Entrepreneur Relief

For disposals after 5th April 2008 a flat rate of 18% comes into effect. Unfortunately this did mean a big tax increase for small business owners looking forward to selling their businesses, perhaps to fund their retirement, or maybe planning to invest in a different business.

Entrepreneur relief has been introduced to help resolve this problem. This taxes the first £1 million gain at 10%.

Relief is available on

  • the disposal of the whole or part of a business
  • the disposal of assets used for the purposes of a business at the time when the business ceases to be carried on
  • disposals of shares or securities in a company

An individual may make claims for relief on more than one occasion, with a lifetime limit of £1million in gains qualifying for relief. The annual exemption which for 2008/09 is £9,600 will remain, however indexation relief and taper relief disappear from April 2008.

The business must be a trade, profession or vocation and the company must be a trading company or the holding company of a trading group. The individual must have been involved (ie been the owner or a partner) in the business for a year prior to disposal. For shares in companies, the individual must have been an officer or employee of the company and owned 5% of the company’s ordinary share capital with 5% of the voting rights. There is no need to have been a full time officer.

For a disposal of assets these must have been in use for the purposes of the business at cessation of trading, relief remains available providing the assets are disposed of within three years of the date of cessation.

Property investments

Commercial property qualified for taper relief and hence the 10% tax rate. It is important for landlords to realise that their investments will not be classed as a ‘business’ and they will not receive the new entrepreneur relief on the sale of the property. This is a disadvantage over the old taper relief rules.

Property used for ‘furnished holiday lettings’ will be treated as a business and will qualify for the 10% rate. Property used in a business, or let to the owners trading company and sold at the same time as the business, will qualify. All other property will be taxed at the ‘universal’ 18% rate.

Davies McLennon are Stockport Accountants

Research & Development Tax Credits

lightbulbR&D tax credits are a company tax relief for investment into research and development projects. The R&D credit goes up to 175% from April 2008 (prior to this the relief was 150%)

What does this mean? well simply if you spend £100,000 on qualifying R&D you get tax relief on £175,000.

For companies not making profits, it is possible to use the relief against the PAYE tax to create a cash refund.

What R&D activity qualifies for the incentive?

The definition of qualifying R&D activity is wide-ranging and sometimes challenging to apply in practice. HM Revenue & Customs (HMRC) and the Department of Trade and Industry (DTI) have issued guidelines to help companies identify their eligible activity.

The activity has to:

  • constitute an advance in the field; and
  • resolve scientific or technological uncertainty.

And it is worth noting the following points:

  • A project does not have to result in a success to qualify for the incentive.
  • SSAP13 disclosure is not an essential prerequisite for a claim.
  • R&D is not just done in laboratories: for example,engineering can qualify, as can back-office software infrastructure projects or improvements to manufacturing processes.
  • R&D activity need not be undertaken in the UK to qualify.

What R&D costs are eligible for the incentive?

There are four main categories:

  • Staffing costs – salary, national insurance costs, pension contributions (and benefits in kind, for a limited period).
  • Consumable and transformable materials – materials consumed/transformed in the R&D process, software used directly in the R&D and limited overhead payments for power, fuel and water.
  • Externally provided workers – agency staff and workers provided by group employment companies.
  • Payments to qualifying bodies/contributions to independent R&D efforts.

Capital Allowances

Under the current system, small enterprises (and if you receive our newsletter, thats what yours is) get 50% of the cost of a new item of equipment or a commercial vehicle allowed against profit in the year it was purchased and then 25% of whats left in year 2 and so on.

A new system begins in April 2008, this gives 100% of the cost in year 1, subject to an annual limit of £50,000. (Note the 100% does not apply to cars, although 100% relief can be claimed on certain fuel efficient cars).

This is good news for small business owners.

Balances on capital allowances pools of up to £1,000 can be written off from 1 April 2008, more good news.

Industrial Buildings Allowances are claimed on buildings used for manufacturing. The current allowance of 4% on the qualifying cost of the buildingreduces to 3% in April 2008 then 2% in April 2009 1% in April 2010 and disappears completely from April 2011.

VAT issues for 2008/09

The VAT registration threshold increased from £64,000 to £67,000 from 1 April 2008.

The VAT deregistration threshold is increased from £62,000 to £65,000 from 1 April 2008.

The legislation relating to the option to tax land and/or buildings will be simplified and minor changes will be introduced to enable taxpayers to revoke an ‘option to tax’ after 20 years.

From 1 July 2008 the voluntary disclosure threshold is to increase from £2,000 to the greater of: £10,000 or 1% of turnover (subject to a maximum of £50,000)

Income Shifting – changes postponed

All the professional bodies and the small business organisations (such as the FSB and the Professional Contractors Group) have been lobbying hard for the changes due to be introduced on the 6th April 2008 to be postponed, thankfully Alistair Darling has seen the light.

The proposed changes were unworkable.

What’s the fuss about? Well HM Revenue & Customs or perhaps more accurately the Government, feel that where husband and wife are in business together as partners or as shareholders in a limited company, they should not be ‘allowed’ to share the income from the business. The ‘proposal’ is that income needs to be allocated strictly in accordance with the amount of work done. So if the wife does 90% of the work, then 90% of the income should be allocated to her. This is something that is certain to be extremely bureaucratic and difficult to enforce – many of the professional bodies have called the proposals “ill thought out” and “unworkable”.

How do you determine the contribution made by each partner? Looking at time alone is surely not good enough. It is possible to contribute key ideas and strategy into a business with very little time, and tyet contribute greatly to success! Isn’t the whole idea of marriage that it is a complete partnership, each partner contributing to home or work as they decide between themselves. The Governments proposals are in fact a massive disincentive to getting married.

So further review and consultations are to take place, with some possible legislation in April 2009.

Protect Your Business From Invoice Scams

Paying on phony invoices is an occupational risk for small businesses. They are regularly the target of scammers hoping to take advantage of sloppy bookkeeping, inattention on the part of employees and poor communications between the people in the firm ordering goods, those receiving them and those approving payment. All too often they are paid unwittingly along with a number of other routine bills.

Scammers have fake invoice production for such things as stationery or cleaning services, down to a fine art. Their invoice will include names (perhaps established by a prior phone call to the business for some innocuous seeming information), figures, and other details that add up to an authentic looking invoice. And they have a range of scams other than fake invoices – solicitations for the purchase of goods or services carefully designed to look like invoices for items already received; payment for listing in a directory of some sort you never agreed to; asserting that there is a government requirement for the services offered when no such requirement exists, and phony advertising to renew an ad allegedly placed ‘last year’ … to cite just a few. Scammers are business smart in other ways and will often send bogus invoices in the summer when many permanent employees are away and temporary personnel are covering operations.

The best protection against invoice scammers is knowledge and vigilance.  Your company’s accounting department, or the individuals responsible for paying accounts, should be made aware of the different types of scams and how they work and you need to have a set of internal controls in place that will pick up fake invoices before payment is made. These include:

  • Not placing orders over the telephone unless there is no doubt that the firm you are dealing with is reputable

  • Always ask for a phone order to be followed up with the offer in writing

  • Check your records to confirm claims of previous business dealings

  • Channel all invoices through one department

  • Read your mail carefully. Warn employees to be on the alert for any unusual invoices.

  • Use pre-numbered purchase orders for every order placed

  • Check all invoices against purchase orders and against goods or services received

  • Verify all invoices with the person who gave written or verbal authorisation for purchase

  • Limit the number of people who can pay invoices to just one or two

  • Never give out or clarify any information about your business unless you know what the information will be used for

In many cases the amount of the invoice is just small enough to slip by the cheque writer’s attention. Invoice scammers build up considerable experience in calculating the most effective amount to place on the invoice, depending on variables such as the size of the firm and the control it seems to have over its management system. Thousands of mass-mailed invoices, each for a small sum, may prove more lucrative for the con artist than several large invoices. It is believed that invoice scammers succeed in collecting a significant percentage of all the bills they mail. While it’s impossible to put an exact figure on it, business bureaus speculate that scam invoices cost the SME sector millions each year.

Brainstorm your business to innovate

Marketing wisdom has it that to develop products with good sales potential you need to first appreciate your customer’s needs and then build a product that answers those needs. Customer needs analysis is the process of unearthing information about just what it is customers would really value in a product. The activities most commonly associated with this process are running customer surveys or focus groups and undertaking market research.

One group that sometimes gets left out of the loop is the company’s employees yet these people, particularly those facing customers, aggregate a huge amount of knowledge about what customers think of a product and about how customers actually use them. A brainstorming session with employees can be a very profitable source of ideas for product innovations that will answer to real needs customers have discussed with them.

Trouble is, traditional brainstorming sessions based on throwing up any and all suggestions for consideration often create more hot air than good ideas. In the real world of business not all ideas are good ideas. One reason is that many blue sky ideas are simply not feasible given the practical constraints imposed by the business’ capabilities. A brainstorming session that ends up with several hundred ideas on the butchers paper may be considered successful in terms of quantity but there’s no guarantee of any quality. Searching through this grab bag of ideas, how can you determine which of them really do address an unmet customer need?

A lot more useful ideas are likely to come up if the thinking is focussed in some way so as to keep it within the zone of what customers need. One way to create this sort of focus is to work to a set of preplanned questions that work off your employee’s knowledge of actual customer needs (or behaviour) rather than to ask for off-the-top-of-the-head thoughts. A set of good questions will restrain thinking to sensible product modifications, or even new versions of a product, that could represent valuable innovations.

There’s no such thing as THE list of right questions to ask and you’ll want to develop your own related to your individual business, its capabilities and its area of operations. However, some generic examples will give you an idea of how this approach works and provide a start for your next brainstorming session.

  • What modifications have customers asked us about? Customers will often discuss the features of a product that would be just right for them. If it would be just right for a group of customers, then it could be worth developing.

  • Are some customers using our product in a way or for a purpose we never expected or intended them to? For example, iPods are being used as flight data recorders in light aircraft.

  • Do any customers invest significantly in modifying your product to get it to do just what they want it to? The most zealous windsurfers who get new boards first and modify them, the most advanced builders experimenting with new materials like stressed-skin panels often suggest or even create useful innovations that manufacturers subsequently adopt.

  • What minor modifications do customers regularly make to the product? Do left-handers have to modify it to suit their handedness?

  • Is there one modification that would open this product up to a new customer segment such as providing instructions in another language or in braille or developing a ‘green’ version?

  • Do customers report a consistent difficulty with using a product? Employees are often well situated to hear about, or even anticipate, customer problems with a product.

Using known unmet needs to guide brainstorming removes the unrestrained speculation that leads to impractical suggestions to meet unproven customer needs. Rather, it allows for creative suggestions on how to devise valued solutions that meet real needs. This approach can be a powerful way of coming up with new ideas ranging from minor product modifications to an entirely new product.

Dealing with unhappy customers

unhappy customerLet’s face it – the customer is not always right. What is always right is to treat them as if they were, because a customer will likely tell numerous people about their bad treatment at your business whereas they rarely pass on the good treatment experiences they have. After all, as customers they expect a good experience. No matter how much customer care training you conduct, some customers will end up dissatisfied with something. They may become so irate that they decide to confront you face-to-face to take the opportunity of venting their frustrations – at times rather abusively.

It’s hard to take a dressing down patiently when the customer is obviously in the wrong. But by and large that is the approach you should train yourself, and your team, to take with complaining customers. Here are six practical tips to keep in mind when talking through a complaint with a customer ­­- if you want to keep them as one.

1: Establish Exactly What The Customer Is Upset About

Listen carefully – actively – to the customer’s complaint before trying to resolve it. Never let the customer go without getting enough information to make a sound decision about how to resolve the problem – calling them for more details will annoy them even further. Allow the customer to explain the situation, then, if necessary go back to ask further questions, clarify issues, or politely disagree. This phase also allows them to let off steam and nine times out of 10, just doing that has a calming effect.

2: Accept Ownership Of The Problem

Avoid getting involved in a point–by–point debate over the rights and wrongs of the situation. Nothing is more guaranteed to enrage a customer who already feels badly done by. Use ‘I’ language – “I will do whatever I can to help you.”,You are an important customer and I would like the opportunity to resolve this situation and make you happy.” ‘I’ language shows the customer that you are taking responsibility to resolve the situation.

3: Take Complaints Professionally And Not Personally

Do not take a customer’s anger personally. Remain objective and remember that they are upset with the situation, not necessarily with you. A professional demonstrates that they value complaints as a way of assessing where things have gone wrong in customer service and as an opportunity to win back customer loyalty.

4: Maintain Open Body Language And A Helpful Attitude

Your body language will express more than your words will as to what your real feelings are. It needs to be just as reassuring to customers as what you are telling them – that you are concerned, you want to hear their grievance, and that when you have all the information, you’ll try to rectify the situation.

5: Apologise Even If The Matter Is Not Your Fault

Marketing research done by major companies tells us why it is important to take the attitude that ‘the customer is always right’. A customer who has a bad experience generally tells 10 other people about it. Simply saying, “I’m sorry. What can I do to make you happy?” can stop the complainer in their tracks and prevent the spread of bad PR.

6: Be Able To Say “No” To The Customer (In A Tactful Way)

On occasion a complaint may be clearly spurious and it will not be possible to give the customer the sort of satisfaction they are seeking. If you cannot give the customer what they want, explain exactly why. Saying “No” requires tact and diplomacy.

Ultimately, customers will assess your response to their complaint, and judge you accordingly, using three criteria: how they were treated (the politeness, empathy, effort, and honesty of the personnel who dealt with them); the process they were put through (how responsive your people were to their grievance, as well as how fast and simple the overall process was – the longer customers have to wait to get answers, the more dissatisfied they are); and the complaint outcome (has it left them feeling satisfied with the way you handled things). Curiously, a well handled complaint can be a powerful driver of customer loyalty.

Davies McLennon are Stockport Accountants

What holds back productivity in your business? you could be in for a surprise!

graph business healthBusiness owners know that workers who aren’t using their time and resources effectively are costing the company money. Declining productivity means falling profits and sliding competitive position. That makes the findings from this year’s Proudfoot Productivity Report a cause of concern to employers.

The 2007 report covered businesses in the U.S., Australia and Europe. It reports a disturbing average of 18% of working time wasted among the surveyed businesses. The U.S. came in as most efficient with ‘only’ 14.1% of working hours wasted while Australia topped the charts at 19.4% wasted.

Analysis of contributory causes revealed that more than three-quarters of inefficient working in 2006 could be attributed to just three causes:

  • Inadequate workforce supervision (31% of all wasted time)

  • Poor management planning and control of work (30%)

  • Poor communication (18%)

The remainder of wasted time recorded was the result of IT problems, low morale and a skills absence or mismatch.

When managers were asked to select from a range of actions they considered could increase workplace productivity the top 2 they chose were investment in workforce skills and investment in management skills. But this may be putting the cart before the horse.

The interesting thing is that all three major contributors to time waste are directly referable to internal management practices.  Wasted time may be up, but as the report recognises, the root cause for that is inadequate management supervision, disjointed planning of production processes and inadequate communication of the information employees need to work at their most productive level.

Managers can’t dodge their share of responsibility for the amount of time wasted each year by under-producing employees. When it comes to improving productivity the first area to attend to should be reforming poor management practices and getting managers up to speed in some basic skills.

Workforce Supervision

How to supervise a group of people effectively is a basic HR skill for anybody in a position of leadership or management. Managers should have at least some training in critical HR areas such as employment law, selecting people with the right workforce skills, setting compensation packages, training and developing employees and carrying out performance reviews. These HR skills underpin your ability to get the best out of your employees and improve organisational performance.

Management Planning

The ability to work to a business plan that sets out the broad goals to be achieved in a given period of time, organise all the inputs required to achieve the goals, coordinate the activities and monitor progress towards them are all essential managerial skills necessary to achieve business growth, yet the ability of many managers in these areas is problematic.

Inefficient practices are rarely improved by simply automating them. Introducing technology before optimising the process it is intended to improve merely results in automated inefficiency. But how many managers take the time to analyse just how efficiently their key processes, such as supply chain operations, are working? How many take the effort to develop procedure manuals to ensure employees do things in a consistent and approved manner?


Managers often have issues with formulating and delivering clear verbal instruction. This can be addressed to a large degree by having the right support resources in place: a clear organisational structure; well defined job descriptions to avoid confusion about responsibilities; policies and procedures manuals to provide a definitive answer on the approved method of doing things; and investing time in inducting and training new employees. Implementing measures like these will reap huge long term productivity benefits.

Employees do usually try to achieve what they think the job requires of them. To get them achieving the right things you need to be very clear in the instruction you provide, whether that be at the level of explaining how to perform a process or what goals the business is trying to achieve and their role in contributing to their attainment.

Poor productivity can be the result of just plain time wasting by employees but more likely it’s the result of poor planning, inefficient practices and an inability to clearly communicate what needs doing. Whether through coaching, talking to a business advisor or putting themselves through one of the many SME management short courses on offer, a manager has a responsibility to make themselves the best they can be before laying problems of poor productivity at the feet of their employees.

VAT and property

If you own a business property you are probably aware if the property is subject to an election to tax for VAT purposes. If you charge VAT on the rents invoiced to your tenants, you will have an election to tax in place.In certain circumstances this can be a commercial inconvenience!

Rental issues
For example certain businesses, banks, unregistered small businesses, will be keen to find premises that have no election to tax in place, otherwise they will be charged 17.5% VAT which they cannot recover.

Purchase and sale
If there is an existing election to tax when a property is sold 17.5% VAT is added to the sale price, a significant problem if you are a purchaser who is not registered for VAT.

2009 and the 20 year rule
The election to tax, once made, cannot be revoked for 20 years. Interestingly the first elections to tax were granted in 1989, 20 years ago next year!

If there would appear to be an advantage for the original election on your property to be revoked, you may like to find out when the election was granted. If it was during 1989, you should be able to file a formal revocation on the 20 year anniversary date.

Flat Rate Scheme

Beware of selling a property if you are in the flat rate VAT scheme. Ask our advise before you sell.