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Financial Monitor (September 2007)

Dividends are generally better than benefits
In our July edition of Financial Monitor we advised company owners that tax savings could be made by having benefits, eg. new kitchens, golf club subscriptions etc paid for by the company. Our advice was based on an article we had read in a professional publication to which we subscribe.

A subsequent review of the perceived tax savings has uncovered an error which means that unless the company earns profits in excess of £300,000 (but less than £1.5 million) it will in fact be detrimental to have benefits paid for by the company rather than receive dividends. In addition, from April next year when corporation rates change, dividends will be better whatever the size of the company’s profit.

Consequently, the position currently is that payment by way of dividends is almost always more tax effective for company owners. Whether that will continue after the Chancellor’s Autumn Statement next month remains to be seen.

What’s Your BiG Idea?
Would you like to claim a share of £100,000? The funding is available from a group of entrepreneurs who have already built successful businesses in Sheffield and are looking for new investment opportunities.

But the money is just the beginning.

Those who are short-listed will have the chance to pitch their idea to a panel of business angels. So The BiG Idea could be the start of something larger still.

For those that are short-listed but do not get investment, they will get an automatic prize of a day’s consultancy from one of the angels, or they could choose £1,000 to put to use in their business.

The competition is designed to increase and develop entrepreneurship in Sheffield. Anybody who lives in Sheffield or has an existing business here can apply.

For more information please visit the website and you can apply on-line at www.thebigwebsite. org.uk

Printed application forms are available from all branches of the Royal Bank of Scotland in Sheffield. The application process is relatively straightforward but you had better be quick – the closing date is 23 November 2007.

Charitable donations – the effect of tax changes
The two per cent reduction in the basic rate of tax, although announced as part of the Budget in March, will not take effect until April 2008. One effect will be to reduce the amount charities (including places of worship) may reclaim in respect of Gift Aid payments from their members and supporters.

For example, a £10 net donation currently grosses up to £12.82, creating a £2.82 tax repayment for the charity. From 6 April 2008, it will gross up to £12.50, reducing the tax repayment to £2.50 – a fall of over 11%. Supporters may wish to take this into account when setting their contributions for 2008/09.

Conversely, of course, the value of the higher rate relief to the donor, on the same £10 net donation, will rise from £2.31 to £2.50 (because the difference between the basic and the higher rate will be 20% instead of 18%). This again is something donors may wish to take into account when setting their contributions for 2008/09 – and something which charity treasurers and fundraisers may wish to point out to their supporters!

Watch out for fraudsters
There appears to be an outbreak of scams based on the fraudster pretending to be HM Revenue & Customs. Contact is made by e-mail, telephone or ordinary post – in the latter case often using official-looking forms. In some instances, there is a request or demand for outstanding taxes or for import duties said to be due on valuable goods held at the docks or airport. In others, there is a request for personal data, such as bank accounts details. Often, there is a statement that this information is required so that a tax repayment or a payment of Child Benefit, etc. can be made.

HMRC state that they never send unsolicited e-mails asking for personal information. Nor do they send e-mails which include links to pages which ask for personal information. Any such e-mail which purports to come from HMRC will therefore be fraudulent and should be reported by being forwarded to domains@hmrc.gsi.gov. uk.

Fraudulent forms received in the ordinary post can be harder to detect. If you are not sending the form to us to deal with, we strongly recommend that you check the return address against a reliable source, such as the telephone directory, or previous correspondence which you know to be genuine.

Is it a time to sell?
Private companies are currently being sold on extremely high multiples of their post tax profits, making it one of the most attractive times to sell a private business in recent history. With the current active market, increasing numbers of owner-managers are considering selling their businesses due to the favourable valuation and taxation climate.

The Private Company Price Index (PCPI) figure for the first quarter of 2007 shows that private companies are selling at an average of 14.8 times their earnings. If you compare this to the 15.8 times earnings that the stock market currently values companies at, the gap between private company and stock market company earnings is at a historically low level. Five years ago, for example, companies listed on the stock market were being valued at an average 22.4 times their after tax profits compared with just 12.2 times for private company sales. With private company valuations at their highest levels for a decade, if you feel that getting a stock market listing is not for you then the alternative of putting your business up for sale is more tempting than ever.

Before you decide to sell and potentially cash-in on the current high valuations, however, there are a number of key issues you should bear in mind:

Groom your company to maximise its value to buyers:
- If you intend to exit your business, you will need to ensure that your remaining management team is robust.
- Ensure that you have put in place a strategy that will retain key staff up to and after any sale – small loyalty bonuses go a long way.
- Consider issues that could put buyers off or reduce the price they are willing to pay for your business and amend these issues accordingly.
Identify potential buyers and reasons for buying your business:
- Have a concept of the ideal buyers and inform your advisor of this. Work with your advisor to draw up a list of potential purchasers, including suppliers, customers or people within the sector that you already know.
- Confirm ‘core’ income and growth prospects.
- Draw attention to any less obvious attractions to niche buyers of your business eg. complimentary products, staff skills etc.
Discuss and agree with your advisors a realistic price for the company:
- Weigh up a buyer’s ability to reduce overheads or improve margins through economies of scale or cross-selling opportunities and price these factors in
Consider the tax objectives:
- For instance, are you taking full advantage of taper relief for the disposal of all the company’s assets, which could effectively reduce your overall tax rebate to approximately 10%?
Make the process easy:
- Prepare properly for the buyer’s due diligence, both legal and financial.
- Prepare for appropriate communication with your staff, customers and suppliers

The sale of your business can be a complex process, getting your business in good shape and completing a sale can take some time. Understandably, the process can seem quite daunting and for some can be an emotional and stressful experience. If you are considering your exit planning strategy, please discuss your options with ourselves.

Construction Industry Scheme – Penalties
The new Construction Industry Scheme (CIS) which came into force on 6 April 2007, brings with it a requirement for contractors to submit a monthly return (CIS300). The legislation provides for a penalty where a contractor fails to submit a return by the due date. This applies even if the return is a NIL return. A monthly return is due within 14 days of the end of the relevant tax month, or 17 days where payment is made electronically.

So far, no penalties have been sought for failure to submit a return because a six month period of settling down is being allowed. However, time is now running out. Any monthly returns which are still outstanding on or after 20 October 2007 will attract the penalty right back to when the return should have been filed.

Where the HMRC system is expecting a return these penalties will be issued automatically by the CIS system. The penalties are £100 for each return that should have been filed between May and September 2007 that HMRC has not received by 19 October 2007. The penalty for these returns and future returns will then increase to £100 per month (per 50 sub-contractors) that the return is late after 19 October 2007. If you need help with your returns please contact us.

Contractors can, of course, file a ‘nil’ return simply by ringing the CIS Helpline. If they are not making regular payments to subcontractor for a while, contractors can ask to be recorded as ‘inactive’ and HMRC then won’t send them a return for up to six months.

Whilst every care has been taken in the preparation of these notes we can accept no responsibility for errors or omissions contained in them or for any loss arising from their use unless we have been consulted professionally prior to any action being taken.

UHY Wingfield Slater
Wellington House, 39 Wellington Street, Sheffield S1 1XB
Tel: 0114 275 1544 Facsimile: 0114 275 1366 Email: info@uhy-wingfieldslater.com Web Site: www.uhy-wingfieldslater.com
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales

A member of the UHY Hacker Young Group of independent UK partnerships. A member of UHY, an international association of independent accounting and consulting firms.

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