An explanation of PAYE coding notices

Employees and employers receive periodic updates to tax code numbers. This number is used by your employer/pension provider to calculate the amount of tax you are stopped on your salary and/or pension.

If your affairs are straight forward (and you are not able to claim certain age related allowances) you are entitled to earn the first £5,225 of your income in 2007-2008, tax free. If this were the case your code number would be 522L.

If your code number drops, to say 200L, you will pay more tax each pay period. If the tax code increases, you will pay less tax. (But see note on K codes below.)

We have listed below a number of generalised factors that may affect your code number. The list is not comprehensive so do contact us if you receive a code number adjustment that is difficult to understand.

1. Reduction for unpaid tax in earlier years. If you had underpaid tax in the tax year to 5 April 2006 by say £500 the Revenue will allow you, in certain circumstances, to pay the tax back in a following tax year. To facilitate this, the Revenue will deduct an amount from your tax code. For instance if you are a standard rate tax payer, currently 22%, your tax allowances would need to be reduced by £2,272 to effectively recover the £500 you owe. (For those of you who like to see the maths this is calculated by dividing £500 by 22 and multiplying the result by 100 = £2,272). On your notice of coding you would see a reduction in your code number from say 522L to 295L. (522-227).

2. Reduction for benefits provided by employer. If your employer provides you with a company car, or private medical insurance, or indeed any other form of benefit, without an adjustment to your tax code you would always owe the Revenue the tax on the benefit at the end of each tax year. So that this does not happen your code number will be reduced accordingly. The reduction works by deducting the value of the benefit from your code; thus a benefit of £500 will result in a reduction in your code number of £500, i.e. 50 points.

3. Reduction for higher rate tax payers. If your earnings are part subject to tax at 40%, and they include significant interest received or dividend income, you will owe the higher rate tax on your investment income at the end of the tax year. To counter this the estimated higher rate tax on your non-salaried/pensionable income will be recovered by reducing your tax code. As your interest and dividends received are taxed at the basic rate, only the marginal increase above the tax already deducted will be taken into account.

What happens if the reduction in your code number is more than your present code?

K Codes – If your tax free allowance of £5,225 is reduced by £2,272, as in example 1 above, you will still have a positive tax code of 295L. If however the deduction from your tax allowance is £10,000 you will have changed a positive tax free deduction of £5,225 into a negative position of -£4,775. This “negative deduction” is actually taxable income. Instead of receiving a tax free allowance of £5,225 you are being taxed on additional income of £4,775.

Your tax code could be changed from 522L to -477L. In their wisdom the Revenue have chosen to display -477L as K477. When you see a tax code prefixed by the letter “K” add on a zero and this is the equivalent income being added to your tax assessment for the year. The larger the K code, the more tax you will pay – although the revenue cannot take more than 50% of your salary in tax in this way!

Associated companies and corporation tax

Most smaller companies pay corporation tax on their profits at the “Small companies rate” – presently 20%. However if profits exceed £300,000 the average rate of corporation tax payable gradually increases, until at profits of £1,500,000 and above all profits are taxable at the main rate of corporation tax, 30%.

Enterprising entrepreneurs might be tempted to make the most of the small companies rate, and transfer certain parts of their businesses to separate companies. If each separate company made profits of £300,000 or under, the possible tax saving could be significant – a reduction in tax payable from 30% of “grouped” profits, to 20%.

Not surprisingly the Revenue saw that strategy coming, hence the Associated Company rules.

Basically if two, on the face of it, separate companies are owned or controlled by persons who the tax man considers to be “Associated” then the amount of profits that each company can earn at the small companies rate (20%) is reduced pro rata. For example if two companies are judged to be associated in this way each company can earn up to £150,000 at the 20% rate. (£300,000 divided by the number of associated companies, in our example 2.)

It is easy to see that companies may be associated if they are both owned and controlled by the same person(s). Unfortunately the Revenue will also associate companies owned by the following groups as well.

1. Husband, wife, or civil partners, including separated but not divorced couples.

2. Parents, grandparents and more remote forebears.

3. Children or grandchildren or remoter issue.

4. Brothers or sisters, including half siblings but not step.

5. Business partners.

6. Certain trustees or personal representatives.

7. Certain beneficiaries of a settlement, or estate.

It is beyond the scope of this article to describe in detail the interesting possibilities that these associated groups can produce. For example spouses of business partners can be taken into account. To add to the mix the Revenue have also granted a concessionary treatment in the case of certain related persons, whose separate business interests have no “substantial commercial trading interdependence”.(This concession does not extend to husbands, wives and minor children.)

So beware. If a husband and wife each own totally independent businesses, they will be associated under these rules. Consequently each company can only earn up to £150,000 at the 20% corporation tax rate. Substitute any of the other 7 categories listed above and potentially large numbers of companies may be associated. If 6 companies are associated each can only earn up to £50,000 at the 20% rate.

If you are concerned that you may be caught by these rules, please call to discuss. This is a complex area of taxation, with its own unique “grey” areas.

Tax Planning Ideas – pre 6th April

Here is a list of possible tax planning options that could be considered prior to 6 April 2008.

The list is not complete. Tax payers with complex affairs should consider a formal review before the end of the present tax year.

Savings:

1. Maximising ISA’s for younger savers.

2. Maximising ISA’s for other savers.

3. Appropriate redistribution of savings among family members with differing tax rates, to reduce overall tax spend.

4. Utilisation of Child Trust Funds.

Pensions:

1. Consider maximising contributions for the year.

2. Non-tax payers can also contribute up to £3,600 per annum with no earnings.

Inheritance Tax:

1. Utilising available allowances and reliefs to protect assets from excessive IHT risks.

2. Time to review Wills to ensure they are compatible wealth protection strategies.

Capital Gains Tax:

1. If appropriate make sure you utilise your Annual Exemption, £9,200, for 2007-2008.

2. Consider inter-spouse transfer of assets with “pregnant” gains if the other partner has capital losses which will not otherwise be utilised.

3. Review portfolios to consider holdings that may have negligible value for tax purposes. This offers opportunities to reduce other taxable gains in the current tax year.

Charitable Giving:

1. Consider Gift Aid donations. The same gifts made after 5 April 2008 will result in slightly less cash benefit to charities as the tax they will reclaim on your donations will decrease from 22% to 20%.

Discounting Is Dangerous

Offering a discount in the heat of negotiations may seem like a good idea at the time but thoughtless discounting is an easy way to lose money fast.

 

thumbsdown
Before you succumb to the temptation to win new business by offering a discount take a moment to consider these ten problems associated with discounting.

  1. Discounting eats away profit margins!

  2. Negotiating a discount focuses the customer’s attention on your price. If your only competitive advantage is price you are in trouble because price can always be matched by a competitor. The focus should be on the benefits of the product to the customer that make the price, if not irrelevant, then at least not the primary influencer of the decision to buy.

  3. Discounting can affect the customer’s perception of the value of your product – the ‘you get what you pay for’ syndrome. The less they pay, quite likely the less they will value it.

  4. Discounting may affect the quality of your service. If you have offered a discount and realise your profit margin is going to be slim if you do the job to your usual standard then there’s the temptation to cut corners. That compromises the quality of your work and if it results in customer complaints it eats into your margins even further. Poor work gets talked about and you risk your reputation and the referred business that can come out of being known for quality.

  5. Discounting can result in reduced demand. Customers might see the opportunity to buy at a discount as an opportunity to really stock up on the item and that can decrease their need to buy for some time into the future. Altered buying patterns can effect sales predictions and cash flow forecasts.

  6. Discounting increases work hours. In effect, discounting means lower income per hour, so to maintain your profit level you are going to need to put in extra hours to compensate for the narrower margins on your sales.

  7. Customers can gouge you. Word of discount deals gets spread around and if you did it for one customer what is your justification for refusing it to the next one who tells you they ‘know you did it for Person X’?

  8. Discounting can be addictive. To make a sale it’s easy to fall into the habit of offering a discount as a first resort instead of as the last. It’s possible to win custom by offering to negotiate on things like after sales service, a longer guarantee period or an added accessory rather than resort to a discount offer. Some of these may never turn into an extra cost to you but are valuable to the customer and may be preferable to a discount in their eyes. Before you discount, stop and think: is this the only way I can give value?

  9. Guessing wrong. If you make up your discount offers on the spur-of-the-moment you are going to guess wrong. It’s very easy to underestimate costs and end up out of pocket. Discounts, if offered at all, need to be based on an itemised costing of the job and include a buffer for any extras incurred should things not go as smoothly as expected.

  10. Discounting starts price wars. The company that usually wins is the one with the biggest balance sheet—the one who can afford to hold out the longest. That’s a dangerous game to play.

Unfortunately, discounting as a business practice has become so entrenched because of its supposed ability to win sales that it is difficult to break the habit. But think about how many times offering a discount has actually been an investment that paid off in the long run.

Of course, there are some valid business reasons to discount, such as liquidating obsolete or seasonal stock or to meet cash flow requirements. But smaller businesses should have carefully calculated strategies for discounting so it’s not done thoughtlessly with a disregard for margins or retaliatory action by irate competitors. If you want to follow best practice then develop a price policy that includes your discount deals and the exact amounts to be offered in each circumstance and stick to it. Base it on an understanding of the real costs of production and your profit margins. If you employ salespeople, make sure they know about it and stick to it as well.

Good Business Deeds Can Be Good Business Deals

Good Business Deeds Can Be Good Business Deals

‘Cause’ marketing that links your company or brand to a non-profit group or charity enables you to promote your business while you give something back to your community. Perhaps the most interesting aspect of this kind of marketing is that it’s been shown to make customers feel better about deciding to purchase and that translates into an increase in repurchase intentions.

Consumers transfer their emotional bonds

Many people have emotional bonds with a non-profit group. They may even be regular financial contributors or do volunteer work for a non-profit organisation. When these people see a business that’s supporting this organisation they’ll often be predisposed to purchasing from it. “Look at what you sell and understand the targets you’re trying to reach. Then align yourself with causes that will bring out the emotions of that audience, from a grassroots, a community and a media standpoint,” advises Rodger Roeser, of Justice & Young Public Relations in Cincinnati.

Employees feel better about their employer

Surveys consistently show that whether candidates are choosing an employer or employees are deciding whether to stay with their present company, the degree to which a business demonstrates a social conscience is perceived as increasingly important. In fact, a majority of employees of companies in many industries have said they’d work for less money if they felt their employer was socially responsible.

It’s good for PR and community relations

Naturally, there are a lot of positives about supporting a cause that will benefit the image your business has in the community. You’ll be seen as a good corporate citizen and as an organisation that contributes to the welfare of everyone in the community.

Seek alignment with your business and your customers

There are thousands of causes and some will no doubt relate to your business activities. Find a cause that has a link with your company, no matter how tenuous, so that people will understand how your business fits into the cause overall. The cause needs to also be related to the interests of your customers. It should align with their feelings and beliefs, and not be in conflict with other organisations they might want to support.

Tell the world what you’re doing

Although it might seem a bit ‘commercial’, your business will only benefit if it tells the world at large about your involvement with the cause. You need to spell out what it is you’re doing and why you’re doing it. It will also help if your business becomes a conduit for your customers to help the cause by making donations through your website or at your business premises.

  • Your cause marketing activities should be part of both your external marketing and your internal communications. It should be featured in your promotions, your packaging and your website, as well as referred to in your employee newsletters.

  • Give your employees and your customers a chance to participate in the cause by hosting a function or sponsoring an event where the proceeds go to the cause

  • Ask the cause you’re supporting to promote your association with them. They have every reason to do this; the non-profit world depends on donations and they like to tell prospective donors that they’ll be in good company when they part with their funds.

In today’s competitive world consumers want to know what a business stands for. Cause marketing will tell them about your business values and reassure them that part of their purchase money is going to a good cause.

Newsletter Archive

Grow Your Business Newsletters

We encourage you to browse our newsletters for tips and techniques that are sure to help you build a better business. Help for ambitious business owners looking to startup or grow a successful and profitable business. Includes help with marketing, advertising, selling, managing people, strategic planning, saving money and more.

Current Issues

 

Issue 2, 2007: Table of Contents

  Issue 1, 2007: Table of Contents

 

Issue 12, 2006: Table of Contents

Issue 11, 2006: Table of Contents

Issue 10, 2006: Table of Contents

Issue 9, 2006: Table of Contents

Issue 8, 2006: Table of Contents

Issue 7, 2006: Table of Contents

     

Issue 6, 2006: Table of Contents

 

     

Issue 5, 2006: Table of Contents

 

     

Issue 4, 2006: Table of Contents

 

     

Issue 3, 2006: Table of Contents

 

     

Issue 2, 2006: Table of Contents

 

     

Issue 1, 2006: Table of Contents

 

accounting, CPA, tax

FREE Consultation & FREE Business Health Test

Learn for yourself, with absolutely no obligation, how Davies McLennon can help you and your business prosper. We offer a free initial consultation, at your office or ours, covering the topics that matter most to you. We’ll even use your current financial statements to perform a no-charge Business Health Test and provide you with a written report about your particular situation.

No Surprises

Nobody likes unpleasant billing surprises from their professional advisors. That is why, for many projects and ongoing work, you will be quoted a flat, all-inclusive, fee for our services.

Our Guarantee

If, for any reason, you are not satisfied with the quality of our service you will pay nothing for that service. You are the final judge!

Are you ready to experience a new and profitable approach to your accounting and business processes? Give us a call at 0161 612 0077 or email info@daviesmclennon.co.uk   for your free consultation and Business Health Test.

Time is money, use it or lose it!

money clockHave you ever reached the end of the day and wondered where all your time went? Playing catch-up to retrieve wasted time is what keeps many SME owners welded to their business premises way outside of ‘normal’ business hours.

For many SME owners a number of their customers, suppliers and employees are likely to be friends as well as business acquaintances. This overlap of private and business relationship can lead to requests for assistance or for special deals that can make serious inroads on their time. A lot of small business operators go slowly broke doing work for friends at discounted rates or for free. ‘Mates rates’ translates as ‘at less than your market value’ and that means more hours you have to put in to make up for the lost profit.

Activities justified as building relationships with customers and suppliers can easily stretch out to time wasting proportions whereas choosing an appropriate form of contact in the first place could have sped up the information flow and decision making. Phoning someone to resolve a complicated issue will save time over emailing backwards and forwards with them but for straightforward matters an email that takes 5 minutes to compose and send is more efficient than several phone calls.

Other ‘entrepreneurs’ seem happy to waste time carrying out basic tasks of little productive value. Is it really necessary to run errands such as picking up a cheque from a creditor when it could be mailed to through? How many waste time making duplicate trips because they haven’t planned the most efficient sequence of visits or deliveries, or notified customers in advance of their visit and find no one at home?

Figuring out just how valuable an hour of your time is can be a real eye opener. Understanding how much money you are wasting by wasting time is the best incentive for making changes that will improve how you utilise your work hours. To figure out the minimum hourly value of your time estimate how much money you’re making per year and divide it by 2,000 (a 40 hour week over 50 weeks – plug in your own actual figure if you know it). To estimate the maximum hourly value consider how much you make when you are most productive such as the value of product you could turn out in an hour, what your billable client time rate is, etc. Somewhere in between these figures is the real value of your time. That figure should be your benchmark for deciding which activities are earning you money and which are losing you money and wasting your time.

With a sense of your hourly value in mind look at each task in terms of opportunity cost – what you could be earning if you weren’t doing this. Any job that brings in less than your hourly value figure should be up for reconsideration. You can make arrangements not to do some of those jobs that bring you in less than your going rate or you can put definite limits on how much time you are going to commit to low value work. Could you outsource your financial record keeping to a bookkeeper? Hire a junior to do the mundane low value adding tasks? Automate some of your processes? Use an answering machine or an answering service?

Dealing with people who use up your time in ways that don’t produce any gain for your business, such as obvious tyre kickers or friends who are always dropping by for a chat, can be dealt with by learning techniques to tactfully terminate pointless conversations. On a more personal level you can decrease wasted time if you learn to use some of the proven time management skills like scheduling your daily activities. In essence, the more time you save by working efficiently and effectively the more money you will be able to make. Taking a course in time management can provide a real payback in terms of avoiding time wasting activities.

No one wants to be a slave to the clock but the fact is there are only 24 hours in a day, 7 days in a week, and 52 weeks in a year. Time wasters come from the people around you as well as from within yourself. Curtailing time wasting activity will allow you to earn top income in minimum time so you can enjoy the fruits of your work. Setting aside some time to think about how you could save time, most definitely will not be a waste of time.

Make Buying From Your Website Easy

Busineecart.gifsses have by now spent money developing a website to feature their products. But actually getting a return on that investment through attracting leads and making sales doesn’t necessarily follow. Many are so poorly designed and constructed that they drive customers away instead of encouraging them to buy.

Tuning up your website by implementing just two basic principles will improve your chances of keeping visitors interested in looking around and progressing to a purchase.

1. Make The Navigation Customer-Centric

While part of the pleasure of shopping in a bricks ‘n mortar store may be the ability to leisurely browse your way over to the item you came in for, that’s generally not the approach of the website store visitor. These shoppers are very intolerant of delay in getting to the product they want by being forced to click through numerous pages, or worse, being so frustrated by poor navigation that they can’t even find what they are looking for at all. Customer-centric navigation tools guide shoppers directly to the products they want to buy before they lose interest.

If you sell a lot of different product lines try to classify them in some way that brings all the items in a particular line together. For instance, if you were selling pool supplies you might use categories like ‘pool cleaners’, ‘pool pumps’ ‘pool heating’, ‘pool filters’, and ‘pool toys’. If there aren’t a great number of these categories then display an individual navigation tab for each, otherwise a drop down menu from a ‘Products List’ tab is a better approach. Use the terms that the target audience is likely to use and recognise – common descriptions if you sell retail to the general public or technical terms if you deal with people in the trade.

A category listing should be only one of the ways of providing access to your products. Search functionality is necessary to complement the ability to browse around in categories. Searches can be set up in any number of ways. A particularly useful method is to provide an A-Z listing of all products so that a person looking for ‘Floating Pool Lights’ can locate them by looking under F and clicking straight through to a list of the types you hold. Even more helpful would be to also have them listed under P (‘Pool Lights – Floating’) and L (‘Lights – Floating Pool Type’) to cover the different ways people approach searching for items.

Some visitors will already have a particular brand in mind while others will be after a replacement part from a particular manufacturer so an A-Z listing of products by manufacturer is also helpful. The shopper in need of a replacement ‘Poolrite’ cartridge filter can go straight to the information on them. Even a parts number search is useful in some situations.

If you deal with price conscious shoppers then the ability to sort results by price can make it easier for them to make a choice. Finally, allow for the user who just isn’t sure and provide a general keyword search option.

2. Make It Easy To Buy

Having made it easy for your visitor to find what they want, now make it simple for them to buy it.

First thing is to provide multiple payment options. These days most website shoppers expect to be able to make their payment online – more than 90% of all online business is done using credit cards. True, not everyone is comfortable providing their card details over the Internet and not everyone likes to shop with a credit card, so to cater to these customers also provide more traditional pay routes like ordering by telephone, by fax and by mail.

Central to making a sale is the design of your checkout process. Studies reveal a distressingly high rate of cart abandonment by online shoppers. There are many contributing factors but in most instances it is simply that the customer can’t follow the process because of unclear navigation. Common features for a smooth checkout include giving the customer the option to continue shopping or proceed to checkout as each item is added to their cart, showing the details of each item they put in their cart including an image of the product and a link back to the page they found it on, and making it easy for visitors to change their mind by altering quantities or removing an item.

Your Internet store is not only open 24×7, it is visible worldwide – so consider what would make purchasing from it easy for a shopper located in another country. Provide your full street address to reassure the customer that they are dealing with a legitimate business. Add a handy currency converter and provide solid information on postage and handling costs.

Instead of just costing you money, a well designed customer-centric website will start doing what it’s supposed to do – making you money.

3. Are you getting the hits? Having a website is one thing, having it ranked highly with Google is something entirely different. It is usually well worth investing money in optimising the ranking of your website. Do not make the mistake of assuming your webdeveloper is doing this for you. It takes time and effort, and unless you reach an agreement and pay for it, you can safely assume it not being done.

Davies McLennon are happy to give independent advice on how you can address these issues.

Profitability Ratios

The Power Of Numbers: Profitability Ratios

In this final article on ratio analysis we look at profitability ratios. Profitability ratios are probably the most important indicators of your business’ financial success. They reveal both its actual performance and its growth potential. No doubt all business owners are familiar with some of these, such as gross and net profit margin, but others, such as Return On Equity, can give you an entirely new perspective on your business.

Net Profit Margin: shows you the bottom line on profitability – how much of each sales pound is ultimately available for you to draw out of the business or to receive as dividends.

Formula: net profit / turnover

Reference to industry norms will provide a baseline for gauging if your profit margin is adequate. Analysed over time, the year-to-year variations may be due to abnormal conditions or expenses. Variations may also indicate cost blowouts which need to be addressed.

A decline in the ratio over time could be indicative of a margin squeeze suggesting that productivity improvements need to be initiated. In some cases the costs of such improvements may lead to a further drop in the ratio or even losses before increased profitability is achieved.

Return On Assets: indicates how well your business is using its assets to produce more income by relating how much profit (before interest and income tax) the business earned to the total capital used to make that profit.

Formula: net income / total assets

The ratio can be used on an annual basis to compare your business’ performance to that of firms in a similar line of work. A low ratio in comparison with industry averages indicates an inefficient use of business assets. A high ROA, indicating high return on investment in assets, can be attributable to high profit margins, a rapid turnover of assets, or a combination of both.

Return On Equity Ratio (ROE): also known as Return On Investment (ROI) it shows you what you’ve earned on your investment in the business over the accounting period.

Formula: net income / owner’s equity

In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. All other things being equal, the higher the ROE the better the company and the more value you are getting from the effort you are putting into running it.

You can compare your business’ ROE to what you might have earned on the stock market or a bank savings account during the same period. Over time your business should be generating at least the same return that you could earn in these more passive, relatively risk free investments. Otherwise, why are you spending your time, trouble, and capital on it? Would you be better off selling up, putting the money into a savings instrument and avoiding the daily struggles of small business management? The alternative is to work at improving ROE through developing a clear strategic plan for growing the business.

The bottom line on your income statement is not the only important figure on it. It may not even be the most significant. Ratio analysis provides a whole extra dimension of valuable information obtainable from the data in your statements that can be used to evaluate your company’s performance, its current status, and its evolution over time by monitoring progress against predetermined internal goals (as in your strategic plan) or by checking on how you measure up against competitors and the industry overall.

Ratio analysis is a proven way of identifying problems in a business. The information they reveal can be used by owners to make the right decisions for improving operations and building a stronger and more successful business.

Davies McLennon are Stockport Accountants