Business Planning Guide

Planning & Strategy Guide 2012/2013B U S I N E S S

T 01273 701200 E [email protected] W www.plusaccounting.co.uk

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Business Planning & Strategy Guide 2012/13

Without strategic planning a business limits its chances of success, particularly during the sluggish economy the UK is currently experiencing.

Whatever stage your business is at, we can help you move to the next level. Whether it is just an idea in your head, or you are approaching the next phase of growth, planning is vital; both financial and strategic planning.

This guide gives you an overview of actions to consider, from starting to leaving your business, with a lot of tax planning information along the way. For further information and advice please contact us directly, we are here to ensure that your business is a success.

Starting your business 4

Tax & your business 6

Unincorporated 6 business owners

Limited company 7 owners

Owner director 8 planning

Reduce your tax 9

Tax pointers 10

Running & growing your 12 business

Leaving your business 14

CONTENTS

Don’t leave your planning until the end of the year, talk to us as early as possible, we can help with a number of business issues, including:

• The impact on your tax position and financial results of accelerating revenue and capital expenditure into the current financial year, or deferring it into the next

• How you might take profits from your business at the lowest tax cost, and how timing of payment of dividends and bonuses can reduce or defer tax

• Improved cash collection strategies

• Improvements to your billing systems and record keeping, or a general systems review to improve profitability and cash flow

• Tax saving employee remuneration packages with potential cost savings for you and your employees

• Avoiding overvaluing stock and work in progress.

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STARTING YOUR BUSINESS

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Your action plan should include:

A business plan You should prepare a business plan that will address such planning matters as:

• The source of your business capital, including your start-up requirements as well as your working capital funding (tax efficiency is an important factor here)

• Whether the business needs a PAYE scheme

• Whether it should be VAT registered

• The business structure that will best meet your needs - sole trader/sole practitioner, partnership, limited liability partnership or limited company.

• The timeline for registering with HRMC.

If you are thinking of starting a business, you should consider, among other factors: the nature of the business, the demand for the service or product, the state of the economy, the availability of suitable funding, its break-even, the profit potential, the rate at which you expect the business to grow, the impact of being the business owner on all areas of your life and the degree of risk involved.

The business structure There are both advantages and disadvantages for each trading structure with respect to control, perception, support, and costs. There are also some things to avoid. For example, if you decide that incorporating your business is the preferred solution there may be important issues to consider before you proceed. Also, you may wish to discuss with us where the ownership of any freehold property should be vested - should property be owned by a company or personally by the owners?

The choice of business structure can also be relevant in how you get the money out of the company. A limited company is a useful tax shelter, but only until you take the money out for personal use. There are different ways of doing this — salaries, dividends, loans, rent, for example. We can discuss your options and implications of each of these with you and help you determine which is most suitable.

• Planning your business start-up • Your funding options

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The importance of the right accounting date for your business It is important to choose the right accounting date for your business. Is there a time of year when it is more convenient to close off your accounting records, ready for us? What would be the best time of year for stocktaking? To what extent is your business seasonal? From a tax viewpoint, the choice of a year-end early in the tax year for an unincorporated business usually means that an increase in profits is more slowly reflected in an increased tax bill. This can, however, backfire when profits reduce, as the reduction in tax is similarly delayed, and can leave you with a large tax liability when you retire or scale down your business.

HM Revenue & Customs registration Advising HM Revenue & Customs when you become self-employed, and probably liable to class 2 national insurance contributions, may not be very high on your list of priorities in the first weeks and months of a new business - but failure to notify that you are in business can attract a penalty. You may not even be sure about the date that your business started! If you have any doubts, we can advise you. Most tax registrations and returns are now required to be done on-line. A new ‘one-click’ registration is available.

Business funding

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

• Overdraft

• Loan

• Mortgage

• Selling an interest to a partner

• Share issue for your company

• Hire purchase

• Leasing

• Debt factoring

• Assistance from Government-backed schemes e.g. National Loan Guarantee Scheme, StartUp Loans and from regional authorities

• Venture capital.

TAX & YOUR BUSINESS

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Planning for the year ahead could make all the difference and save your business money. There are a range of tax planning areas to consider when running a business, we discuss some of them in this guide, but for advice and more information please contact us directly.

UNINCORPORATED BUSINESS OWNERSBusiness profits are charged to income tax and class 4 national insurance contributions on the current year basis. This means that the profits ‘taxed’ for each tax year (ending 5 April) are those earned in the accounting period ending in the tax year.

There are special rules which determine the amount of profits taxed for the beginning and final years of a business, and for those joining and leaving partnerships.

There are an increased number of penalties for not complying with the rules and regulations of government departments. We have already mentioned HM Revenue & Customs ‘late registration’ penalty, covering late registration for income tax and class 2 national insurance, but other areas to avoid are:

• Late VAT registration

• Late filing penalties

• Late payment surcharges and interest

• Penalties for errors in returns

• Penalties for failing to operate PAYE or subcontractors scheme in the construction industry.

• Planning to take account of future changes in the rate of corporation tax

• Putting you in touch with patent and intellectual property law specialists

• Helping you to comply with government regulations and avoid fines, surcharges, penalties and interest

• Timing capital and revenue expenditure to maximum tax advantage

• Improving your invoicing and debt recovery systems

• Managing debt and cash flow

• Developing a plan for tax- efficient profit extraction

• Improving profitability

• Protecting your business from financial disaster

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

• Identifying and valuing unpaid bills and unbilled work at the year end

• Dealing with administrators or liquidators

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Although we will seek to help you steer clear of them, we need you to play your part by letting us have all the details for your accounts and tax returns in good time, and by telling us of all changes in your business, financial and personal circumstances.

Modernisation of the penalty rules means that many taxpayers could be liable to substantial penalties for understatements on their tax returns. Even if you make an honest mistake, HM Revenue & Customs may argue that you have been careless. You will need to be absolutely sure that you tell us everything that may be relevant to your tax liability for a year.

You should ensure that you meet any tax and other legal requirements for your particular business.

For a smaller business, the VAT flat rate scheme (for example) can provide significant tax savings, particularly in the first year of trading.

You can claim tax relief and VAT relief for certain expenditure incurred before you started trading.

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LIMITED COMPANY OWNERS

If the limitation of liability is an important consideration, then a limited company may be the right solution - but do bear in mind that banks and other creditors often require personal guarantees from directors for company borrowings, so the owners or directors of the business may in fact bear the liabilities of the business out of their personal assets.

Self employed For the self-employed, the timetable of tax payments is relatively straight forward:

• 31 January in the tax year, first 50 per cent payment on account

• 31 July after the tax year, second 50 per cent payment on account

• 31 January after the tax year, balancing payment

The payments on account are made based on the previous year’s tax liability, and are your ‘down payments’ towards the current year tax bill.

Reducing your payments on account Payments on account are normally equal to 50 per cent of the previous year’s net liability. A claim can be made to reduce your payments on account, if you expect your tax liability to fall from one year to another, although interest will be charged if your actual liability is higher than you expected.

Please do not wait until it’s too late - keep us informed of any factors which might change your tax liability. We can only suggest solutions if you tell us in good time about issues facing your business.

There is also a system of interest and surcharges to encourage prompt payment.

The profit of a limited company is subject to corporation tax at rates ranging from 20 per cent to a marginal tax rate of 25 per cent. The 20 per cent rate applies to profits up to £300,000. Profits are calculated in broadly the same way as those for unincorporated businesses except that the owners of the business are paid remuneration that is subject to PAYE and classes as a qualifying deduction from business income. However, this means that any income withdrawn from the company as a salary is automatically liable in the hands of the recipient at income rates of 20 per cent, rising to 40 per cent and ultimately the additional tax rate of 50 per cent dependent on the level of remuneration and other taxable income. However, this flexibility gives rise to a range of

effective planning opportunities, which we would be pleased to discuss with you based on your own circumstances.

On page 8, we will also look at the impact of planning on national insurance contributions, especially where a dividend is paid.

Corporation tax is normally payable nine months and one day after the end of the financial year end, although large companies are liable to pay their tax partly by instalments.

Retained profits can be used to buy equipment or to provide for pensions - both of which should be eligible for tax relief.

If you do not make your full 2011/12 balancing payment by 31 January 2013, HM Revenue & Customs will add a 5 per cent surcharge to the tax and national insurance. Interest will be charged from 1 February 2013. Delay until after 31 July 2013, and a further 5 per cent surcharge will be added. And interest is charged on outstanding surcharges, as well as unpaid tax and NICs.

CASE STUDY

TAX & YOUR BUSINESS

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Reducing national insurance costs Although leaving profits in the company can be tax-efficient, you need money to live on, so you should consider the best ways to extract profits from your company. A salary will meet most of your needs, but do not overlook the use of benefits-in-kind, which may save income tax and could also result in a lower national insurance bill. The total tax and national insurance can be as much as 75.8 per cent.

There are many matters to be considered when deciding whether directors should be paid by dividend or salary/bonus. In practice, a combination of each is usually an appropriate course.

Remember that dividends are usually payable to all shareholders. If you have outside shareholders who are not involved in the day to day running of the company then you will need to consider your dividend strategy carefully. Although it is possible

Bonus £ Dividend £

Profit to extract 10,000 10,000

Employers’ NIC -1,213

Gross bonus 8,787

Corporation tax @ 20% 2,000

Dividend 8,000

Employee’s NIC -176

Income tax @ 40% -3,515

Additional tax -2,000

Net amount extracted £5,096 £6,000

CASE STUDY - Bonus or Dividend?

OWNER DIRECTOR PLANNING INCREASE YOUR NET INCOME

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

Six strategies to save NICs • Increasing the amount the employer contributes to company pension schemes

• Share incentive plans (shares bought out of pre-tax and pre-NIC income)

• For companies, disincorporation and instead operating as a sole trader or partnership

• Instead of more salary, paying a significant one-off bonus to reduce employee contributions (this will not work for directors)

• Paying dividends instead of bonuses to owner-directors

• Provision of free childcare or childcare vouchers.

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For the moment, consider how much you might save if, as an owner director, you wish to extract the £10,000 profit your company makes in 2012/13 by way of a dividend rather than a bonus. Please note that we assume that you are paying higher rate (40 per cent) tax, so your earnings exceed the so-called ‘upper limit’ for NICs.

for shareholders to waive their entitlement to dividends, this can result in tax complications, so a better option may be to have different classes of share, on which different rates of dividend can be paid. However, if this technique is used as part of a scheme to avoid tax or NICs for employees, it may not be effective and thus result in an even higher tax liability.

Finally, you may need to consider with us the effect that regular payment of dividends will have on the valuation of shares in your company.

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REDUCE YOUR TAX: CAPITAL EXPENDITURE

Capital allowances ‘Capital allowances’ is the term used to describe the deduction you are entitled to claim for expenditure on business equipment, in lieu of depreciation.

For expenditure on business equipment, including vans and fixtures in buildings, but not cars, you may claim a full 100 per cent deduction of up to £25,000 against your profits. If your accounting period is less than 12 months long the £25,000 limit is scaled down proportionately. Where you have an accounting period of longer than 12 months, the period must be split and the allowance considered separately for each period. If your business is located in an Enterprise Zone your business is entitled to a 100 per cent deduction on all expenditure qualifying as referred to above.

The allowance is available for each enterprise if you run more than one, provided these businesses are not controlled by the same person and either occupy the same premises or carry on the same business activities.

A 100 per cent first year allowance is available for investment in designated energy saving plant and machinery, plant and machinery to reduce water use and improve water quality, and for new unused cars with official emissions of up to 110g/km.

There are also generous allowances of 100 per cent of the cost to property owners to provide rented residential space over shops and other commercial and for the capital cost of renovating empty business premises in disadvantaged areas, whether owned or let, back into business use.

The flat conversion allowance is subject to rent limits. While the renovation allowance is available until 2017. Both allowances are also subject to other conditions, so you should consult us if you wish to claim either of them.

Otherwise, most plant and machinery qualifies for an allowance of 18 per cent on a reducing balance basis. There is a lower rate of 8 per cent for long-life assets, fixtures integral to buildings, high emission cars and thermal insulation.

It is no longer possible to claim allowances for industrial or agricultural buildings. However many items that may seem to be part of a building may actually be regarded as plant or as features integral to a building, and may therefore qualify for a capital allowance deduction of 8 per cent.

As capital allowances are based on qualifying expenditure in the accounting year, you might consider buying plant and machinery before the end of the year, rather than just after, to obtain an earlier deduction.

If you rent out property, you may be able to claim a 10 per cent wear and tear allowance. If you transferred an unincorporated business into a limited company (as often happens), we will help you to consider how you treat goodwill. This can provide a useful means by which you can receive money from the company tax-free, and where the company can reduce its tax by 4 per cent of the goodwill figure, subject to the trade commencing post 1 April 2002. Such arrangements must be structured correctly at the time, so please seek our early advice.

TAX & YOUR BUSINESS

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Unpaid bills and unbilled work It is a feature of the tax system that businesses must include in their turnover for the year a value for incomplete work, work you have completed and billed, but not yet been paid for, and work completed but not yet billed; all as at the end of the year.

Service businesses are also required to have accounting records that enable them to bring into account the sales value of incomplete contracts at the end of the year. This is an aspect of your business that requires careful planning so do please discuss this with us.

For unpaid bills, you may be able to claim relief for an identified bad debt, but you cannot claim relief for a general provision based on expectations of how many customers will not pay. Claiming bad debt relief does not stop you trying to obtain payment. Smaller businesses may account for VAT on a cash balance and may soon be able to do so for income tax also. These cash accounting systems provide bad debt relief at source.

A consultation was launched in the 2012 Budget regarding the plan to allow small unincorporated businesses with a turnover of up to £77,000 to apply cash accounting for their accounts.

TAX POINTERS

Research & Development Tax relief is available on qualifying research and development (R&D) expenditure at varying rates. These reliefs are for more than the amount spent and so represent a form of government grant.

The relief is particularly generous for smaller businesses.

However, the relief is only available to businesses which operate as limited companies. This may be a critical issue to consider at the commencement of your business. Maximum rates of relief for this tax year are:

• For small and medium-sized companies paying tax at 20 per cent, the maximum rate of tax relief is 45 per cent (that is a tax credit of 225 per cent of the expenditure)

• For small to medium-sized companies not yet in profit, the maximum rate of relief is 11 per cent as a tax credit

• For larger companies paying tax at 24 per cent, the maximum rate of relief is 31.2 per cent (a credit of 130 per cent of the expenditure).

There is also a limit of around £5.5 million on the amount of additional tax relief a company can claim under this SME scheme.

This is not subject to a minimum spend.

SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project may claim the large company R&D tax credit. This means they will qualify for relief on 130 per cent of their expenditure.

If your company exploits a patent, you may be able to benefit from the ‘patent box’. This is an arrangement that reduces the effective rate of corporation tax to 10 per cent of the income from exploiting the patent. Transitional rules will phase the benefits in, with 60 per cent of the rate reduction being available from 1 April 2013 and the full rate reduction applying in 2017.

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Make the most of your expenses You will pay tax on your taxable profits (which will differ from the profit shown in your accounts), so it is essential to claim all business related expenses as well as the costs included in your accounting records. You can claim a proportion of your household running costs and a proportion of your home telephone bills if you maintain an office at home. You can also claim for the cost of travel and accommodation when you are working away from your main place of business.

You must keep adequate business records - including a log of business journeys - because in addition to ensuring your accounts are accurate, these records may be requested by HM Revenue & Customs.

Have you considered using a good computer package for record keeping?

You must keep your business records for six years. Make sure that they are kept safely and not exposed to damp. It is important to ensure that computer records are properly backed up.

File on time – or else It is one thing accepting that tax has to be paid but quite another when you find out that someone is seeking to charge you a penalty and interest because you filed or paid late. It is just one of the aspects of our compliance system that many find an absolute pain, if you will forgive the expression!

File your self assessment tax return one day late and you will find a penalty notice on its way to you for £100 – and this is a penalty that increases the longer filing is delayed. The fact is that whenever a return is required to be submitted, that obligation has attached to it a penalty for non compliance. So, yes, as your accountants it is our role to submit returns and your duty to pay on or before the due date. But, in order for us to play our part in the submission of your returns we need your cooperation in providing information when requested.

Together we will work with you to ensure that you pay the minimum in business tax and we commit to doing our part, where so instructed, in seeking to ensure that your business is compliant with regard to its responsibilities for avoiding filing penalties.

Some possible tax deductions In order to attract a deduction in computing the profits of a trade or business any expenses must be incurred wholly and exclusively for the purpose of the trade. As we have already discussed capital expenditure is not an allowable expense, and certain other expenses are barred by statute. However, there are a number of expenses which, while deductible also have other favourable tax treatment:

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

Annual party £150

Long service awards: Minimum term of service Value of gift

20 years

£50 per year

Suggestion schemes: Encouragement award Payment in relation to first year benefit Payment in relation to ongoing benefit Maximum period for ongoing benefit Overall maximum

£25

50%

10%

5 years

£5,000

Household expenses contribution Per week amount £4

Customer gifts Limit per gift £50

Childcare provision £55 per week

RUNNING & GROWING YOUR BUSINESS

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Involving the family You can employ family members in your business, provided the salary and other benefits you pay them are commercially justifiable. You can remunerate family members with a salary, and perhaps also with benefits - such as a company car or van. However, before buying a vehicle through the business you should discuss this with us as it is possible to incur a personal tax charge on a van of £1,775 including the use of fuel for private purposes - the tax cost of cars can be even greater. Other options include medical insurance or making payments into a registered pension scheme.

You can also take family members into partnership, thereby gaining more flexibility in profit allocation. In fact, taking your children into partnership and gradually reducing your own involvement can be a very tax efficient way of passing on the family business. Be aware, though, that taking family members into your business may put the family wealth at risk if, for example, the business were to fail. HM Revenue & Customs may challenge excessive remuneration packages or profit shares for family members, so seek our advice before you make any decisions.

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

Employed or self-employed When you take someone on in your business, you will need to determine whether they are an employee, or self employed. This is a complex area, because there is no statutory definition of ‘employment’ or ‘self-employment’. The consequences of making an incorrect decision can be very serious indeed. You may be liable for not only the employer national insurance contributions (NICs), but also the amounts of tax and NICs that would normally be borne by the employee if you incorrectly treat someone as self employed.

In particular, it is not possible for an employer and employee to agree that someone is not an employee. If the work has the nature of employment, that is how it should be taxed.

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

You should remember that employees are entitled to receive the national minimum wage, have at least 5.6 weeks paid annual holiday, and have various other employment rights.

EMPLOYMENT MATTERS

You are successfully growing your business, but getting to the next step can be tricky. Knowing who to employ can be difficult, whether you employ your spouse, contractors or full time staff there are different tax planning opportunities. You may also need outside investment for that extra funding boost – we take a look at just some of the options available. Please contact us to discuss how we can help you to take your business to the next stage.

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Employee share schemes Under the Enterprise Management Incentive scheme (EMI) employees can be granted options of up to £250,000 for shares in your company. Employee commitment can be rewarded through the growth in value of the shares for which options are held, with the resulting capital gain, potentially, taxable at 10 per cent, although there are restrictions that may mean 18 or 28 per cent is payable.

EMI and the Share Incentive Plan (SIP) are tax efficient incentives that can be packaged to attract and retain the right people for the future of your company, at a cost the company can afford. Even the potential national insurance contributions liability on the growth in value of SIP shares during the option period can be attached, by consent, to the employee.

We would welcome the opportunity to discuss an employee share ownership strategy, whether for individual employees or for the entire workforce.

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

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

• Venture Capital Trusts offer income tax reliefs (30 per cent) and the opportunity to pool investment with others looking to invest in qualifying companies

The rules and tax breaks for each scheme are different, and do tend to change from time to time, but please discuss the options with us if you are thinking of attracting outside investors. From 6 April 2012, the investment limit increased from £500,000 to £1 million and some scheme rules are relaxed.

From April 2012, there is a new Seed Enterprise Investment Scheme for those willing to invest in very young companies.

The tax exemption for trading companies and groups on the sale of shareholdings of 10 per cent or more in trading companies may also encourage corporate investors. If you are aiming to bring new investment into your company, you will need to have a very clear idea of why the investors should choose your company, and what they can expect to get out of it. You will need to have a comprehensive business plan, with supporting financial forecasts to put before potential investors or lenders.

• Involving family members in the business • Minimising employer and employee NIC costs • Finding investors • Trading during tough economic times

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FUNDING FOR GROWTH

LEAVING YOUR BUSINESS

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Every business owner should have a personal exit strategy. We sometimes refer to this as a ‘starting with the end in mind’ strategy. Key issues to consider could include:

• Passing on your business to your children or other family members, or a family trust

• Selling your share in the business to your co-owners or partners

• Selling your business to some or all of the workforce

• Selling the business to a third party

• Public flotation or sale to a public company

• Minimising your tax liability

• What you will do when you no longer own the business

• Whether the new owners will need or desire your involvement after the sale

• Working with a corporate finance team

• Winding up.

A fall in the value of your retirement funds and the value of property may influence your decision as to when you are able to retire.

Whatever thoughts you have concerning the sale of your business, we know from our experience that careful planning and the right advice is essential.

Indeed, creating and putting into practice appropriate strategies at each stage of your business life is essential if you are to obtain the maximum reward for taking the risks inherent in being in business.

WHAT IS YOUR EXIT STRATEGY?

• Identifying successors in the family

• Minimising the tax on gifts or sale of the business

• Identifying successors within the business

• Identifying possible purchasers

• Valuing your business

• Grooming the business for a sale

• Preparing the business for success without you

• Timing the sale

• Maximising the sale price

• Minimising the tax on a sale

• Planning your transition to your next business

• Providing succession options through your partnership or shareholders’ agreement

• Providing for a smooth transfer of your business interests at your death or if you become disabled

PLEASE CONTACT US FOR ASSISTANCE ON:

The impact of the economic downturn has damaged many people’s financial aspirations and the effects continue to reverberate alongside the ongoing sluggish economy. The value of much property and businesses has fallen. Share prices are still about 15 per cent below their historical peak, and the bank base rate remains at a historically low rate.

WE CAN HELP.

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SELLING YOUR BUSINESS

Selling your business represents a major personal decision and it is essential to plan how you will maximise the net proceeds from its sale. When might you sell? Who are the prospective purchasers? What are the opportunities you have to reduce the tax due on the sale?

Let us help you maximise the potential from your ‘ultimate sale’.

Maximising the value of your business Whoever buys your business will want to be clear about the underlying profitability trends - is your profitability on the increase or decrease? Up-to-date management accounts and forecasts for the next 12 months will be close to the top of the list of the information which you should be prepared to make available to prospective purchasers.

The value attributable to many businesses is driven by the historical profits and therefore a rising trend in profitability should result in an increase in the business’ value.

If you consider your business to have a market value, or if you are looking to your business to provide you with a lump sum on sale, it is essential to start planning now how you will realise that value. This is particularly important if you envisage realising the value of your business within the next 10 years.

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

These are the types of questions a potential purchaser might ask:

• Are sales flat, growing only at the rate of inflation, or exceeding it?

• Is yours a service business with limited fixed assets, or are stock and equipment a large part of your company’s value?

• To what extent does your business depend on the health of other industries or of the economy?

• What is the outlook for your line of business as a whole?

• Will your company’s products and processes be outmoded in the near future?

• Does your company use up- to-date technology and have a well-developed research and development programme?

• How competitive is the market for your company’s goods or services?

• Does your company have to contend with extensive regulation?

• Are your company’s products and services diversified?

• What are your competitors doing that you should be doing, or could do better?

• How strong is the company’s staff that would remain after your sale?

• When should you sell?

You need to weigh up the factors which might influence the right time for you to sell your business.

LEAVING YOUR BUSINESS

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SELLING YOUR BUSINESS

Personal factors

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

• Have your life goals changed?

• When do you want to retire?

• If you are selling within the family, when will you sell and how will this transfer/sale be funded?

• Has your health begun to deteriorate?

• Do you still relish the challenges of running your business?

• Does your business have an heir apparent?

• Will your income stream and wealth be adequate, post sale?

• What will you do after the sale?

• What is your envisaged timescale?

Business factors External factors can also be important in timing your sale. If you can time your business sale to coincide with a period of economic growth, when buyers outnumber sellers and will pay premium prices, you will most likely secure the best price. The following questions may assist in assessing when is a good time to sell your business:

• What is the current state of the economy? • What is the likely demand for your business?

• What is the effect of the current state of the stock market?

• To what extent is your business ‘trendy’ or at the leading edge?

• Do your business forecasts show increases to the top and bottom lines?

• Is your business doing better than other similar businesses?

• Is your business at, or near, its full potential?

• What is the likely price the business will realise?

• Will the key employees continue within the business?

You should clearly identify the strengths and opportunities for your business.

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TAX AND LEAVING YOUR BUSINESS

Minimising the capital gains tax (CGT)

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

CGT basics

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

CGT reliefs may be very valuable

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

Entrepreneurs’ relief This relief applies to sales of a whole business or part of a business. This relief does not apply to the disposal of assets. There are specific circumstances under which the relief can apply to such a disposal, but these are related to the disposal of the business in which the asset is used.

Entrepreneurs’ relief comes with a lifetime limit of £10 million at a reduced rate of CGT. The effective tax rate is 10 per cent, so the maximum tax saving is £1,800,000. As this is a lifetime limit each disposal uses up relief which would otherwise be available for subsequent disposals. The types of disposal which attract relief are:

• The sale by a sole trader of his or her business as a going concern (including incorporating it)

• The sale of chargeable assets which were used by a sole trader in his or her business, which has ceased trading within the last three years

• The disposal by a partner in a partnership of his share in the firm, or of part of his or her share, and the disposal of shares and securities in a company, to which further conditions apply.

Where the business disposed of is operated through a company, the seller must own at least 5 per cent of the ordinary share capital of the company which must entitle him or her to 5 per cent of the votes; he or she must be an officer or employee of the company, and the company must be carrying on trading activities, and to no substantial extent any other activities. This requirement about the company’s activities, is the same test as previously applied under taper relief, so if your company qualified for business asset taper relief, it also qualifies under the new rules. There is also relief available on the proceeds of winding up or dissolving a former trading company, provided this is done within three years of ceasing trading activities.

LEAVING YOUR BUSINESS

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Contact us if you would like further help or advice on leaving your business.

CASE STUDYRebecca, a higher rate tax payer, is a director of a company which she formed many years ago. She owns all of the ordinary share capital, and has been a director of the company throughout. The shares are now valued at £300,000, and they cost her £100 when the company was set up. Her gain, and the related entrepreneurs’ relief, from the disposal on 24 November 2012 will be:

£

Proceeds 300,000

- Cost 100

Net gain 299,900

- Annual exemption 10,600

Taxable 289,300

Tax at 10% 28,930

Lifetime limit 10,000,000

Used in 2012/13 299,900

Carried forward 9,700,100

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

WE CAN HELP.

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

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

Lifetime transfers

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

INHERITANCE TAX AND YOUR BUSINESS

EIS investments A gain on any disposal can be deferred by investing in shares under the EIS scheme. This delays the tax due on the original disposal, but does not eliminate it.

However, the CGT treatment of gains on EIS shares themselves is very advantageous, and this might be an area worth considering.

Eliminate CGT altogether? CGT may not be chargeable if you are not resident in the UK. However, you should seek advice from us before seeking to avoid CGT by leaving the UK.

No CGT is payable for businesses or other assets that pass on your death. They may be subject to inheritance tax instead, where they may qualify for generous business property relief.

Transfers on your death

Do not overlook your business when you draw up your Will. Reliefs may mean that there is little or no IHT to pay on your death, but your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders’ agreement.

There are a number of traps to avoid. For example the 100 per cent business property relief from inheritance tax can be lost if you had an outstanding contract for sale at death.

B U S I N E S S

If we can help you with any of the information provided in this guide please get in touch. Call 01273 701200 www.plusaccounting.co.uk

Planning & Strategy Guide 2012/2013