only available in certain specified circumstances which include a capital loss on SEIS. It can be used in the year of the loss and/or the preceding year to relieve net income and can therefore potentially save tax at the individual’s highest rate of tax.

 

A bonus exemption

There is also an additional exemption for 2012/13 only where assets are disposed of at a gain in that year and funds equal to the amount of the gain are invested in SEIS shares. Where only part of the gain is invested in such shares then only that part is exempt. The maximum gain to be relieved is capped at £100,000. Further, this relief will only be allowed where the investment also qualifies for income tax relief and a claim is made. If for any reason the SEIS relief is withdrawn on the shares then the 2012/13 gain will be reinstated.

Example

Isaac sells quoted shares in 2012/13 for £200,000 making a gain of £80,000. He invests £60,000 of the proceeds in new shares which qualify under SEIS. He will be able to claim a reduction of £60,000 in the chargeable gain on the shares.

A further bonus exemption

The availability of reinvestment relief has been extended to gains made in 2013/14. Reinvestment relief is available at 50% of the matched gain where the proceeds are invested in SEIS shares in either 2013/14 or 2014/15.

Example

Isaac sells some more quoted shares in 2013/14 for £200,000 making a gain of £80,000. He invests £80,000 of the proceeds in new shares which qualify under SEIS. He will be able to claim a reduction of £40,000 (being 50% of the amount invested in SEIS) in the chargeable gain on the shares.

Comparison to EIS

The introduction of SEIS from April 2012 supplements the current long established EIS scheme. Some aspects of both schemes are similar but there are also key differences. These are not considered in detail here but for example, consider the position of the individual investor. Improvements to the EIS scheme mean that those investing in qualifying companies under that scheme be able to put up to £1 million into EIS companies, for which they will receive income tax relief at up to 30%. From a tax relief perspective on investments up to £100,000, the SEIS is more favourable but it clearly cannot be used for larger investments.

 

How we can help

SEIS is a welcome addition to the existing EIS and related Venture Capital Trust investment schemes particularly as it may be an alternative way of attracting funds at a time when it is still difficult to obtain finance from traditional sources such as banks. Great care will be required to ensure that all opportunities to use it are obtained for investor and qualifying company alike. Please do contact us if this is an area of interest.

Trade marks

Tuesday, July 29th, 2014

Ever wondered how you can register a trade mark that makes your brand recognisable, for example a logo or a sound?

Registering a trade mark lets you stop other people from using it without your permission. A trade mark registration lasts 10 years and is only valid in the country of registration. You can renew it every 10 years. Company names and domain names aren’t automatically trade marks. Company names are registered with Companies House (so no-one else can register a company with the same name at the same registry). Domain names for internet use are registered with a domain registrar and are similarly protected.

If you want to protect your brand name or image you will have to go through a different registration process.

Register a trade mark in the UK

  1. Firstly, you will need to check that your brand qualifies as a trade mark – you can’t change it after you’ve submitted an application.
  2. Find out if an identical or similar trade mark already exists – it’s your responsibility to do a thorough search.
  3. If a similar mark does not exist you can proceed to register your trade mark.
  4. The Intellectual Property Office (IPO) checks your application.
  5. The IPO makes your application public to give other people the chance to oppose it.
  6. The IPO accepts or refuses your trade mark application – they’ll send you a certificate if they accept it.

If you are establishing a recognisable brand image the last thing you want is a competitor to capitalise on your hard work by plagiarising your trade mark. The best way to protect your investment is to register your trade mark. The IPO website explains how this can be done or you can employ a registration firm to do the form filling for you. http://www.ipo.gov.uk/types/tm/t-applying/t-apply.htm

Patent Box

Monday, July 28th, 2014

The Patent Box provides a reduced rate of corporation tax for companies exploiting patented inventions or certain other innovations protected by particular intellectual property (IP) rights.

How it works

The reduced rate applies to a proportion of the profits derived from the licensing or sale of the patent rights or from the sale of the patented invention or products which incorporate the patented invention. Profits derived from routine manufacturing, development or exploitation of brands and marketing intangible assets are excluded.

The reduced rate of tax is given by providing an additional deduction in the corporation tax computation.

To minimise administrative costs, Patent Box profits for many claims can be calculated using a formulaic approach which is intended to identify, in most circumstances, a reasonable figure for profit derived from the patent.  Companies can opt to identify the profit through a more detailed calculation (not considered in this factsheet).

The election allows a deduction to be made in calculating the profits of the trade period.  The amount of the deduction is:

RP   x      (MR – IPR)
                    MR

where:

  • RP is the relevant IP profits of the trade of the company,
  • MR is the main rate of corporation tax, and
  • IPR is the special IP rate of corporation tax (10%).

 

HMRC Example

If a company has trade corporation tax profits of £1,000, which qualify in full for the Patent Box when the main rate of tax is 22%, then instead of arriving at a tax charge of £100 by multiplying £1,000 by 10%, the calculation proceeds as follows:

Profits of Company’s trade chargeable to CT        £1,000

Patent Box Deduction 1,000 x (22-10)/22            545

Profit Chargeable to corporation tax                     455

Tax Payable £455 x 22%                                       £100

This approach is used, rather than directly charging the relevant profits at 10%, to avoid complications if the company claims losses or other reliefs and to simplify the way the Patent Box will be administered on corporation tax returns.

The formula is the same for companies charged at the main rate of corporation tax and for companies charged at the small profits rate, or at the main rate with marginal relief.  This means that in some cases Patent Box profits may be charged at a little below 10%.

 

Phasing in of the regime

The regime applies to accounting periods commencing on or after 1 April 2013 and is to be phased in over the following four financial years.

The phasing in is achieved by applying the appropriate percentage to the relevant IP profits of the company for each accounting period as follows:

 

2013        60%

2014        70%

2015        80%

2016        90%

 

Conditions

The company must be a qualifying company and own or hold a license for a UK or European patent. There are two main conditions:

  • the company must have undertaken qualifying development by making a significant contribution to the creation or development of the item protected by the patent or a product incorporating this item; and
  • if the company holds a license in patent rights, the license must give it exclusivity for those rights.  This must extend at least country-wide.

There are a number of detailed conditions and qualifying criteria within the scheme. We will be happy to discuss this matter in more detail.

 

How we can help

 

Please contact us if you would like more information on the Patent Box regime.

Personal Tax – When is Income Tax and Capital Gains tax Payable

Friday, July 25th, 2014

Under the self assessment regime an individual is responsible for ensuring that their tax liability is calculated and any tax owing is paid on time.

 

Payment of tax

The UK income tax system requires the payer of key sources of income to deduct tax at source which removes the need for many tax payers to submit a tax return or make additional payments. This applies in particular to employment and savings income. However this is not possible for the self employed or if someone with a significant amount of investment income is a higher rate taxpayer. As a result we have a payment regime in which the payments will usually be made in instalments.

The instalments consist of two payments on account of equal amounts:

  • the first on 31 January during the tax year and
  • the second on 31 July following.

These are set by reference to the previous year’s net income tax liability (and Class 4 NIC if any).

A final payment (or repayment) is due on 31 January following the tax year.

In calculating the level of instalments any tax attributable to capital gains is ignored. All capital gains tax is paid as part of the final payment due on 31 January following the end of the tax year.

A statement of account similar to a credit card statement is sent to the taxpayer periodically which summarises the payments required and the payments made.

Example

Sally’s income tax liability for 2011/12 (after tax deducted at source) is £8,000. Her liability for the following year is £10,500. Payments for 2012/13 will be:

                                                                                                      £

31.1.2013 –    First instalment (50% of                                       4,000

                      2011/12 liability)

31.7.2013 –    Second instalment                                                4,000

                      (50% of 2011/12 liability)

31.1.2014 –    Final payment (2012/13                                       2,500

                      liability less sums already paid)                      _____________

                                                                                                £10,500

                                                                                              ______________

 

There will also be a payment on 31 January 2014 of £5,250, the first instalment of the 2013/14 tax year (50% of the 2012/13 liability).

Late payment penalties and interest

Using the late payment penalties HMRC may charge the following penalties if tax is paid late:

  • A 5% penalty if the tax due on the 31 January 2014 is not paid within 30 days (the ‘penalty date’ is the day following)
  • A further 5% penalty if the tax due on 31 January 2014 is not paid within 5 months after the penalty date
  • Additionally, there will be a third 5% penalty if the tax due on 31 January 2014 is not paid within 11 months after the penalty date.

These penalties are additional to the interest that is charged on all outstanding amounts, including unpaid penalties, until payment is received.

Nil payments on account

In certain circumstances the two payments on account will be set at nil. This applies if either:

  • income tax (and NIC) liability for the preceding year – net of tax deducted at source and tax credit on dividends – is less than £1,000 in total or
  • more than 80% of the income tax (and NIC) liability for the preceding year was met by deduction of tax at source and from tax credits on dividends.

Claim to reduce payments on account

If it is anticipated that the current year’s tax liability will be lower than the previous year’s, a claim can be made to reduce the payments on account.

 

How we can help

We can prepare your tax return on your behalf and advise on the appropriate payments on account to make.

We can advise you whether a claim to reduce payments on account should be made and to what amount. Please do contact us for help.

 

National Minimum Wage (NMW) rates and penalties

Thursday, July 24th, 2014

Last week we published details of who is, and who is not, entitled to payment at National Minimum Wage rates. This week we have listed the current rates of NMW that apply.

There are currently three aged based national minimum wage rates and an apprentice rate, which are usually updated in October each year. The rates that apply from 1 October 2013 are as follows:

  • for workers aged 21 years or more: £6.31 per hour
  • for workers aged 18 to 20 inclusive: £5.03 per hour
  • for workers aged under 18 (but above compulsory school age): £3.72 per hour
  • for apprentices aged under 19: £2.68 per hour
  • for apprentices aged 19 and over, but in the first year of their apprenticeship: £2.68 per hour

Apprentices aged 19 or over who have completed one year of their apprenticeship are entitled to receive the national minimum wage rate applicable to their age.

Note for employers:

 

Don’t forget that it’s a criminal offence not to pay someone the National Minimum Wage or to falsify payment records. Employers who discover they’ve paid a worker below the minimum wage must pay any arrears immediately.

 

HMRC officers have the right to carry out checks at any time and ask to see payment records. They can also investigate employers, following a worker’s complaint to them. If HMRC finds that an employer hasn’t been paying the correct rates, any arrears have to be paid back immediately. There will also be a penalty and offenders might be named by the government.

It’s the employer’s responsibility to keep records proving that they are paying the minimum wage – most employers use their payroll records as proof. All records have to be kept for 3 years.

Travel and Subsistence for Directors and Employees

Wednesday, July 23rd, 2014

Travelling and subsistence expenditure incurred by or on behalf of employees gives rise to many problems.

We highlight below the main areas to consider in deciding whether tax relief is available on travel and subsistence.

 

Employees with a Permanent Workplace

Many employees have a place of work which they regularly attend and make occasional trips out of the normal workplace to a temporary workplace. Often an employee will travel directly from home to a temporary workplace and vice versa.

An employee can claim full tax relief on business journeys made.

A business journey is one which either involves travel:

  • from one place of work to another or
  • from home to a temporary workplace or
  • to home from a temporary workplace.

Journeys between an employee’s home and a place of work which he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the costs of these have to be borne by the employee. The term ‘permanent workplace’ is defined as a place which the employee ‘regularly’ attends. It is used in order to fix one end of the journey for ordinary commuting. Home is the normal other end of the journey for ordinary commuting.

Example 1

An employee usually commutes by car between home in York and a normal place of work in Leeds. This is a daily round trip of 48 miles.

On a particular day, the employee instead drives from home in York to a temporary place of work in Nottingham. A round trip of 174 miles.

The cost here is the cost of the travel undertaken (174 miles). A deduction would be available for that amount.

Example 2

An employee who normally drives 40 miles in a northerly direction to work is required to make a 100 mile round trip south to a client’s premises. His employer reimburses him for the cost of the 100 miles trip.

A deduction would be available for that amount.

Subsistence payments

Subsistence includes accommodation and food and drink costs whilst an employee is away from the permanent workplace. Subsistence expenditure is specifically treated as a product of business travel and is therefore treated as part of the cost of that travel.

Anti-avoidance

Some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar’ to the trip made to or from the permanent workplace.

‘Substantially similar’ is interpreted by HMRC as a trip using the same roads or the same train or bus for most of the journey.

Temporary postings

Where an employee is sent away from his permanent workplace for many months, the new workplace will still be regarded as a temporary workplace if the posting is either:

  • expected to be for less than 24 months, or
  • if it is expected to be for more than 24 months, the employee is expected to spend less than 40% of his working time at the new workplace.

The employee must still retain his permanent workplace.

Example 3

Edward works in New Brighton. His employer sends him to Wrexham for 1.5 days a week for 28 months.

Edward will be entitled to relief. Any posting over 24 months will still qualify provided that the 40% rule is not breached.

 

Site-based Employees

Some employees do not have a normal place of work but work at a succession of places for several days, weeks or months. Examples of site-based employees include construction workers, safety inspectors, computer consultants and relief workers.

A site-based employee’s travel and subsistence can be reimbursed tax free if the period spent at the site is expected to be, and actually is, less than two years.

There are anti-avoidance provisions to ensure that the employment is genuinely site-based if relief is to be given. For example, temporary appointments may be excluded from relief where duties are performed at that workplace for all or almost all of that period of employment. This is aimed particularly at preventing manipulation of the 24 month limit through recurring temporary appointments.

 

Other Employees with no Permanent Workplace

Travelling appointments

For some employees, travelling is an integral part of their job. For example, a travelling salesman who does not have a base at which he works, or where he is regularly required to report. Travelling and subsistence expenses incurred by such an employee are deductible.

Home based employees

Some employees work at home occasionally, or even regularly. This does not necessarily mean that their home can be regarded as a place of work. There must be an objective requirement for the work to be performed at home rather than elsewhere.

This may mean that another place becomes the permanent workplace for example, an office where the employee ‘regularly reports’. Therefore any commuting cost between home and the office would not be an allowable expense. But trips between home and temporary workplaces will be allowed.

If there is no permanent workplace then the employee is treated as a site-based employee. Thus all costs would be allowed including the occasional trip to the employer’s office.

The home may still be treated as a workplace under the objective test above. If so, trips between home and any other workplace in respect of the same employment will be allowable.

 

How We Can Help

Full tax relief can be given for travel and subsistence costs but there are borderline situations.

We can help you to decide whether an employee can be paid expense payments which are covered by tax relief and do not result in a taxable benefit.

Please note that if you do make payments for which tax relief is not available, there may be PAYE compliance problems if the payments are made free of tax.

Please contact us if you require advice whether payments can be made to employees tax free.

Exporters data to be released by Government

Tuesday, July 22nd, 2014

 UK businesses should be aware that the Government are consulting on the possible release of data held by public departments, particularly, HMRC. We have reproduced extracts from a recent press release that sets out the scope of the present consultation.

 

“The data held by the public sector is among the most useful and valuable anywhere. This is why the UK Government is at the forefront in making a step change in the availability of data held by the public sector, with the potential to deliver significant public benefits.

 

… some of the customs data that HMRC holds has the potential to be used in ways which could generate real public benefits if made more widely available, without compromising the core principle of taxpayer confidentiality. In particular, the ability for HMRC to share and publish certain export data would enable HMRC to more effectively support and contribute to public and private sector initiatives to help UK exporters compete and prosper in the global market place.

 

This consultation proposes the release by HMRC of a limited set of exporter data alongside similar data that HMRC already makes available in respect of importers. Release of some exporter data would provide a number of potential benefits such as:

  • greater visibility of UK exporters to new customers in the global market place;
  • assisting developers to create exporter registers and online shop fronts to advertise and showcase UK exporters and their products;
  • enabling those who provide export services to more easily identify their customers;
  • helping importers to locate alternative UK suppliers.

 

There are likely to be further positive uses which emerge only once the data is available.”

Valuing Your Business

Monday, July 21st, 2014

There are many reasons why you may need to calculate the value of your business. Here we consider the range of methods available as well as some of the factors to consider during the process.

It is important to remember throughout that valuing a business is something of an art, albeit an art backed by science!

Why value your business?

One of the most common reasons for valuing a business is for sale purposes. Initially a valuation may be performed simply for information purposes, perhaps when planning an exit route from the business. When the time for sale arrives, owners need a starting point for negotiations with a prospective buyer and a valuation will be needed.

Valuations are also commonly required for specific share valuation reasons. For example, share valuations for tax purposes may be required:

  • on gifts or sales of shares
  • on the death of a shareholder
  • on events in respect of trusts which give rise to a tax charge
  • for capital gains tax purposes
  • when certain transactions in companies take place, for example, purchase of own shares by the company.

Share valuations may also be required:

  • under provisions in a company’s Articles of Association
  • under shareholders’ or other agreements
  • in disputes between shareholders
  • for financial settlements in divorce
  • in insolvency and/or bankruptcy matters.

When a business needs to raise equity capital a valuation will help establish a price for a new share issue.

Valuing a business can also help motivate staff. Regular valuations provide measurement criteria for management in order to help them evaluate how the business is performing. This may also extend to share valuations for entry into an employee share option scheme for example, again used to motivate and incentivise staff.

 

Valuation methods

While there is a ready made market and market price for the owners of listed public limited company shares, those needing a valuation for a private company need to be more creative.

Various valuation methods have developed over the years. These can be used as a starting point and basis for negotiation when it comes to selling a business.

Earnings multiples

Earnings multiples are commonly used to value businesses with an established, profitable history.

Often, a price earnings ratio (P/E ratio) is used, which represents the value of a business divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits. Here the calculation of the profit figure itself does depend on circumstances and will be adjusted for relevant factors.

A difficulty with this method for private companies is in establishing an appropriate P/E ratio to use – these vary widely. P/E ratios for quoted companies can be found in the financial press and one for a business in the same sector can be used as a general starting point. However, this needs to be discounted heavily as shares in quoted companies are much easier to buy and sell, making them more attractive to investors.

As a rule of thumb, typically the P/E ratio of a small unquoted company is 50% lower than a comparable quoted company. Generally, small unquoted businesses are valued at somewhere between five and ten times their annual post tax profit. Of course, particular market conditions can affect this, with boom industries seeing their P/E ratios increase.

A similar method uses EBITDA (earnings before interest, tax, depreciation and amortisation), a term which essentially defines the cash profits of a business. Again an appropriate multiple is applied.

Discounted cashflow

Generally appropriate for cash-generating, mature, stable businesses and those with good long-term prospects, this more technical method depends heavily on the assumptions made about long-term business conditions.

Essentially, the valuation is based on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms.

Entry cost

This method of valuation reflects the costs involved in setting up a business from scratch. Here the costs of purchasing assets, recruiting and training staff, developing products, building up a customer base, etc are the starting point for the valuation. A prospective buyer may look to reduce this for any cost savings they believe they could make.

Asset based

This type of valuation method is most suited to businesses with a significant amount of tangible assets, for example, a stable, asset rich property or manufacturing business. The method does not however take account of future earnings and is based on the sum of assets less liabilities. The starting point for the valuation is the assets per the accounts, which will then be adjusted to reflect current market rates.

Industry rules of thumb

Where buying and selling a business is common, certain industry-wide rules of thumb may develop. For example, the number of outlets for an estate agency business or recurring fees for an accountancy practice.

What else should be considered during the valuation process?

There are a number of other factors to be considered during the valuation process. These may help to greatly enhance, or unfortunately reduce, the value of a business depending upon their significance.

Growth potential

Good growth potential is a key attribute of a valuable business and as such this is very attractive to potential buyers. Market conditions and how a business is adapting to these are important – buyers will see their initial investment realised more quickly in a growing business.

External factors

External factors such as the state of the economy in general, as well as the particular market in which the business operates can affect valuations. Of course, the number of potential, interested buyers is also an influencing factor. Conversely, external factors such as a forced sale, perhaps due to ill health or death may mean that a quick sale is needed and as such lower offers may have to be considered.

Intangible assets

Business valuations may need to consider the effect of intangible assets as they can be a significant factor. These in many cases will not appear on a balance sheet but are nevertheless fundamental to the value of the business.

Consider the strength of a brand or goodwill that may have developed, a licence held, the key people involved or the strength of customer relationships for example, and how these affect the value of the company.

Circumstances

The circumstances surrounding the valuation are important factors and may affect the choice of valuation method to use. For example, a business being wound up will be valued on a break up basis. Here value must be expressed in terms of what the sum of realisable assets is, less liabilities. However, an on-going business (a ‘going concern’) has a range of valuation methods available.

 

How we can help

With any of the valuation methods discussed above, it is important to remember that valuing a business is not a precise science. In the end, any price established by the methods described above will be a matter for negotiation and more than one of the methods above will be used in the process. Ultimately, when the time for sale comes, a business is worth what someone is prepared to pay for it at that point in time.

We would be pleased to discuss how we can help value your business as well as help you develop an exit strategy to maximise the value of your business.

VAT – Seven Key Points for the Smaller Business

Friday, July 18th, 2014

This factsheet focuses on VAT matters of relevance to the smaller business. A primary aim is to highlight common risk areas as a better understanding can contribute to a reduction of errors and help to minimise penalties. Another key ingredient in achieving that aim is good record keeping, otherwise there is an increased risk that the VAT return could be prepared on the basis of incomplete or incorrect information. This aspect is not considered further here but useful guidance can be found in www.hmrc.gov.uk/factsheet/record-keeping.pdf

 

Input VAT matters

Only registered traders can reclaim VAT on purchases providing:

▪       the expense is incurred for business purposes and

▪       there is a valid VAT invoice for the purchase.

Only VAT registered businesses can issue valid VAT invoices. VAT cannot be reclaimed on any goods or services purchased from a business that is not VAT registered. Proforma invoices should not be used as a basis for input tax recovery as this can accidentally lead to a duplicate VAT recovery claim.

Most types of supply on which VAT recovery is sought must be supported by a valid VAT invoice. This generally needs to be addressed to the trader claiming the input tax. A very limited list of supplies do not require a VAT invoice to be held to support a claim, providing the total expenditure for each taxable supply is £25 or less (VAT inclusive). The most practical examples of these are car park charges and certain toll charges.

The following common items however never attract input VAT and so no VAT is reclaimable – stamps, train, air and bus tickets, on street car parking meters and office grocery purchases like tea, coffee and milk!

 

Business purpose

This is often an area of contention between taxpayers and HMRC as VAT is not automatically recoverable simply because it has been incurred by a VAT registered person.

In assessing whether the use to which goods or services are put amounts to business use (for the purpose of establishing the right to deduct input tax), consideration must be given as to whether the expenditure relates directly to the function and operation of the business or merely provides an incidental benefit to it.

 

Private and non-business use

In many businesses, personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.

Typical examples of where claims are likely to be made but which do not satisfy the ‘purpose of the business’ test include:

▪       expenditure related to domestic accommodation

▪       pursuit of personal interests such as sporting and leisure orientated activities

▪       expenditure for the personal benefit of company directors/proprietors and

▪       expenditure in connection with non-business activities.

Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed. Special rules apply to recover input tax claimed on assets and stock (commonly referred to in VAT as goods) when goods initially intended for business use are then put to an alternative use.

Example

Three laptops are initially bought for the business and input VAT of £360 in total is reclaimed.

One is then gifted by the business owner to his son so VAT will have to be accounted for to HMRC of £120 (1/3 x £360)

 

Business entertainment

VAT is not reclaimable on many forms of business entertainment but VAT on employee entertainment is recoverable. The definition of business entertainment is broadly interpreted to mean hospitality of any kind which therefore includes the following example situations:

▪       travel expenses incurred by non employees but reimbursed by the business, such as self employed workers and consultants

▪       hospitality elements of trade shows and public relations events.

 

Business gifts

A VAT supply takes place whenever goods change hands, so in theory any goods given away result in an amount of VAT due. The rule on business gifts is that no output tax will be due, provided that the VAT exclusive cost of the gifts made does not exceed £50 within any 12 month period to the same person.

Where the limit is exceeded, output tax is due on the full amount. If a trader is giving away bought-in goods, HMRC will usually accept that he can disallow the tax when he buys the goods, which may be more convenient than having to pay output tax every time he gives one away.

Routine commercial transactions which might be affected include such things as:

▪       long service awards

▪       Christmas gifts

▪       prizes or incentives for sales staff.

 

Cars and motoring expenses

Input tax errors often occur in relation to the purchase or lease of cars and to motoring expenses in general. Some key issues are:

▪       Input VAT is generally not recoverable on the purchase of a motor car because it is not usually exclusively for business use. This prohibition does not apply to commercial vehicles and vans, provided there is some business use.

▪       Where a car is leased rather than purchased, 50% of the VAT on the leasing charge is not claimed for the same reason.

▪       Where a business supplies fuel or mileage allowances for cars, adjustments need to be made to ensure that only the business element of VAT is recovered. There are a number of different methods which can be used, so do get in touch if this is relevant to you.

 

Output VAT issues

Bad debts

Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier, output VAT must normally be accounted for when the sale is initially made, even if the debt is never paid, so there is a risk of being doubly out of pocket.

VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice.

Example

A trader supplies and invoices goods on 19 October 2012 for payment by 18 November 2012 (ie a normal 30 day credit period). The earliest opportunity for relief if the debt is not settled would be 18 May 2013. The relief would be included in the return into which this date fell, depending on the return cycle of the business.

The amount of the claim

The taxpayer can only claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. The claim is entered as additional input VAT – treating the uncollected VAT as an additional business expense – rather than by reducing output VAT on sales.

The customer

A customer is automatically required to repay any input VAT claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.

Preventing the problem?

Small businesses may be able to register under the Cash Accounting Scheme, which means you will only have to account for VAT when payment is actually received.

 

How we can help

Please contact us if you require any further guidance on VAT issues for your business.

National Minimum Wage (NMW)

Thursday, July 17th, 2014

The National Minimum Wage is the minimum pay per hour almost all workers are entitled to by law. It doesn’t matter how small an employer is, they still have to pay the minimum wage.

Who is entitled to the minimum wage?

Workers must be school leaving age (last Friday in June of the school year they turn 16) or over to get the minimum wage. Contracts for payments below the minimum wage are not legally binding. The worker is still entitled to the minimum wage.

Workers are also entitled to the minimum wage if they are:

  • part-time
  • casual labourers, e.g. someone hired for 1 day
  • agency workers
  • workers and home workers paid by the number of items they make
  • apprentices
  • trainees, workers on probation
  • disabled workers
  • agricultural workers
  • foreign workers
  • seafarers
  • offshore workers

Apprentices under 19 or in the first year of a level 2 or 3 apprenticeship get an apprentice rate. All other apprentices are entitled to the National Minimum Wage for their age.

Not entitled to the minimum wage

The following types of workers aren’t entitled to the minimum wage:

  • self-employed people running their own business
  • company directors
  • volunteers or voluntary workers
  • workers on a government employment programme, e.g. the Work Programme
  • family members of the employer living in the employer’s home
  • non-family members living in the employer’s home who share in the work and leisure activities, are treated as one of the family and aren’t charged for meals or accommodation (e.g. au pairs)
  • workers younger than school leaving age (usually 16)
  • higher and further education students on a work placement up to 1 year
  • workers on government pre-apprenticeships schemes
  • people on the following European Union programmes: Leonardo da Vinci, Youth in Action, Erasmus, Comenius
  • people working on a Jobcentre Plus Work trial for 6 weeks
  • members of the armed forces
  • share fishermen
  • prisoners
  • people living and working in a religious community

 You won’t get minimum wage if you’re:

  • a student doing work experience as part of a higher or further education course
  • of compulsory school age
  • a volunteer or doing voluntary work
  • on a government or European programme
  • work shadowing

Employers should note that HMRC have powers to enforce payment of the NMW in situations where workers have been underpaid.