balanced online:
Issue 1

The Cassons website

The course facilitator, Conrad Potts, normally works with major blue chip organisations such as Marks and Spencer, Granada and Glaxosmithkline and Cassons are the first team of chartered accountants to have benefited from this strategic management course.

Tax relief on goodwill

By contrast, no tax relief is available for the cost of “existing” goodwill until it is sold. Existing goodwill includes all internally generated goodwill of a business carried on by a company prior to 1 April 2002, so it cannot be turned into ‘new’ goodwill.

The new rules will have implications for the sale or purchase of businesses. If you are selling, it is probably better for you to sell the shares in your company. If you are buying, there may be more tax relief for buying the business’ assets (including goodwill) rather than the company.

Your company now needs to keep separate records of new and existing goodwill, not only so future tax planning can be properly carried out but also to ensure your company claims the right tax relief in its accounts. You should pay particular attention to your accounting policy for goodwill since this will determine the tax relief you get (and you can expect the Inland Revenue now to take an interest in how your company accounts for goodwill).

Contact us for further details about how these new rules will affect your company.

Many small businesses rely on significant proportions of their annual income coming from a small number of customers. If one of these customers cannot pay its debts, serious repercussions on the cash flow of the business can follow. Sometimes the consequence can be that a business collapses altogether.

Similarly, persistently late payers can seriously disrupt cash flow. Pursuing payments is time consuming, costly and absorbs valuable management resources.

Credit insurance can help put your mind at ease by protecting the business and safeguarding its future. It is the ultimate protection against the effects of bad debt and offers the following key elements:

Credit insurance packages can be tailored to any business and quotes usually take 48 hours to obtain.

Stop press!
We’ve produced a case study which illustrates how one business found credit insurance to be the solution to their problems. It is available, free of charge, by e-mailing balanced@cassons.co.uk.

Suppose that you need £1m to develop new products, open new branches, or acquire another business. Your business is worth £0.5m, and £1m is more than you can borrow. Your business plan tells you that in 5 years´ time your business could be worth £10m – if only you could now make the breakthrough you have identified.

A venture capitalist may want a return of £4m in 5 years´ time for a £1m investment now. If your business will be worth £10m, he will demand a 40% stake. You will have only 60% of the loaf – but it will be worth £6m. Would you rather keep 100% of the business?

It goes without saying that you need to be sure that your business plan will work. It needs to be SMART: specific, measurable, attainable, resourced, and time-framed. To be persuasive, it should be backed up by thorough analysis of the market: trends and developments, customers, and competition. You will have to show that you have the right management, systems and procedures.

Then you must structure the finance appropriately, and put the proposition to the venture capitalist most likely to be interested in your proposition.

It will not be easy. Raising finance is never straightforward. And you will have to part with stake in your business. Should you do it? If you know which side your bread is buttered, yes!

Taxing Christmas?
For those employers about to bestow festive cheer on their employees, a few words of caution not to forget about tax!

Most employers can get tax relief and can spend up to £150 per head, (increased from £75 last year) without tax on employees for an annual Christmas party or similar function. If you have more than one function, a summer ball as well perhaps, the £150 is the annual limit for all functions. More than that and the taxman wants his share. The party must be open to all members of staff or it will not qualify at all and becomes wholly taxable on employees.

There are other implications for Christmas bonuses, staff presents and gifts for customers. For a Solution Sheet on this topic please email balanced@cassons.co.uk.

Property development

Depending on your tax status, any ‘gain’ you make on selling the property could be charged to income tax (‘IT’) or to capital gains tax (‘CGT’), and this will affect how much tax you have to pay.

Suppose you buy a run-down property to develop and sell as soon as possible for a profit, intending to reinvest in a further property that you hope to be able to sell at a profit, and so on. In this case you would be carrying on a trade of property developing and you would be charged to IT on any profit.

Alternatively you might buy a property in need of renovation, with the aim of either living in it yourself or keeping it as a long-term investment and renting it out. In the latter case, any gain you made on the ultimate sale would be subject to CGT.

There are advantages to being charged to CGT rather than IT, although it is not always clear-cut which you would be charged. We can advise you based on your individual circumstances.

The simplest way to purchase a property is probably to buy it personally. Unless you intend the property to be your home, this may not be the most tax efficient way to buy the property and you may wish to consider setting up a property company. The best method will depend on your personal circumstances and intentions. We can explain how the differing tax treatments will affect you and help you make the best choice.

The VAT treatment of property is particularly complex. It is possible that you could reclaim all your VAT, or be charged VAT at a rate of either 5% or 17.5% depending on the details of the property and your intended development work. We can show you how to ensure that you are paying VAT at the lowest possible rate.

Injury, crashes, vandalism, disqualification – these are just some of the reasons why you could find yourself stranded, unable to get to work or to continue with your social life without incurring substantial costs.

We are now able to offer a simple, low cost insurance policy which provides practical and financial support when it is needed most. Cover starts from as little as 20p per day so why not speak to us to see how it could be of benefit to you?

Anyone in any type of pension scheme should review their pension planning well before that date. A single tax regime will apply to all types of pension (compared with 8 now).

The cornerstone of the proposals is a lifetime limit of £1.4m on saving in tax-approved pension schemes. Within that limit, 25% of the fund can be taken as a tax-free lump sum, the balance as taxable pension. If the limit is breached, the excess will suffer 33.3% tax. Together with tax on the pension benefits bought with the excess, the effective tax rate will be 60%.

There will be rules to protect the position of people whose pension funds already exceed the £1.4m limit. For those beyond, or close to, the limit, there are particular planning opportunities.

There will also be an annual limit of £200,000 on contributions (or on benefits accruing in final salary schemes) If the limit is breached, the excess will taxed as a benefit-in-kind, giving rise to an immediate income tax charge.

Contributions will no longer be limited to a percentage of earnings. The maximum will be 100% of earnings. For most people, the limit will be simply what they can afford.

For most of those with personal pensions, a limit of £200,000 (or 100% of earnings) will restore the flexibility to pay low contributions in some years and catch up in others.

The earliest age at which pension benefits may be taken will be raised from 50 to 55. (This will be phased in by 2010.) The proposals retain the requirement that an annuity must be bought by age 75.

A valuable change is that members of occupational schemes may take benefits whilst still working. This will particularly benefit entrepreneurs who choose to retire but still play a consultative role in their businesses. Previously, even unpaid involvement could produce swingeing tax penalties.

Tax planning for a second home
If your home increases in value then you don’t pay tax on any profit. But what if you have a holiday home? Or what if you and your partner each have your own home, and you get married? Tax may then be due on any profit made on the second home. You may be able to reduce the amount of this tax, but the tax planning will be much easier if you act within two years of residing in your second home. Do any of these scenarios sound familiar to you? Contact us to find out how we can help.