Why am I suddenly suffering NICs when I wasn’t before?

From January 2015 (“Month 10” of 2014/15 tax year), many directors of small companies taking salaries up to the personal allowance will find they’re suddenly stung by NICs when they weren’t in the previous month…what’s happened?

Director NICs
Director suffering employee NICs in month 10

You’ll see the image above for month 10 of 2014/15 for a one person company paying £833/month.  Boxes highlighted in red above show salary, employEE NICs suffered, employER NICs added, but then that the employment allowance effectively waives the employER NICs.  Net effect only the employEE NICs are suffered.

Background

For the last few tax years (up to but not including 2014/15) accountants were generally agreed on what the “best” salary to take was, when you were in full control of the company, hence able to fully choose your salary/dividend mix.  It’d be the NIC threshold, which is typically a bit lower than the personal allowance.

In 2013/14, this amount was £641/month.  Paying slightly above this wouldn’t trigger a personal tax liability, but it would trigger NICs…both employER and employEE.  In the majority of cases, suffering both these NICs would outweigh the corporation tax saving of the slightly higher tax, so paying more was counter-productive.

How is 2014/15 different?

In 2014/15, the equivalent of the above £641/month is £663/month.  However, a small spanner was thrown into the works in the form of the “employment allowance”.  This basically meant that the first £2k of employER NICs suffered by a company would be waived.  Therefore paying slightly above £663/month does still lead to employEE NICs, but no employER ones.  Geeky calculations show that there is a modest overall tax saving to be had by doing this, as the corporation tax saved slightly exceeds the employEE NICs suffered.

Therefore for the first year in a while, a lot of micro business owners are taking a salary that does lead to some NICs being suffered.  Worth also mentioning here that many more won’t as they’ll have gone for the “easy” option of paying £663/month…very slightly more overall tax paid, but many argue not worth it for the extra admin.  There is no “right” answer.

£833/month means that over the year, the NIC threshold will be breached, but it’s still below the personal allowance, meaning no income tax is suffered.  If the salary were to go above £833/month, then income tax would be suffered as well, making it not worthwhile from a tax minimisation perspective.

How do NICs work for employees?

EmployEE NICs are a deduction from the gross salary, so the employEE foots the bill (hence the name).  EmployER NICs are an addition to the gross salary, so the employER foots the bill (hence the name).

For “normal” employees these are calculated on a month by month basis, with whatever was paid in previous months being irrelevant in the current month’s calculation.  Therefore NICs on “normal” employees tend to be fairly constant throughout the year, obviously changing a bit if/when salary increases/decreases.

What about directors?

To prevent some quirky ways those in charge could exploit the above (mainly by paying all their annual salary in one month each year), HMRC decided that director NICs should be done on a cumulative basis.

Each month is no longer looked at in isolation, you’re given a certain allowance from the beginning of the tax year, with no NICs suffered until it’s reached, then NICs suffered on everything following that.

For those paying £663/month, even at the end of month 12 they won’t quite breach this threshold (they’ll be trivially below it).

For those paying £833/month however, the threshold will be met part way into month 10.  Therefore whilst you’d have been happily paying £833 gross pay = net pay for the first 9 months, suddenly employEE NICs are suffered in month 10, and indeed they will be in months 11 & 12 too.

How do I pay this?

There’s a variety of ways you can pay this, see here.  If the company is small, the liability can be paid quarterly, meaning just one payment required in April for the NICs suffered in Jan-Mar inclusive.

Yuck, wish I didn’t have this

Potentially if you’ve been paying £833/month and now decide you’d rather not have the faff of making deductions and paying them over to HMRC, then if your month 10 payroll hasn’t yet been filed, it’s not too late.

If you prepare and file payroll for months 10-12 with a salary reduced to £153/month, you’ll end up below the NIC threshold.  Reasons being:

12 x £663 = £7,956 (below NIC threshold)
12 x £833 = £9,996 (above NIC threshold)
9 x £833 + 3 x £153 = £7,956 (below NIC threshold)

Tips when applying for trainee jobs in a small business

Firstly, I am not an expert recruiter.  I have no significant HR knowledge/experience.  However, as the owner of a (very) small business that’s taken on a few trainees over the years, I feel I can provide some guidance to those struggling to secure their first proper role.

I had a “gap year” after university.  It wasn’t planned.  Naivety meant I didn’t find it as easy securing that awesome graduate role as I’d expected, so I spent a year doing various low level temp jobs around periods on the dole.  Pretty depressing time…but then accountancy firm Tenon took a chance on me, and 10 years on look at me now (ahem).  I’m very grateful to them for that and hope I can do the same for a few others.  Point is, I know it’s hard for youngsters to get their first foot on the job ladder, and I’m keen to do any tiny little things I can to help.

 

The application/CV

This is your first chance to impress.  Mess it up, and it’s irrelevant if you interview really well.

  1. The cover note is vital.  When it’s a trainee role, I firmly believe the cover note is more important than the CV.  Your CV inevitably won’t have much in the way of useful work experience.  It’ll have your school qualifications and probably a bit of blurb about how you like sports/socialising with friends…point being, most junior CVs are very similar.  Take the cover letter seriously, it’s your main chance to stand out.
  2. Spell check everything.  We all make typos from time to time, but this is your first, and potentially only chance to impress, so don’t look sloppy.  Get a friend/family member with good grammar to review it too.
  3. Tailor the cover letter to the role.  This goes beyond saying “I’ve always wanted to be an [insert job title here]”.  If you could readily replace “accountant” with “solicitor”/”architect”/whatever, then it won’t convince me that this application is any more than a fleeting thought for you…not something any employer wants to take a punt on.  Why do you want the role?  What parts of your qualifications/experience to date make you suitable for the role?
  4. Tailor the cover letter to the firm.  As above, this goes beyond saying “I’ve always wanted to work for [insert firm name here]”…in fact, make sure you don’t do that, it’ll make you look daft and/or insincere when the firm you’re applying to is tiny and has only been going a few years.  Have a proper look over their website, see if you can pick out some things they specialise in and explain why that appeals to you.
  5. Address it to the relevant person.  Links with the above, take the effort to find out who’s likely to be the person making the decisions.  Avoid “Dear sir/madam” and use a real name if you can.
  6. If your CV has glaring weak spots, explain them.  Loads of us have some things that didn’t go as well as hoped in our lives.  An exam you flunked, job you got fired from, you dropped out of uni, period of unemployment etc.  In many cases you can “hide” these and get away with it, but where that’s unlikely, don’t just ignore it, explain it.  Recruiters are human too so will understand not everyone has a flawless record…and every now and then, it’ll work in your favour (eg the recruiter may have hated the same subject/been in a similar situation themselves).
  7. If you’re overqualified, explain why you’re applying for the role.  Perhaps not relevant for the typical school leaver, but a few of the applicants for our recent vacancy have left me baffled.  Their CV suggests they’re a high flyer in some other field…yet they’re applying for a junior trainee role…why?!  Sure, every now and then someone will decide they’re pursuing the wrong career and want to change…if that’s you, say so!  Otherwise you’ll be met with suspicion/it’ll be assumed you applied by mistake and/or will waste the recruiter’s time.
  8. Where are you/the role based?  We got quite a few applications from people hundreds of miles away.  Most made no mention of this fact, and that commuting wouldn’t be realistic.  Again, if there’s any obvious “problems” with your application, explain them.  Perhaps you used to live near here and were considering moving back anyway, or you have friends/family you could stay with if you got the job before finding a place of your own.  If you don’t mention it at all, I’ll assume you haven’t considered it and blindly applied to hundreds of jobs however inappropriate, so won’t take your application seriously.
  9. Consider your internet profile.  This will apply more if you have a distinctive name than if you’re called John Smith.  Most employers will Google you to see what comes up.  For me personally, and on the basis we’re expecting school leavers/new graduates, I actually liked to find some silly pictures/banter…made me think the person was normal!  Had I seen anything particularly extreme it could’ve been a negative though.  I appreciate different recruiters will have different attitudes to this…generally speaking avoid having anything too contentious out there but don’t get overly worried about a friend swearing on your Facebook wall or a picture of you in the pub.
  10. Don’t chase it up excessively.  Hopefully the job advert gave a deadline for applications.  If so, and you submit yours 2 weeks before that, don’t hassle the firm if you don’t hear back straight away.  They’ll likely be waiting until the deadline to ensure they’ve received all applications before deciding who to call to interview.  You don’t want to stick in their mind for the wrong reasons.

Most of the above is about trying to make the reader feel you could be bothered to make an effort, that you’re fairly committed to the role, fairly normal, and not too irritating.

The interview

So, you passed filter one, congrats!  They’ve offered you an interview.  To my mind it’s less easy to distinguish between people based on interview…but there are a few things that stood candidates out in a good/bad way.

  1. Respond promptly.  This is not a time for a demonstration of power, keeping them waiting (like not texting too soon after a first date).  At this early stage it’s highly unlikely you stand out as amazing, you’re just someone they’re going to give a chance to, who will easily be written off if you muck them around.
  2. Read the interview instructions carefully.  Obviously things like time and date, but also what will you be doing?  They’ll be giving you some information on what you’ll be tested on, and who will be doing it.  Do some research based on that.
  3. Psychometric tests?  It’s fairly common to have some kind of psychometric test.  If you haven’t done anything like that, try finding a few online to practice.
  4. Who’s interviewing you?  Have they said which individual(s) will be interviewing you?  If so and you’re feeling keen, look them up either on their website or perhaps LinkedIn, or even Facebook.  You can bet they’ll have done the same for you.
  5. Dress code?  The instructions will likely make this clear, don’t ignore it.  If they say “smart casual” and you turn up fully suited and booted, for me at least it’s more likely to make me think negatively that you can’t follow instructions, rather than impressed at how dapper you look.  If it’s unclear, err on the smart side…you can take a tie off, but you can’t easily convert a hoody into a shirt.
  6. Turn up on time.  Like the spell checker, don’t be late, it paints you in a bad light.  Being significantly early (ie >15mins) won’t tend to do you any favours either.  If you’re travelling a long way so hard to know exactly how long it’ll take to get there, aim to get to the area nice and early, check you find the place, but perhaps then potter about/go to a cafe to kill a bit of time/review their website again to refresh your knowledge of them.  5-10 minutes early is perfect.
  7. Again, do your research on the firm.  We specifically asked interviewees what they knew about us.  Other employers may not, but if they don’t, you can find a subtle moment to drop in some of your knowledge of the firm/key individuals then go for it.  It’s flattering for the interviewers to feel you care about them…flattery will get you everywhere!
  8. Speak highly of your current/previous employer.  If you moan about how crap your current/last job is, we may well think you’re a negative, moaning person.  It doesn’t matter if the work was mundane or boss was occasionally difficult, key thing is what positives you took from that to help you on the next step upwards.
  9. Relax.  Ok, so easier said than done…but it’s perhaps worth stressing the recruiter won’t necessarily be looking for the person who gave the most technically accurate answers.  Especially if this is for a role in a small firm, it’s vital that you fit into the team well.  Personality/attitude will be more important than knowledge/experience for a junior role.
  10. If you get rejected, send a short thank you.  Ok so I find it a bit cringeworthy on The Apprentice when someone gets fired then says “thanks so much for the wonderful experience”…but despite that, I’d recommend you do it here.  You might be their second choice who just missed out.  Show that you’re mature and not sulking, and if things don’t work out with the first choice recruit, you’ll likely be the one they turn to.

Hopefully the above will prove useful to someone somewhere.  Interested to hear any comments people may have below.

IPSE/PCG tax treatment and how to enter on FreeAgent

A lot of contractors will purchase membership with IPSE (the association of Independent Professionals and the Self Employed, previously PCG – Professional Contractors Group).  They predominantly provide assistance against IR35, but also other things which impact many contractors.

Question many people ask is what is the tax treatment of the membership fees?  IPSE are pretty clear on it here.  In summary, you can reclaim VAT on the cost, but it’s not an allowable expense for corporation tax purposes.

Next question for FreeAgent users is how to correctly account for that in the software.  As things stand, I don’t think there’s any suitable code which gives it the correct tax treatment.  Whilst there is a “subscriptions” code, FreeAgent assumes there’ll be no VAT on these costs (which can be easily overwritten, just change the “Auto VAT” option) but also that it will be allowable for corporation tax (which can’t easily be overwritten).

FreeAgent does however give you the ability to create new codes, with whatever tax settings you choose.  Step by step instructions on how we recommend doing it below:

  • Go to “Settings” –> “Income & Spending Categories”.
  • Click “Add New” –> “Admin Expenses category”.
  • I’d suggest calling it “IPSE Membership”, but this is free text, so put what you like.
  • Nominal code, I’d suggest “357” so it sits as near as you can get it to subscriptions.
  • Reporting name “Subscriptions to professional and trade bodies”.
  • Make sure you remove the default tick in “Allowable For Tax”.
  • Leave VAT at “Standard rate”, then “Create Admin Expenses Category”.
IPSE Membership
How to add IPSE Membership category to FreeAgent

Now, whenever you allocate a payment to that code, FreeAgent should correctly reclaim VAT (barring unrelated factors like whether or not you’re on the flat rate scheme) but not allow it for corporation tax purposes.

Contractor sideline business – start new company?

Something we get asked quite a lot is what best to do when someone with an existing business wants to set up something a bit different on the side.  This may be a contractor wanting to develop their own apps/games, to team up with other people to form a bigger consultancy and take on bigger projects, or perhaps do something entirely unrelated to their main work.

Anyone who’s read my blogs will know my main focus is on keeping it simple.  If there are big tax savings/other benefits to be had, then sure, consider more complex options…but complex isn’t always (indeed very rarely is) better.

Key question is typically whether to run it all through their existing business, or to create a completely independent business for it.

Benefits of running it all under your existing company:

Less admin – you only need to keep one set of books.  You don’t need to worry about which company’s bank account to pay for things from.  You don’t need to worry about intercompany loans, or funding via director loan account.  Your personal tax stays easy as there’s just one company you draw salary/dividends from.
Less cost – directly related to the above, accountancy fees typically won’t change much if one company starts to do a few other things.  If you wanted a second company, fees would almost certainly increase, possibly close to doubling.
Joint costs – inevitably there’ll be some purchases which don’t relate to one specific business or the other, as you’ll use it on both.  Eg you buy a new computer, a lovely desk, or rent an office.  If it’s one company, no worries!  If you had two, you might need to apportion costs or charge a “rent” for the other company using the first company’s stuff.
Use of losses – if one company effectively has two trades, one profitable, the other loss making, the losses can be offset against the profits within the same year.  This basically means you get corporation tax relief for any losses the new business might incur in the early days, when set up costs dwarf income.  This would not apply if you had two separate companies, one profitable, one loss making (caveat – can potentially be achieved with a group structure…but see my second paragraph about keeping it simple).
Potentially lower CT rate – this won’t make a massive difference with tax rates as they stand, and would only impact a few anyway, BUT…if you have a highly profitable contracting business making (say) £200k annual profits, it’ll fit nicely in the small company rate, meaning 20% corporation tax.  If it takes on a second trade, regardless of whether the second trade makes a small loss reducing this to (say) £190k, or small profit increasing it to (say) £210k, you’ll still be below the £300k threshold above which you drift into the slightly higher marginal tax rate.  If on the other hand you had two independent companies, one making a profit of £200k, the other making either a loss or profit of £10k, then as you control two companies, the tax bands will be halved.  This means the £200k profit company will be paying marginal rates on profits above £150k.  Google “associated companies” if you want more info re this.

Benefits of setting up a new company:

Complete separation – if you feel it really is a completely different business, you may feel it would muddy the waters to have the figures merged.  Having separate books will make it crystal clear how well each business is doing.  Yes with just one company you can of course do a bit of management accounting to keep tabs on the profits of each business…but it’s harder.
Different owners? – not relevant if both companies will be “just you”, but often the second company will be some kind of joint venture with one or more other people.  Giving them shares in your main company is a dangerous thing to do, but if you set up a new one, it can have its own share split which doesn’t need to mirror your first company.
VAT? – depending upon what you’re doing in each business, sometimes it’ll make sense for one to be VAT registered, the other not.  Eg one business might be selling to VAT registered businesses, whilst the other sells to Joe Public (who can’t reclaim VAT).  If you have two separate companies with different businesses, you can validly have one registered for VAT, the other not.  Similarly you may benefit from both registering for VAT, but one being on the flat rate scheme, the other not.  Only thing to be careful of here is if they invoice each other, you might end up with one company charging VAT that the other can’t reclaim.
Completely different branding – before making this point, I should stress one company can have multiple trading names.  This is fine, but any invoices/websites/whatever would need to state somewhere “XYZ is a trading name of ABC Ltd”.  Sometimes you might not want this.  If you have two separate companies, they can have completely independent names
Selling a business – one Ltd Co can potentially sell off a “business” from it, whilst keeping the other business ongoing.  However, any potential buyer would typically prefer the clarity of one company with just that business in it.  Not every business will have “selling out”/”go for an IPO” as a plan for even years down the line, but some do.

Summary

So plenty of things to consider, and there is no “one size fits all” correct answer.  However, unless any of the benefits of two companies are significant and required from day one, our advice generally is to run it from your existing company until it is proved to be a viable business in its own right.  As at that point, you can create a separate company and spin it off.  Otherwise you can have a situation where someone sets up a new company for every idea that pops into their head, then gets swamped with filing deadlines and accountants fees for multiple different entities, few of which achieve anything!

Interest to hear other people’s thoughts on this, especially if you strongly disagree with any of the points above.

RTI filing deadlines with FreeAgent

RTI filing deadlines are causing confusion for a lot people (like everything HMRC related!)

RTI is very different to every other tax in terms of deadlines.  VAT, corporation tax, self assessment, for all of those you wait until the period ends, and then have a certain amount of time after the end date to file the return.  RTI is different, giving you much less slack.

Basic rule (that you can realistically ignore)

The basic rule is you need to submit your payroll information to HMRC for any given period on or before the date staff are paid.  For the purposes of this blog, and as FreeAgent doesn’t support weekly pay, we’re only going to discuss monthly payrolls.

BUT…HMRC have no idea when you physically pay your staff, as they don’t have direct access to your bank statements (thank goodness).  So how do they know?

Let’s ignore what the rules say for the time being, and look at the information HMRC actually do know/find out when you submit:
the date the payroll is said to occur.  In theory this should be the date the payroll is paid (but in reality it might not be).
the date you actually clicked the buttons to submit the payroll.

Payroll RTI date
Payroll RTI date

Above is a screen print (with sensitive data blurred) of a month 7 payroll period (October), as drafted on 11 September 2014.

Key thing I want to flag is the date highlighted in red.  In this example, 25 Oct 2014.  That date is to some extent editable, but whatever is chosen for it becomes the filing deadline.  It needs to be a date between 6 Oct 14 and 5 Nov 14.  FreeAgent defaults to 25th of each month, and I see no good reason to change this consistently, it’s as good a date as any.

This business is a bit ahead of themselves, month 6 was submitted early (deadline for it would have been 25 Sep, it was submitted 9 Sep), but that’s fine, no harm in submitting early.

What are the default FreeAgent filing deadlines?

As FreeAgent defaults to set the payroll date to 25th of the month, that is also the filing deadline, so:
Month 1 – 25 April
Month 2 – 25 May
Month 3 – 25 June
Month 4 – 25 July
Month 5 – 25 August
Month 6 – 25 September
Month 7 – 25 October
Month 8 – 25 November
Month 9 – 25 December
Month 10 – 25 January
Month 11 – 25 February
Month 12 – 25 March

What if I only notice on 26th of the month that I haven’t submitted the payroll for that month?  Well, you can be cheeky, and edit the date, putting it back a day, then submit (so it’s on time).  Not really recommended, and of course there’s only a small window that this is physically possible anyway (absolute latest 5th of the month afterwards).  Plus, for the time being there’s no penalty for late submissions.

Why don’t I set it to 5th of the month after to give me maximum time to file?  Theoretically you can…but I wouldn’t recommend it.  People tend to find having a payroll date of 1st-5th the month confusing.  Reason being it means for profit and loss purposes the payroll is in a different month to for payroll purposes.  Eg take a company with a year end of 31 March.  If they ran their payroll dated 5th of the month, then “Month 12” payroll would be processed 5th April, making it in the year after the year it realistically related to.

HMRC have recently agreed to delay the introduction of late filing penalties for companies with <50 employees until March 2015.  Therefore, at present, even if you’re late (as many companies have been multiple times), there’s no penalty.  Be aware this will change, it was going to be from October 2014, but due to teething problems all round, small companies have another 6 months respite.

If an RTI return is submitted late, FreeAgent will ask you for the reason.  The options are:
– No other reason applies
– Notional payment: Payment to Expat by third party or overseas employer
– Notional payment: Employment related security
– Notional payment: Other- Payment subject to Class 1 NICs but P11D/P9D for tax
– Micro Employer using temporary “on or before” relaxation
– No requirement to maintain a Deduction Working Sheet or impractical to report work on the day
– Reasonable excuse
– Correction to earlier submission

Reality is most of those are “big boy” only things where there are complex issues at play.  The main one most FreeAgent users are realistically going to use will be “No other reason applies”.

If the real reason is “I forgot”, this does not count as a “Reasonable excuse”.  Neither does your hamster dying or you having man-flu on the submission date.

So realistically, what should I do to stay on top of things?  I’d recommend setting a monthly recurring reminder in your calendar, perhaps dated 6th of each month, to submit the month’s payroll.  Yes, it’ll be almost 3 weeks early, but better that than doing the reminder for 25th, then if you’re on holiday that week, or it’s a Saturday you’ve got to mess around with dates or accept it’s late.

In terms of when can you physically pay the salary, to stay on the right side of the law, I’d recommend always paying yourself a bit to late rather than early.  Realistically HMRC won’t know when you transfer the funds unless they do an enquiry and demand the information (highly unlikely), but better to be safe than sorry.

Any queries/comments, feel free to post below.

Stamp duty, any logic?

As with most people moaning about stamp duty, yes, we have just moved house.  I am therefore inevitably a little biased against it as it’s just stung me for a lot of money.

But…trying to be logical about it, where is the fairness in stamp duty?

It doesn’t tax wealth, it taxes movement and geography

Some would say it taxes you lots only if you buy a really expensive home.  Whilst kind of true, problem is, it doesn’t really tax wealth, how much you suffer in your lifetime is significantly impacted by how often you move and where you live.  Eg simple example, two scenarios (ignoring inflation):

Person 1 – is loaded and lives in a cheap part of Britain.  They get a 9 bed mansion with acres of land for just under £1m, paying £40k stamp duty.  They keep this property for 20 years.  Total stamp duty paid over 20 year period living in a 9 bed mansion = £40k.

9 bed cheap area
9 bed mansion with acres in cheap area

Person 2 – has a growing family and lives in a more expensive part of the UK, like London.  Year 1 they get a studio apartment, cost £200k, stamp duty 1% = £2k.  Year 4 they upgrade to a 1 bed flat, cost £400k, stamp duty 3% = £12k.  Year 8 they want modest outside space for the toddler(s) to run around so go for a 2 bed terrace, cost £600k, stamp duty 4% = £24k.  Year 12 they need somewhere a bit bigger, a 3 bed semi at £800k, stamp duty £32k.  Year 16 they’ve got teenagers so need more space still, hence buy a 4 bed detached at just under £1m, stamp duty 4% = £40k.  Total stamp duty paid over 20 year period living in 5 different properties ranging from studio flat to 4 bed detached = £110k.

4 bed expensive area
4 bed modest home in expensive area

So person 2 paid almost three times as much stamp duty to end up living in a 4 bed house than person 1 paid to live in a 9 bed mansion.

Where’s the logic/fairness in that?

What if person 2 lived in a cheaper part of the UK?

If person 2 happened to live in a much cheaper part of the UK, where lets say house prices are a quarter what they are above, would the stamp duty bill be quarter too, ie £27.5k?  Logic would presumably say yes, that would be fair.  Reality is it’d be way less.  (0% of £50k) + (0% of £100k) + (1% of £150k) + (1% of £200k) + (1% of £250k) = £6k.  Of course if they were more like person 1 and bought the most expensive property at the beginning then didn’t move again, they’d pay just £2.5k stamp duty to end in the same house.

Where is the logic/fairness in that?

Inflation?

If you add inflation into the equation it gets even worse, as barring occasional brief blips, every time you move house prices will be that much higher, hence stamp duty increasing significantly (as the bands have not historically increased in line with house prices).  Therefore the person who bought the expensive place ages ago is in an even better position relative to the person who keeps moving at ever increasing house prices.

Ok, let’s look at specific demographics – the elderly?

What about the other end of someone’s life?  One problem we hear a lot is that there aren’t enough family homes.  The road I spent my later childhood years on has 12 houses, all 4-5 bed detached.  Whilst a handful of these now have families in, most now have couples/widows aged 60-90.  Their kids left home years ago (like I did), but the parents stayed put.  Why don’t they downsize to somewhere smaller, freeing up the house to a new family?

Well…what’s the incentive to them?  They could perhaps reduce their council tax bill by a modest sum, but if they wanted to move to a nice 2 bed flat with lift near the town centre to make life easier in their old age, they’re going to be paying >£250k for it, hence HMRC will reward them for freeing up their family home with a stamp duty bill of £8+k.  So whilst they would likely get some cash from the released equity, the taxman would sting them for freeing up their home to a more appropriate demographic.  Hardly an incentive.  It’s therefore understandable why they often make the choice to stay put hogging the big houses.

Property developers?

What about property developers?  Surely they do a good service to the British housing stock, buying run down properties, spending money to improve them and make them fit for modern families.  One by one they turn dumps into lovely homes.  Reality is they’ll only do it if there’s a profit in it for them…and if 3+% of the property price is going to go on stamp duty, they’ll need to do make a big profit based on their work to compensate for that.  This will likely put off a lot of people, as before they consider spend on refurbishment they need to sell for ~£10k more than they buy simply to break even.

Buy to let landlords?

What about buy to let landlords?  They get off pretty well.  Most will buy the smaller units as they’re typically easier to let.  So they buy quite a few places at 0-1% stamp duty, and hold them forever.  Total stamp duty haul = negligible.  Compare that to first time buyers who might own it for perhaps 5 years before moving up the ladder.

International speculators?

There’s been a few programmes recently about rich foreigners buying prime London property then leaving the place to sit empty.  It’s taking potential homes out of circulation, leaving it empty.  They sit on it for years as a “safe place” for their money, in the hope of future property price increases.  They’ll probably pay stamp duty on the purchase (some would say they’ll use complex overseas avoidance schemes to greatly reduce the bill, outside the scope of this blog), but again, if it’s not re-sold for some time, the long term stamp duty haul isn’t that great, so these people don’t really get stung either.

Other stamp duty issues?

Stamp duty also causes grief due to the unique “slab” way taxes are calculated.  Buy a property at £250,000 and you pay £2,500 stamp duty.  Buy a property at £250,001 and you pay £7,500.03 stamp duty.  An extra pound in sales price and the stamp duty triples.  This means there are certain price points where it’s very tricky to sell a house, most notably the bracket immediately above £250k.  It’s never a good thing where taxes skew the market like this.

Compare this to income tax, where when you breach a personal tax band (eg going from basic to higher rate tax) you only pay the higher % on the bit in the higher band, not suddenly on everything.

Also, as mentioned above, the bands simply haven’t kept pace with house price inflation.  Geeky name for this is fiscal drag, it often applies to earnings too where wage inflation dwarfs increases in tax bands.  The problem with this is that when stamp duty was introduced, it was only intended to hit those buying the most expensive properties.  Now, there are many parts of the UK where even the cheapest of homes will suffer some stamp duty.

Why don’t people move to cheaper areas?

I wondered this myself.  With internet connections always improving, why don’t some average earning individuals who work from home move from expensive areas to cheaper areas.  Their income could potentially be largely unchanged (as they work remotely anyway), yet property prices greatly reduced.  They could sell the 1 bed flat in London and buy a 4 bed house in Wales.

You might expect this to help even out house prices, supply and demand would mean people moving to the cheaper areas so prices even out.

Reality is this doesn’t seem to be happening, as differences between house prices between regions seems to be going up rather than down.  Why?  I don’t know.  I guess reality is partly that many people can’t work remotely and wages are higher in London/South East, but also that people would be leaving behind friends and family if they moved away.  Many would rather live in a more modest home where they know and like than risk going somewhere new.

Summary?

So where does this leave us?  If you live in an area where house prices are relatively low and don’t move much, it’s not much of a problem.  However, in the higher priced areas it’s a major concern.  It doesn’t stop people owning expensive properties, it stops them moving between properties.

  • Workers are stung if they have to move around a bit
  • Growing families are stung if they try to move to a bigger place
  • Retirees are stung if they try to move to a smaller place
  • People trying to regularly improve run down properties are stung
  • Meanwhile rich land barons sitting on/accumulating property don’t suffer at all

Stamp duty encourages the clogging up of the housing market.  It makes people lean towards sticking where they are, regardless of whether their circumstances change and another property might be more suitable.  Downsizing is discouraged, making it harder for people who need more space to upsize.  How is any of this good for the country?

What possible solutions are there?

With some of my comments above being centred around the unfairness due to geography, some would argue that stamp duty bands should be regional rather than national.  Eg in rural Wales/North England, the bands could start at (say) £75k for 1%, £150k for 3%, whilst in London it might be (say) £300k for 1%, £600k for 3%.  This would potentially then mean regardless of where you are geographically, the cheapest 1 bed flats could be stamp duty free, modest family home 1%, nice family home 3%.

I personally don’t like this idea at all.  Why?  Because whilst the above sounds very fair and simple, it gets difficult when you look at borderline cases.  You’d end up with a situation where one end of a road pays a higher % stamp duty for the same price house as another end of a road.  You need to draw the boundary somewhere, and that’s going to skew results at those boundaries (same way nobody pays £251k for a house now).

Potentially it could be worked out on some precise average house price per post code area calculation.  Problem with this is you often wouldn’t know how much stamp duty you’d pay until detailed calculations had been done.  Not very helpful for significant costs to be unknown when planning a purchase.

Anyone who knows me will know I think simplicity should always be a key focus of tax rules, and this would not be simple.

Ok then Chris, what would you do?

If I was chancellor, I’d simply abolish stamp duty altogether, probably staggered over multiple years.  Sure, this will reduce income to the treasury which will need to be clawed back elsewhere, in which case if it’s agreed it should be based upon property, then do it via council tax, or the Lib Dem’s proposed “mansion tax”.  Don’t tax property movement, if you want to tax property, tax the ownership of it.

What do you think?

Supermarket Price Promise Swizz

Tesco Price Promise

Most of the big supermarkets work out at the till what your shop would’ve cost at their main competitors, and let you have the difference off your next shop.  You’ll likely have seen something like the image to the left.

Obviously I’m an awesome shopper so saved lots of money…or did I?

Problem is, unless you shop in a very quirky way, you won’t really win.  The receipt to the left definitely gives the impression that had I tried to buy equivalent things from competitors, I’d have spent £3.18 more.

Let’s simplify things massively and pretend there’s only 3 identical products that each supermarket sells.  Apples, oranges and bananas.  I’ll also pretend there’s only 3 supermarkets for this purpose (sorry Morrisons, but there aren’t many of you down South).  They each price these items differently.

[table]
 ,Apple,Orange,Banana
Tesco,10p,20p,20p
Asda,20p,10p,20p
Sainsbury's,20p,20p,10p
[/table]

In the above situation, it may be that supermarkets buy all 3 items for (say) 8p each.  They make a very slim profit on one item, but a much bigger mark up on the other two.  The precise details of this are fairly irrelevant, but you can bet they won’t be losing money on any products.

What you (unrealistically) could do

Based on the above, a really savvy shopper with all the information, infinite time, and zero travel costs, would buy their apples from Tesco, oranges from Asda, and bananas from Sainsbury’s.  Problem is, few of us have all the information, or infinite time, or zero travel costs…and the supermarkets know this.

Buying one product, you win whatever

If you just buy one apple from Tesco, they’ll tell you your shop was 10p cheaper than their competitors.  If you just buy one apple from Asda or Sainsbury’s, they’ll admit they’re 10p more expensive than Tesco, but give you a voucher for it, so you feel you’ve still got the lowest possible price.

…but virtually nobody buys just one product

Whichever of the three supermarkets you’re in, if you buy all three products, you’ll pay 50p.  Therefore the till receipt will proudly say you couldn’t have saved anything by buying from either of their competitors.  This is the issue.

You only win if you buy the products at the best price of the competition.  Bizarrely if you only buy the products at the worst price of the competition, you can do ok.  Eg if you just bought an orange and a banana from Tesco for 40p total, it’d tell you both Asda and Sainsbury’s would’ve saved you 10p each, so you’d get that 10p back.

As soon as you have any kind of mix (which inevitably the vast majority of shopping baskets will do), it all tends to get blurred together.

More often than not it says I saved money, why?

What will also happen in the real world is that Tesco will have bright red signs banging on about how cheap their apples are, whilst having fairly inconspicuous price signs next to their oranges and bananas.  So chances are when people shop at Tesco they’ll buy lots of apples and not very many oranges/bananas, and the till receipt will make them feel pleased about how much they saved.  It’s no coincidence that in Asda/Sainsbury’s, people would likely buy more oranges/bananas respectively, again due to highlighting of low price, so people shopping there would also feel they’d done very well.

Taking the very real example of my own purchase receipt above, inevitably I was drawn to some of Tesco’s special offers that day.  On those items I probably did pay a bit less than the other big supermarkets.  I’ll also have bought some products at a not particularly good price, simply because I needed them and couldn’t be bothered to go to multiple shops.  The leaning towards special offers means you’ll often think the supermarket you shop at gives the best prices overall.

The ultimate (but unrealistic) solution

So I guess the best solution if only want to visit one shop and have no pride(!) is to put through each individual item as a whole purchase in itself.  That way each separate item will get price checked, and you should then get the best price on each individual item all added together, rather than all the items added together then check the overall price.

In my simple world, at Tesco, you’d pay 10p for your apple (great, best price), pay 20p for your orange and get a 10p voucher back (great, 10p net cost), then similarly pay 20p for your banana and get a 10p voucher back (again, great, 10p net cost).  Net impact, you get all three items for just 30p.

…I wonder if anyone actually does this?!

A more realistic solution?

You know sometimes in the past you might’ve been buying some stuff for you, some stuff for someone else, so you put one of those dividers to break your shopping into two separate purchases?  It’s perhaps very slightly annoying for the checkout operator, but nowhere near as much as doing each item individually!  I was thinking it might make sense to do this, dividing your shop into two:

First batch with all the items not on special offer, where you don’t think you’re getting a good price and are probably cheaper elsewhere

Second batch with the items where you’re confident you’re getting a great deal price-wise.

Doing them in this order means the first batch (overpriced) will give you the discount voucher that you can then use immediately on the second batch (where it’ll probably say you’ve made huge savings)!

The problem with tax schemes

Many small business owners will be aware of contentious tax “schemes”.  Perhaps someone will have tried to sell one to them, maybe they’ll have heard about celebrities using them, possibly even a mate (or more likely “friend of a friend”) uses one.

Are they legal?

Well, this is the million dollar question.  You might think there’s a simple yes/no answer.  Reality is tax law is sufficiently complicated and open to interpretation that one intelligent person can read the legislation and think a scheme is fine, whilst another wouldn’t.

But it’s got QC/tax counsel approval?

Whooptidoo.  As above, just because one intelligent person thinks it’s above board doesn’t mean it is unfortunately.  As the schemes typically lead to hardly any/no tax being paid, you can rest assured HMRC put their cleverest bods to try to prove it’s not ok.

Also bear in mind that the scheme provider will quite possibly have asked numerous tax bods for their opinion.  Many may well have said it’s rubbish, but the provider only needs one to agree with them and of course that’s the one they’ll quote.

Are they immoral?

Well, that’s for each person to decide.  Let’s assume for a second that the scheme in question is 100% legal.

Some will think if it’s legal, it’s perfectly acceptable.

Others will say these aggressive tax avoidance schemes are immoral…but they’d happily put money in an ISA, or perhaps invest company cash into a pension to reduce their tax liabilities.

Everyone has a different idea on what’s responsible tax planning vs aggressive immoral tax avoidance.

It interests me that politicians often try to play the moral line…not from a “but they milk their expenses” point of view, more just that it implies they know they can’t stop these things with the law.  Therefore they hope they can rely on peer pressure from the media to stamp it out.

My mate has used one for a while and he hasn’t been caught

Let’s have a think about the timescale of these things.  For the sake of the below, I’ll assume the scheme in question is completely flawed and therefore will not work at all (but this isn’t known at the beginning).

Day one – the scheme provider says you you can take out loads of money without worrying about tax.  You do so.

6 months have gone by – still nothing from HMRC.  You tell all your mates how great the scheme is and recommend they all join (probably pocketing a commission).

12 months have gone by – still nothing from HMRC.  No surprise there, nothing’s been submitted to HMRC yet, so they’re completely unaware of what you’re doing and haven’t even considered whether it’s ok or not.

21 months have gone by – you’ve just filed your first year’s statutory accounts and CT return.  It’s done via self assessment, so these are initially accepted by HMRC and Companies House without question.

33 months have gone by – this is the approximate likely deadline for HMRC to enquire into the first tax return.  You get a scary letter.

So it may well be almost 3 years before you get a whiff from the authorities that what you’re doing is wrong.  Up to that point you assumed all was great, and indeed told all your mates/colleagues so.

Therefore even if your mate has been “successfully” using a scheme for a couple of years, that in no way means HMRC know and are ok with it.

What happens when HMRC do enquire?

This will vary significantly from case to case and depending upon the scheme in question…but the basics will be you getting a scary letter from HMRC asking you to explain various suspicious transactions in the accounts/tax returns.

At this point you forward the letter to your scheme provider.  Quite possibly they’ve gone underground, in which case you’re on your own.  You’ve paid them however much for running the scheme for 2-3 years and paid no/negligible taxes.  If the scheme is flawed, you’ll now need to find a “vanilla” accountant to do bog standard accounts/CT returns as though you weren’t in the scheme.  So, unexpected accountancy fees for you, plus all the taxes you should have paid for the first couple of years, plus probably some penalties and interest.  Sad panda.

Alternatively the scheme provider may well respond, probably advising you not to worry, they’ll deal with it, and to continue as they originally advised.  You run the risk that all they’re doing is prolonging their fee earning potential from you, and delaying you getting things sorted and going back on the straight and narrow.

Don’t be tempted by the newest latest scheme, as often the people behind it will have also been behind the last few latest schemes over a decade or two.  Flog them for a few years, when HMRC sniff round your clients, do a runner.  Come back under a different legal entity, find some new punters, rinse and repeat indefinitely.

I’ve read the above, but I still want to use one of these schemes…

Ok, if you’re insistent, then find a provider who’s been around for ages as they’re less likely to disappear when the going gets tough.  Make sure you either put money aside in case it turns pear shaped, or be prepared to declare bankruptcy/similar if you spend it all and get caught.

Also, you might want to get a neck brace and sleeping pills for all that looking over your shoulder/struggling to sleep at night you’ll likely suffer…!

FreeAgent user – how much dividend can/should I take?

It’s a question we get asked a lot. There’s two important and completely separate considerations you should have when considering paying a dividend.

1) Can my company afford it?

2) Is it a good idea from a personal tax perspective?

Company retained profit

Let’s take the company side first. Dividends can only be paid out of retained profit. This means what’s left after you’ve set aside enough to pay all the company’s liabilities, including tax bills even if the due date is some time off.

Fortunately, FreeAgent does all the hard work for you, summarising it all into one number. Bizarrely they choose to hide this number in the very bottom right of the overview page, but it’s there as “Carried forward/distributable“.

Carried forward profitSee the example above for a business in a fairly healthy position. What this figure represents is what you’d hypothetically have left if you ceased trading today, collected in all debts owed to the company, and paid off any debts owed by the company. This is why it’s the absolute maximum dividend you can take, as otherwise you’d be leaving the company in a position where it can’t afford to pay its debts (ie you’d be defrauding the creditors).

If this number is negative, you can’t take a dividend at all. Your company is already insolvent, meaning it owes more to others than the value of its assets (ie negative equity).  Taking a dividend anyway in this situation is technically illegal.

Inevitably as with anything, the data FreeAgent throws out is only as accurate as the data put into it…so make sure FreeAgent is up to date and that things like the bank balance in the software agrees to what’s _actually_ in the bank before making any significant decisions.

Also (stating the obvious) always clearing this figure down to £nil isn’t a great idea. Good to leave a nice buffer there in case things take a turn for the worse.

Your personal tax situation

Completely separate to the above, the question comes in over whether it’s tax efficient to take a further dividend at this point.

What other earnings have you had in the tax year to date? Dividends suffer 7.5% (barring first £5k) whilst a basic rate taxpayer. As a higher rate taxpayer they’ll suffer 32.5% personal tax. If you get above £100k total income, then the effective rate is higher still.

The key time for this is 5th/6th April. It makes no difference whatsoever what your company year end is. The personal tax you pay on dividends revolves around the personal tax year, 5th April.

Therefore especially this time of year (mid March at time of writing), if you’re thinking about taking a big dividend, it’s worth giving it a bit of thought. Does it make sense to take that dividend quickly now, or is it beneficial to hold fire until 6th April if you can?

Delaying until post 6th April will always delay the personal tax…but if it only delays it, is it worth it? Also, if you’ve only earned (say) £20k this tax year, and expect to earn (say) £60k next tax year, it definitely makes sense to rush through that dividend now. Nearly always better to pay a small amount of tax soon rather than a much larger amount later.

If you’ve been using FreeAgent for a while, you can easily see your relevant figures for the current tax year from the “My money” tab.

Top tip – you can also go to the “Taxes” –> “Self assessment” tab, click the current tax year and have a look at what the liability currently shows as. Then click “Edit details” in the top right, stick in a figure you’re thinking about taking in the “Dividends” box then “Save changes”. See what your liability is now. This gives you an easy way to get a good idea of what extra personal tax you’ll have to pay if you take that extra dividend. NB ensure you then delete this hypothetical dividend figure!

Dividends experimentAgain, the data FreeAgent chucks out is only as good as data that’s been entered…so check it’s correct before making significant decisions. Also be aware as things stand FreeAgent won’t account for student loan repayments, so that may be a hefty additional amount to pay over and above the figure FreeAgent quotes. It also doesn’t currently account for payments on account (EDIT – I gather this has just been changed, March 2014). However, I anticipate both these things will change in the fairly near future.

For Maslins clients we tend to have a look at their personal tax position in February/March to advise. It’s generally a quiet time for us (after January tax return rush) and it’s the time you most want to be thinking about this…as simply waiting a day can potentially have a massive impact.

The boring legals

You should produce the board minutes and dividend voucher for each dividend.  Once you’ve paid the dividend, uploaded the bank transaction to FreeAgent, and explained it, you can then easily get templates for these from “My money” –> “Dividends”.  Strictly speaking you should print these out, sign and date, then file away somewhere safe.

Small office spaces available Tunbridge Wells

Some of you will have heard about “The Old Bakery”, either because you’re a Maslins/MVL Online client or you’ve read tweets/similar about it.  It’s a two storey building, we occupy the first floor, but the ground floor is up for grabs.

Floor plan
Floor plan

It’s currently split into 4 main areas (all measurements approx):

– big lockable room 7.5m x 3.5m
– small lockable room 3.5m x 3.5m
– open area 10.5m x 4.75m
– kitchenette/bathroom area (toilet and shower)
Approximate floor layout to the right.

Location – it’s just off Camden Road, so fairly central (you can be in the RVP in a 2-3 minute walk).

As it’s set back a bit from the main road, it’s quiet, and reasonably well hidden.  This admittedly isn’t great if you’re hoping to pick up passing trade, but is great for those who want to be fairly central but remain reasonably anonymous.

Main space 

Parking – Sadly it doesn’t come with parking, but for drivers there are affordable pay and displays nearby.

Condition – it’s newly refurbished.  Good insulation, brand new central heating and electrics, LED lighting.  We’ve left the “character” floor, which admittedly can have a marmite effect on people.  There are high ceilings and a pretty good amount of natural light.  Shared cable broadband is included, though you can set up your own independent line if you require lots of bandwidth.  There are a handful of wired network points, but it’s anticipated most people will rely on wireless.  Similarly no phone line provided, as anticipated most will rely on mobile and/or VOIP (you might want a dedicated line for this).

Access – you will be able to access the building and your section 24/7…hopefully nobody was thinking this, but in case you were, do be aware it is in a residential area, so late night loud parties are not an option(!)

Prices – these are still tbc, but current plans for prices inclusive of most bills, but possibly not rates (don’t ask…well, do if you like) are:
– big lockable room £500/month
– small lockable room £300/month
– desk in shared space £150/month (anticipating perhaps 6 spots, in no way crammed in)
If comparing to more formal serviced offices, please do look at what they charge extra for.
If someone wishes to sublet the whole place on a fairly long contract, probably looking at £1,000/month.

Lease terms – negotiable.  We anticipate minimal commitment from either side, though if you wish to have a longer term lease, a small discount may be negotiated.  The place is in fairly good condition, and we’d expect you to leave it broadly as you found it.

Furniture – negotiable.  We can probably provide basic office desk/chair if required.  We appreciate those in the open area may also wish to have a lockable chest of drawers/similar for any valuables.

Timing – it’s pretty much ready to go, just the flooring needs a little bit more elbow grease from me.  Having tenants lined up will likely speed me up on this.

If the above’s of interest, please email chris@maslins.co.uk with any queries.