Below is a list of  questions answered by Jon Dawson of RSM Bentley Jennison.

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Question:

"My end of year is 31st March and it's looking like I'm going to be showing approximately £9000 profit. I would like to reduce that as much as possible and have been considering investing in some training for myself and in some IT equipment (a new server). 

The training is likely to be a self study course over several months. Would I be able to include all those costs this month? I'd heard that I could only put in a third of the IT costs initially - is that right?

Also, I was considering paying myself a bonus since I only draw £440 per month in salary and then take a dividend at the end of the year. I was thinking of taking an addition amount to bring my earnings up to the £7185 threshold. However, I wasn't sure if this would be tax/NI efficient."

Jon Dawson replies:

Study costs
Firstly, I would suggest that you ensure that you obtain an invoice from the trainers dated for March. This is actually quite a tricky area.

The technical Answer:
The  tax treatment will follow the accounting treatment  and the accounts should follow the accruals concept. This means that income and the costs incurred in generating that income should be matched as far a possible. The accruals concept would suggest that you would charge the training costs against your profits as the course unfolds.

So, if the  course were for 6 months of which March was to be the first month, you would only charge 1/6 in the current financial year and defer the remaining  5/6 of cost to be  charged against next year's profits. This would mean that you would only obtain 1/6 of your tax relief in the current financial year.

The pragmatic answer:
In many cases, you will make a non-refundable payment for a course of this sort which would mean that, even if you dropped out of the course, you would not receive a refund of any of your fees.In this circumstance, I think that there is a good commercial argument for stating that this is a "sunk cost" for the month of March and charging all the costs against profit in that month.

Having said this, I think that if  you encounter a pedantic tax inspector who took an interest in this and he insisted that the accruals concept should prevail, I think that it would be difficult to defeat that argument.
 
IT Equipment
Again, to qualify for tax relief in this financial year you should ensure that you have an invoice and that the equipment is in use before the year end. In accounting terms, the server will be treated as a capital asset and will be written off or depreciated over a period of years.

However, for tax purposes, you will be eligible (subject to the above) to claim capital allowances on the expenditure this year. Formerly, you could obtain 100% tax relief  for the cost of expenditure on I.T equipment .

If your company is a small company (turnover less than £5.6m) then you can claim 50% of the cost of the server in the year of purchase.

I enclose an illustration [MS Excel] to show what this means in practice. 

Profit extraction
For most small companies such as yours it is usually more tax efficient to take funds out of the company by dividend rather than salary (but see below on conditions for dividend payment).

Generally, we suggest that directors take a small salary of c £5000 per year as you are  doing. This salary reduces the company's profits which suffer corporation tax and does not attract any tax for the director because it is usually covered by his/her personal tax allowance. Moreover, this level of salary does not attract any National Insurance for employer or employee but does mean that the tax year in question will be treated as a qualifying year for state pension purposes (for what that may be worth).

As a director, unless you have a service contract in place, you are not affected by the minimum wages legislation. So, by increasing your salary you will potentially reduce the corporation tax liability of the company which will save you tax at 20%.

However, you will increase your own personal tax liability at 22% (or possibly 40%) and you will incur Employers NIC at 12.8% and employees National Insurance at 11%.

I would recommend therefore that you not take any further salary but allow the company to pay corporation tax and then take the money out as dividend.

Dividends, unlike salary, do not reduce the company's tax liability but they are generally a more take efficient means of taking profit from your company.

As noted above, the payment of a dividend does not affect the company's tax position but, under current accounting rules, you should not allow in the March COMPANY accounts for a dividend paid in April.

You can allow in your March accounts for additional remuneration payable to you and this would reduce the company's taxable profits providing  the following conditions are met:

1. There is a minute confirming the award of the bonus and the minute is before the end of the financial year.
   
   
2. The remuneration is paid and subject to PAYE etc within 9 months of the year end.

DIVIDENDS
Dividend are usually the best method of taking profit for an owner manager of a small company. But you should be aware of the following points:

1. Dividends can only be legally paid from the company's profits if the company's balance sheet does not contain any reserves of accumulated profit the company cannot lawfully pay a dividend.
   
   
2. If a shareholder receives and retains a dividend which she knows to be unlawful then the company or a liquidator can demand repayment of the dividend.
   
   
3. The company can pay differing levels of salary to different employees and directors. However, dividends are paid in accordance with shareholdings so if someone owns 50% of the shares, she is entitled to receive 50% of any dividend declared.
   
   
4. The dividend should be approved by and minuted by a directors' meeting and the dividend paid in a financial year should be ratified by the members of the company and the Annual General Meeting.

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Question:
"How easy is it to get a small firms loan?  Are certain banks better than others?"

Jon Dawson replies:
This was a  scheme launched some years ago by the DTI to help provide finance for young and growing business who could not otherwise secure finance.The bank lends money to the company and 80% of the loan is guaranteed by the DTI thus reducing the bank's risk.

It is not an easy option.The project must be viable.The borrower must have exhausted all available security before turning to the loan guarantee scheme.The loans are only available for business that have been in  existence for less than 5 years.The loan must be to finance growth and not to replace losses.

The company must be in a qualifying trade. Most normal trading activities are acceptable but there are some anomalies.

All major banks participate in the scheme but some bankers are more eager to use the possibilities of the scheme then others. Some bankers I have met were not aware of the scheme. So the message is to ensure that your banker is aware and is happy to recommend it.

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Question:
"At what stage should a company consider bringing in a non-executive director to help bring some external focus etc to the business?  What am I likely to pay for such a person and where do I find them?"

Jon Dawson replies:
In principle, non-executive directors are an excellent idea for any business. They can provide ideas, experience and a sounding board for the management team. If the business is serious about major growth and the possibility of a floatation, then they should start to consider the appointment of non-executive directors.

How do you find a non-exec? Your lawyer or accountant may know someone  or, alternatively, there is an organisation called Non-Executive Directors Association with its own web site.

How much should you pay? Barclays Bank paid former Chancellor Nigel Lawson £100,000 per annum for 1 day per week.

But  the rate of pay will depend on who you appoint and how much time they have to devote to your affairs. Realistically, you will want someone to attend regular board meetings and be in a position to make a useful contribution at those meetings. For someone of the right calibre, I would expect to pay £10-£15k per annum.

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Question:
"Are there any good online accounting systems available and what are the advantages/disadvantages over say Sage Line 50?"

Jon Dawson replies:
Sage Line 50 is a very good system with good functionality and is well supported by Sage. It is not however an online system, although I believe that Sage are looking to introduce an online package.

Our firm has developed an on line accounting package ( BJ On Line) which we launched a couple of years ago and is used by EMIN itself and an increasing number of other businesses.

It has the main functionality features of Sage and, like Sage, it is designed to be used by the non-accounting expert.

The main advantage of this system is the fact that it is available online. This means that information can be accessed from anywhere in the world and information can be shared by different people within an organisation. It also means that the client can share accounting data with us so that we can assist with any problems they have and help them to produce regular management accounts to control their business.

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Question:
"What are the rules for inheritance tax on shares held in small privately owned companies? I understand that shares held in AIM listed companies have exemptions - do shares held in non-listed companies have any similar relaxation?"

Jon Dawson replies:
In principle when an individual dies, all the assets in his or her estate are valued and, if the total estate exceeds the nil rate band for Inheritance Tax then IHT will be payable on the  estate. The nil rate band for IHT is currently set at £300k

There are, however, some exemptions.

1. Shares in unquoted trading companies qualify for a zero value for IHT purposes. The shares must be ordinary shares and the company must be a trading company and not a property or investment company. Where a company carries out trading and investing activities then the zero valuation may be compromised.
    
   AIM  shares are treated as unquoted for the purposes of this relief.
   
   
2. There is a similar relief available on some quoted shares. The relief reduces the value of the shares by 50% for IHT purposes. However, this relief is available only for people lucky enough to have a substantial stake in a quoted company.

So, for IHT purses, my pathetic holding of 250 BT shares would be valued at the price quoted in the FT with no relief available.

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Question:
"What are the benefits of EIS for investors in small private companies?  What does the company have to do to qualify? What are the constraints limiting investors qualifying for EIS?" 

Jon Dawson replies:
The Enterprise Investment Scheme was introduced some years ago and confers valuable reliefs to investors in unquoted companies.
 
TO QUALIFY FOR EIS RELIEF THE COMPANY MUST BE:

• A trading  company
• Unquoted (AIM is O.K)
• Independent

TO QUALIFY  FOR RELIEF THE INVESTOR MUST BE:
Not connected with the  company. This means that he or she cannot be an employee or director of the company and cannot own more than 30% of the shares in the  company at the time when the EIS investment is made. The maximum investment to  qualify for EIS relief is £400k per annum.
 
TO QUALIFY FOR EIS RELIEF THE SHARES MUST BE:
Ordinary shares.

THE RELIEFS CONFERRED BY EIS STATUS ARE:

1. Any gain arising on EIS shares is exempt for Capital gains tax if they have been held for 3 years or more.
   
   
2. The shares are exempt from Inheritance Tax.
   
   
3. The investor can deduct 20% of his investment form his tax liability in the year of investment (or the previous year). Fred has a tax liability of £60,000 for the tax year in which he has invested £100k in an EIS  company. The £100k investment reduces his tax bill by £20k to £40k.
   
   
4. If the investor has a capital gain for the tax year in which EIS investment is made then the gain can in effect be "rolled over" into the EIS shares.

So Maureen has a capital gain of £200,000 in the tax year in which she invests £200k in an EIS company. The gain is rolled over into the EIS schemes so that there is no tax to pay until the EIS shares are sold.

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Question:
"What are the most tax efficient methods for providing share options to senior management in small privately owned companies?"

Jon Dawson replies:
Share options are a very useful way of incentivising key management and trying to align their aspirations with those of the business owners. In granting an option the current  business owners are not giving away any value at present but they are giving away a share of the future growth in the company value.

If we think of the company as a pie; then the existing pie belongs to the current shareholders. But we want the pie to become a bigger pie, partly by the efforts of management, and we will reward  them by giving them a slice of the increase in the pie.

A share option is simply a piece of paper which conveys the right to buy a given number of shares at a point in the future at a price which is fixed now. So if someone is given an option to buy shares at £1 each when they are worth £2 each, that person is making a profit of £1 per share. Typically, options are exercised when the employee reties or if the company is sold. Typically, the option lapses if the employee leaves the company or certain other disqualifying events takes place.

The most advantageous form of  option is An EMI scheme which confers certain benefits on the  holder. The chief advantage is that the taper clock for the option holder starts to run from when he or she is grated the option and not when he or she exercises it. This means that, if the option has been held for 2 years or more, the option holder can probably look forward to an effective rate of tax of 10% on the gain.

The attached example [MS Excel] shows the main criteria to qualify the company and the employee for EMI options and how the taxation on the exercise of an option might work.

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Question:
"I have made a small personal investment in a small privately owned company.  What is taper relief and how will it impact on any capital gains I make when I come to realise my investment - e.g.: on company sale? How do I calculate this?   What happens if I make a loss on my investment? - can I use this to offset gains elsewhere?"

Jon Dawson replies:
Investment in a small unquoted TRADING company qualifies as a Business Asset for Capital Gains Tax purposes. This  brings some important benefits which we will examine below. The company must be a TRADING company, though, which means that it cannot  exist  wholly or mainly to invest in land, shares or other investments. This does not preclude a company which trades in land, such as a building company, but would preclude a company which acquired properties to produce a rental income.

The  taper relief means that once the shares have been owned  for 2  fully years they qualify for maximum taper relief for CGT Purposes. This means that 75% of the gain is disregarded for tax purposes and produces an effective rate of tax on the gain of 10% (or less).

This is an extremely generous relief which has made a huge difference to tax planning for smaller companies .

The attached illustration [MS Excel] shows how this might work in practice.

In terms of losses, if you unfortunately realise a loss on shares in an unquoted trading company then this may be relieved in two ways:

1. The capital loss can be offset against any other capital gains you may have in the same year as the loss or in the future.
   
   
2. The problem with this is that many tax payers rarely have a taxable gain to utilise a loss in this way. So the loss may be offset against  an individuals income. This can apply even where the share is not sold but becomes of "negligible value". This is shown in the example [MS Excel].

THE LOSS RELIEF IS ONLY AVAILABLE ON SHARES WHICH THE INDIVIDUAL BUYS  BY SUBSCRIPTION FROM THE COMPANY ITSELF AND NOT BY PURCHASE FROM SOMEONE ELSE.

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Question:
“If I am claiming expenses from a client, I’m sending them the receipts and keeping a copy – is this OK or should I send them a copy and keep the full receipts?”

Jon Dawson replies:
I don't think that it is likely to get you into trouble but best practice would be to keep the original documents for your records and send a copy to your customer.

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Question:
"I have a limited company but seem to use my own money (and credit cards as the business one is not through yet & also has a low limit). What’s the best thing to do – can I claim this back? Or is it best to count this as investment into the company that I can withdraw later?

It’s getting rather complicated on my spreadsheet of what I’ve paid to where – some is my money and some is the company’s money – aargh – any tips and hints gratefully received!

Also I have a husband who is doing a lot of copy-editing. He owns 20% of my company but I’m the only fee earner. What’s the best way to pay him – he has a PhD and is very well qualified, so I suspect that we wouldn’t have problems of overpaying him?"

Jon Dawson replies:
Your situation is a very common one. In an ideal world, I would recommend that it is best to keep personal funds and company funds separate. But, of course, the real life world of small business is not like that.

1. If you pay expenses on behalf of the business  either in "cash" or on your credit card then you can recover this at any time since the company is simply returning your money to you.
   
   
2. I am not sure how you keep your records but,  either on Excel or in Sage, I would recommend that you keep a record of your loan account.
   
   An example of the bookkeeping is attached [MS Excel].
   
   I would suggest that you set out  your spreadsheets as the example attached.
   
   
3. If the company owes you significant sums  for a significant time, there is no reason why it should not pay you interest. This would be taxable income (but not subject to NIC) for you and a tax allowable expense for the company.
   
   
4. You have no problems whilst the company owes money to you. You will create tax problems for yourself and the company though if you get into a position where you owe money to the company.
   
   
5. Your husband
   If your husband is doing work for the company then there is no reason why you should not pay him for this work. The rate you pay him should be broadly commercial i.e.: what you would pay someone else to do the same work. This payment might be as a salary subject to PAYE or you might pay your husband in a self employed capacity.
   
   In the latter case, your husband would have to declare the income to HMIT and you would have to be careful to ensure that he satisfies the criteria which the Revenue use to decide whether someone is employed or self employed. There is a booklet "Employed or Self Employed" which is available from Revenue web site.
   
   There is no reason why the company cannot pay dividends to you and your husband would then receive 20% of any dividend paid. Dividends are usually a more tax effective means of paying the directors than salary but a company can only legally declare a dividend when it has profits available.
   
   The whole issue of dividend payments in companies owned by wife and husband is the subject  of  a tax case knows as "Arctic Systems". The final verdict on this case is awaited from the House of Lords.
   
   My view is that paying a legally declared dividend to a shareholder such as your husband is legitimate tax planning.
   The Inland revenue do not agree and we will have to see what Their Lordships say.
   

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Question:
"Would you be able to advise on the best way to present my accounts in Excel? I started in business last August and am very organised from an administration perspective.  
 
I save all my receipts and invoices (VAT and otherwise) relevant to business expenditure. I am not eligible to claim VAT - I am a sole trader and under the claim threshold.
 
I would like to establish best practice for my accounts.  What could you recommend in terms of layout and information I would need to record? Thank you in advance ...... "

Jon Dawson replies:
You  state that you are not VAT registered. You can register for VAT even if your turnover is less than £60k. In some circumstances, it can be beneficial to register even if you do not need to . This might apply if your customers were other VAT registered business .You would then be able to reclaim VAT on your purchases (which might or might not be significant) but you would have the administrative task of completing a VAT return each quarter.

Turning now to the bookkeeping issue:

The most important advice I give to people is to try to do their bookkeeping on a regular basis. The longer you leave such a task the more daunting it becomes and the less inclined you are to tackle it .

Looking after your accounting records is very important for three reasons:

1. To enable you to see how the business is performing
2. In case of any questions from the Inland Revenue
3. To help you to control your accountancy costs.

Maintaining your records on Excel is fine but, if and when the business becomes larger, you may feel the need to use a package such as Sage or Quick Bucks.

Broadly speaking I would suggest:

1. A spreadsheet showing income and analysing the total income between the types This would cross reference to your sales invoices (if you are in a trade where you issue invoices). 
   
   
2. A spreadsheet for expenditure. This would record the total expenditure and break it down between the main types of expenditure. This should ideally be cross referenced to your purchase invoice and to the cheque etc. number by which payment was made.

I would recommend that you check your spreadsheets off against the bank statements each month or so. This should identify any errors you might have made ( e.g: entered a payment of £100 as £10) and should enable you to identify any items such as bank charges and bank interest which you can then enter into your spreadsheet.

I would recommend that you keep your invoices in 2 files for both sales and purchases.When you raise a sales invoice or receive a purchase invoice, you would put it into the unpaid file. When you pay the invoice or receive payment from your customer, you would transfer it to the paid invoice and give it a sequential number.

Hope that this helps.

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Question:
“Please explain how private equity firms arrange their affairs to optimise personal income & company corporation tax status. How could these schemes beneficially be applied to universities and their spin out companies?”

Jon Dawson replies:
Private equity firms have been much in the news recently, not least because their owners famously earn huge pay packets and appear to pay very little tax.

One of the reasons for this is that the majority of the owners are not UK domiciled. The question of domicile is a complex one but, for someone who is not UK domiciled, they are not liable to tax on income arising in the UK.

In essence, private equity firms operate like this:

• Private investors subscribe into a fund.
• The fund then borrows large sums of money, so that the owners can claim tax relief on the interest on their borrowings.
• They use the money to buy shares. Usually, these will be shares in a private company or in a public company which is then taken "primate" i.e.: it ceases to be quoted .
• During the period of ownership any income arising is offset by interest on the borrowings.
• On exit, the owners will typically be paying capital gains tax at an effective rate of tax of 10% due to the availability of business asset tape relief.

There is no reason in principle why a private equity fund could not be set up to invest in university spin off business.

The practical difficulties are:

1. The established private equity houses make money by minimising risk. SO typically the companies they buy are established companies which are experiencing a dip in fortunes rather than more risky start up ventures.
   
   
2. If you are borrowing to buy an established trading company, there are lots of valuable assets to provide security to lenders of finance. Typically, this would not be  available in a start up situation.

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Question:
“I would like an up-to-date statement on university spin out companies and R&D tax credits (current qualifications for, benefits accruing, proposed 2008 changes etc.).  
A simple authoritative summary - with cross references to key documents containing more detail would be greatly appreciated (NB: one of the problems with the web is that you do not know if you are downloading the most up-to-date information).”

Jon Dawson replies:
A good question & attached is my response in full [MS Word].

All I will say here is this: the research and development tax credit system was introduced as one of Gordon Brown's Big Ideas to encourage invention and innovation .

My experience is that the Inland revenue have  interpreted "innovation" quite narrowly and it is often difficult to satisfy their criteria.

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Question:
“Can you provide a simple explanation of taxation taper relief and how it works?”

Jon Dawson replies:
A sentence containing the words "simple" AND "business taper relief" is probably a contradiction in terms, rather like "Military Intelligence"

But anyway, the basic concept was to provide a more generous tax framework for people who were investing in relatively risky ventures such as private business.
 
To obtain full business asset taper relief the tax payer must have owned the asset for 2 complete years. Once he or she has achieved this period then 75% of any gain arising is exempted from capital gains tax . This means that for a 40% tax payer, a gain might only be taxed at a rate of 10% . An example is enclosed [MS Excel].

Qualifying assets for business asset tape relief are as follows:

1. Company shares. Must be shares in a an unquoted company (AIM listed shares are eligible) and the company must be a trading company i.e.: not an investment  company or a property company.
   
   
2. Property which is owned by an individual and let to a trading business. So the property must be commercial and not residential
   
   
3. Property let as a qualifying holiday let.

This relief is extremely valuable and for any planned disposal it is very important to ensure that nothing takes place to prejudice the availability of this relief .

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Question:
“What exactly is EIS? How can a company qualify and who can benefit? How can this beneficially apply to university spin out companies?”

Jon Dawson replies:
EIS is Enterprise Investment Scheme. It was introduced some time ago to encourage private investment in relatively high risk ventures.
A university spin out company would be perfect. The EIS scheme provides tax sweeteners to improve the attractiveness of investing in companies such as a spin out company.

The advantages of applying to an EIS are as follows:

1. The investor receives a tax  credit of 20% on his investment. So, if MR X invests £100,000 in a qualifying company, he will have £20k deducted from his tax liability for that year.
   
   
2. EIS shares are exempt from any capital gains tax arising on a  disposal providing that they have been held for 3 years. So, if MR X buys shares for £100,000 and sells them 4 years later for £200,000, he will have no tax to pay on the gain.
   
   
3. If the company fails and the shares become of no value the investor can utilise the loss on his investment against his taxable income and not just against other capital gains transactions.

To qualify for relief the company must be:

• Unquoted when the shares are issued
• Must carry on a qualifying trade i.e.: not an investment or property company

The investor must buy the shares direct from the company and must not serve as a director in the company.