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But think twice. Instead of clearing or reducing your mortgage, consider your future. In particular, think about your pension provision.

Inadequate pension

You may be one of the millions of UK citizens who have an inadequate private pension. If so, consider putting your newly-acquired lump sum into a pension scheme.

The current average interest rate for a long-term mortgage is 4%. Your pension fund makes its money from the stock market. Average annual stock market returns for the past 90 years are around 7% ( most investors don’t even achieve half this return, see my earlier blogs). Paying into a pension could therefore make financial sense.

Check the facts

You need to treat stock market returns with caution, of course. Pension investment companies have varying success rates. Plus they charge a percentage fee of 1-2% for their services. You should always check these facts. Nonetheless, over a period of 20 years or so, you can expect your return from a pension fund to exceed your mortgage interest rate.

Consider your options

You should consider your options carefully, of course. By paying off some of your mortgage, you increase the equity in your property. This may help you obtain a lower interest rate if you remortgage and mortgage rates may increase from 5%.

Tax breaks

But the main reason for being so bullish about paying into your pension is the considerable tax advantages this brings, especially for higher rate tax payers. The differential in interest rates and investment returns are not the main issue. Investment into a pension provides 100% tax relief. As a higher rate tax payer £80 paid into a pension provides a credit to your pension fund of £100 and also £20 deducted from your tax bill. Hence the cost to you is £60 for a guaranteed £100 return. 100/60 = 66% return on your investment. For a basic rate tax payer the guaranteed return is 25% even without any investment return.

So, the point is this, if you are lucky enough to gain a lump sum, don't rush into a decision about using it. Work out what you want and when. For many people, paying into a pension rather than paying off a mortgage can bring better long-term returns and security.

Andy Parker
Chartered Accountant and Chartered Financial Planner

January can be a gloomy month – not least for those facing the deadline for completing their online tax return – but January 2012 has brought at least a small ray of sunshine for small businesses which feel unfairly treated by Her Majesty’s Revenue and Customs.

In a precedent-setting judgement, the Tax Tribunal has ruled the Government is acting illegally by issuing late-payment penalty fines against thousands of small businesses which fail to submit their tax returns on time. Unless this ruling is defeated on appeal, it will mean up to 100,000 firms could claim refunds for the tens of millions of pounds taken by HMRC in fines.

Late reminders 

The issue is not the fines in themselves, but the failure of HMRC to remind companies their return is overdue. The Tribunal ruled it was a deliberate policy not to inform companies promptly if they had failed to file a return. Instead of sending out a letter immediately when a business misses the May deadline, HMRC waits until September. This means they can also claim four months of late payment fees in addition to the £100 late completion fine. 

According to the presiding judge this amounted to a “cash-generating scheme” and fell “very far below the standard of fair dealing expected of an organ of the state.” 

HMRC’s defence in court was it had no obligation to remind companies, and the penalties for not making returns on time were well publicised. However, the judge dismissed this, noting the penalties were intended to encourage compliance, not extract money by sending out late reminders. 

Double Standards  The stance taken by HMRC seems all the more appalling when you consider the recent scandal of cosy arrangements with big businesses. Huge companies such as Vodafone and Goldman Sachs have avoided paying billions of pounds in tax. Small businesses, however, without City lawyers and big bucks leverage have been consistently penalised. 

So, if you fell foul of the late payment accumulator you should watch this space for developments. 

Andy Parker
Chartered Accountant and Chartered Financial Planner

We’ve all done it. That letter needs writing; those invoices need filing; that client needs calling. But then, that other thing needs doing too. You know, that really important thing. The one that can’t wait - your annual tax return.

It’s human nature. We put off anything that doesn’t need doing by yesterday. But the problem with filing your online tax return even a few minutes after the deadline, is you’ll be rewarded with an unwelcome fine of £100. This penalty is being applied much more rigorously in 2012 – there is no day’s grace and even if you owe no tax, the fine will still be payable. You will be fined £10 every day after the deadline until your return is submitted. This deadline is fast approaching so if you submit your tax returns online you must make sure this is done by midnight on 31st January.

The dangers of last minute filing online

Unless you enjoy living life on the edge, it’s not a good idea to wait until the last minute to complete your tax return online. Even if you think you have enough time, you may face unexpected problems which prevent you meeting the deadline.

• The internet is not reliable. We all know this but sometimes we choose to forget. If your connection goes down on the 31st January or you suffer computer problems you will miss the deadline. Whilst you can appeal against your fine and cite such problems as a ‘reasonable excuse’, there is no guarantee this will be accepted. You will have to provide specific evidence and that will take time and effort. 
  
• HMRC online system overload. It won’t just be you leaving it until the last minute – in fact, there are currently 3 million UK taxpayers who have not submitted their return. The HMRC site is put under great pressure up to the deadline with tens of thousands of people trying to submit returns. The system can find it difficult to cope and you may have problems logging in or the process could be slow. Again, you can appeal with this as a reasonable excuse, but do you really want to spend time dealing with that? 
  
• Get organised before you start. Facts, figures, dates, evidence – there is a lot of information which needs to be to hand when you complete your tax return. If you can’t find a bank statement or a wages slip, you won’t have time to organise a duplicate if you leave it until the last minute and you could face that £100 fine. 
  
• Give yourself enough time. Rushed returns are prone to errors and HMRC is intolerant of these. Enter even one digit incorrectly and you could alter the final figure for tax payable. This could leave you open to hefty penalties.

So, it’s not worth the risk. A deadline is a limit, not a target. Make the time to complete your online return before the deadline and avoid these problems. Gather all your documentation, double check your entries and send it on its way with time to spare. Then you can put your feet up and relax, knowing your tax return is out of the way for another year.

Andy Parker 

Chartered Accountant and Chartered Financial Planner

With Christmas out of the way and as we rapidly approach the end of the tax year it’s a good time for every small business owner to take a look at their financial management and accounting practices. Small business owners often make seemingly simple accounting mistakes which at their most extreme could mean the difference between a good and bad fiscal year.

Here are three common financial mistakes we encounter and how to avoid them.

Not discussing costs and payment terms in advance.
Counting the chickens before they are hatched is a common issue and is especially problematic at the end of a financial year when you’re considering what profits have been made and planning ahead for the new year.

Sales forecasts and orders are great, but don’t count this as revenue until the service has been delivered. Likewise don’t assume that because you have done the work your customer will see it like this.

How to avoid: Firstly by being clear about when a sale is complete and making allowance for future costs associated with completion.

Secondly by protecting yourself by having proper contracts and terms and conditions in place that can be enforced if customers don’t pay.

And thirdly by having effective credit control procedures, to make sure sales are turned into cash as quickly as possible.

A good way of dealing with these problems is to discuss budget or estimated costs in advance along with the scope of your work and payment terms. Contrary to common perceptions, it is remarkably easy to use Direct Debit to collect payment from customers. This has many advantages, even ignoring the obvious cash flow benefits. It means your customer must take you seriously when you deliver your invoice as they have already agreed to payment leaving their bank account shortly afterwards. This puts the onus on them to stop payment rather than you having to chase for payment.

It also means you have to talk about the important but difficult topics of budget, costs and payment before you have done any work. A customer that does not or cannot pay is NOT a customer.

Failing to consider the financial ramifications of a large purchase
If you need to buy a new server, piece of machinery or other equipment for your business, timing and how you pay are very important. Whether you pay cash, buy on finance or delay payment to a new financial year will have significant impact not only on cash-flow but also on your tax liabilities come the year-end.

How to avoid: When making a major purchase consider a short-term loan if purchasing with cash would put a serious dent in your reserves. Using a credit card is an option for items you know you can pay off in a few months, but beware of high interest rates. Leasing is also an alternative especially useful if the equipment you're considering requires periodic updates or you need to use an item only temporarily.

Failure to keep an eye on cash and cash flow
The challenges small business owners face on a day to day basis often means some spend all their time worrying about immediate concerns, for example how much they have in the bank today, rather than looking ahead to see whether they can afford to pay suppliers tomorrow. Others are so busy working in their business they don’t even have time to keep a check on the current cash position, only being alerted to cash problems when the bank contacts them about being overdrawn.

Getting to grips with the financial management of a business can be a challenge, but is essential.

How to avoid: Put in some simple management systems and reports to track expenditure. Produce a budget for your business, with forecasts of what you expect to generate in terms of sales and how much you expect to spend. Translate this into a month by month cash flow forecast so that you can see any months when you are likely to be close to your overdraft limit or look to be cash rich. With these tools and a set of simple business KPIs you can take control of the financial management of your business. Alternatively you can outsource all of this work to your accountants. We use Xero accounts for this purpose to great acclaim from clients.

2012 could be a tough year for some businesses but getting hold of the financial management of your business will certainly put you in a strong position to face any challenges customers, the markets or suppliers might throw at you.

Andy Parker
Chartered Accountant, Birmingham

Amidst all the doom and gloom of 2011 I was encouraged to read that according to recent research 470,000 new businesses were created last year an increase of 18 per cent on figures for 2010. Even taking account of the high number of insolvencies there was still a net gain of 455,000 new limited companies. It’s not unsurprising as in previous recessions when large numbers of people have been made redundant many have elected to set up their own business, often offering their skills and experience back to their old employer and others in the industry from which they emerged.

There’s nothing to suggest 2012 won’t see a similar surge in start-ups. It’s not easy when you first start a business and in my view the first 12 months are critical to long term, sustainable success. There’s lots of business advice available but here are my top dos and don’ts for any new business owner.

1. Do develop a business plan. There’s a lot of rubbish spouted about business plans and the business planning process. Academics make it look very complicated, the banks are only really interested in one dimension of your business (the money) and many business owners don’t see the point of writing a plan when they feel they already have a very clear picture of what they want their business to do. 

   An effective business plan is practical, not theoretical and in fact the process of developing the plan is often as important as the end written result. A good business plan considers all aspects of the business, often across 4 dimensions: finance, people, customers, production/process, with goals set and action plans developed for each of these areas.  
   

2. Don’t listen to your mate down the pub. That may be a little bit harsh, but do take the advice of friends and family with a pinch of salt. Look for them for support and encouragement by all means but when it comes to the important decisions you will need to take, whether about the legal structure of your company, how you will market your business and even the process for recruiting staff, get help and advice from people with the right experience and expertise.  
        
3. Do set the financial side up right at the outset. Make sure your business is properly registered with the revenue from day one. Be clear about the financial records you will need to maintain and the best systems to use for keeping your books, a cardboard box under the bed is rarely the best solution.

   Check out the VAT thresholds and decide whether you should register for VAT and which VAT scheme is the most appropriate for your type of business. And make sure you prepare and use a cashflow forecast, it will be possibly the most important management tool you’ll use during your first 12 months.  
   

4. Don’t make mistakes with your pricing. This is one of the most common errors we encounter in companies. Make sure you fully understand ALL the costs to produce and sell your products, otherwise there’s a real danger of selling at a loss. Consider the levels of margin you want to make. Check you are getting the best possible price for any materials you buy in, ideally get 2 or 3 quotes for everything and negotiate volume discounts where you can. Look at your competitors but don’t get drawn into price wars, instead look for ways to distinguish your products or services from the rest of the market and add value to justify any price differential.   
     
5. Do plan for your personal future as well as your business future. Think about your family, your retirement, your plans for down-time. It’s all too easy to get so wrapped up in the excitement of your new venture that it becomes all consuming. Perhaps the most important point is to make a personal financial plan, alongside your business plan. Whilst it may seem difficult initially to find money to invest in a pension, for example, the longer you delay, the greater the long term consequence.

If you’re starting a new business in 2012 good luck, and if you need advice, give me a call. I’m always willing to offer any new business owner 30 minutes of my time to advise on the basics of start-up.

Andy Parker
Chartered Accountant and Business Advisor

I do think HMRC might be over-egging it a bit when it comes to tax enquiries at the moment. It’s been reported that HMRC recovered £179 million as a result of enquiries into tax returns in one year alone.

Over recent years HMRC have become more and more determined to discover tax discrepancies. There’s nothing wrong with that in my view, if they are tackling people who are making false claims or trying to fiddle the system. But unfortunately it also means than many innocent business owners and self-employed individuals are being caught-up in complex and time consuming tax enquiries. Apparently around 1 in 10 people completing a self-assessment tax return will be investigated. The frightening things is HMRC have sweeping powers to look into all aspects of your business and personal financial affairs and in real terms they don’t have to justify or explain why they are launching an investigation.

With new sweeping powers it’s not a case of if, but when, you will face a tax investigation.

Talking to the providers of our tax investigation fee insurance product I learned that claims increased 42% in the 12 months to February 2011 and they show no signs of abating. I guess at least these businesses were covered by insurance and didn’t need to find the money to pay their advisors to assist with the investigations, which are always time consuming and complex. But we’ve also heard of cases where business owners have given in to HMRC demands simply to avoid the time and costs involved in continuing to fight their case.

With the need for the Government to get hold of as much revenue as it can I don’t see much hope for a reduction in the number or nature of tax enquiries in years to come. The only advice I can give is to keep proper accounting, VAT and personal tax records and consider taking out insurance against any tax investigation you might face. At around £150 plus VAT per year it’s money well spent.

Andy Parker
Chartered Accountant, Birmingham

In case you’ve missed it from 1 April 2012 all VAT registered businesses must submit their VAT return and pay any amounts owing electronically.

There’s expected to be a last-minute rush by businesses not yet using the online facilities. To be honest we’d recommend switching as soon as possible so you don’t face a last minute panic when you’re forced to file online. Actually there are some advantages to the online VAT submission and payment system.

The system has built in automatic checks to help reduce errors, meaning there's less chance of having your return sent back to you to be corrected or for clarification.
You don't have to worry about your return being lost or delayed in the post as you'll get an on-screen acknowledgment - including a unique submission receipt reference number - when you submit your return. You can print this out as proof of submission.

Plus paying electronically normally gives you to up to seven extra calendar days to submit your return and pay your VAT, unless you make annual returns or payments on account.
So, if your business is VAT registered and isn’t yet submitting VAT returns online get registered for HMRC’s VAT Online Service now. I wouldn’t give HMRC any excuse to pick you up for non-compliance, with their current focus on tax investigations of all sorts it’s worth playing by the rules – you’ll make your life easier in the long term.

For help and advice with online VAT submissions or tax investigations give me a call.

Andy Parker
Chartered Accountant Birmingham

I was reading the results of a survey recently which looked at how equipped entrepreneurs are to succeed in business. The results were somewhat surprising.

Fail to plan and you can plan to fail!

In this survey 16 per cent of entrepreneurs didn’t have a written business plan. Now, I’m no advocate for the kind of business plan you might learn how to write in business school. But I am in favour of a set of measurable goals and detailed strategy outlining how the goals will be achieved. Without considering the key areas of your business - finance, people, processes and customers – you are unlikely to have a full picture of all the challenges you face, or all the opportunities open to you.

Every business needs a plan. It should be as detailed as your business needs. That is, if you’re a small company your plan may be written in a few key headlines or bullet points. If you are a larger business with multiple divisions or layers of management you may need a more sophisticated plan, with goals set for each area of the business.

Any accountant worth their salt will be able to help an entrepreneur with the business and financial planning process both before start up and on an ongoing basis.

Baffled by financial terms

I wasn’t really surprised to read that entrepreneurs sometimes find even basic accounting terms confusing. It was surprising to learn that almost half don’t know the correct definition of gross profit and 31 per cent do not know what turnover means.

Without understanding these terms it’s hardly surprising that business owners don’t try to track the relevant financial measures in their business.

I’m always at pains to work with clients on key performance indicators (KPIs) that are relevant, and more to the point, understood. Without this information how can you hope to know whether your business is on the road to success or doomed to fail?

VAT threshold

The survey noted that entrepreneurs didn’t know things like the VAT threshold (£73,000, by the way). Well again I’m not particularly surprised by this and in fact in my view they don’t need to know what the threshold is, just that there is a threshold and that they need to register when they reach that level. Their accountant will help them with that in any event. It is true of course that VAT can be one of the pitfalls for small businesses. Getting it wrong can have a negative impact on cash flow and leave a business vulnerable to a penalty from the HMRC.

To me, this just highlights the importance of getting the right advisors on board right from the start. If things like financial record keeping, VAT records and so on are set up correctly from the start there’s far less likely to be an issue as the business grows.

So, what help do entrepreneurs really need from their accountants? Good, sound business planning advice, a quick lesson in the key financial measures they need to track and understand, patience to explain these things again if they weren’t understood the first time, and expert advice on the technical aspects of running a business and keeping HMRC happy. If your accountant doesn’t provide this, find someone else!

Andy Parker
Chartered Accountant and Business Advisor, Birmingham

In April last year the government introduced a 25 year feed-in tariff to encourage greater investment in renewable energy. This provides guaranteed inflation linked payments to companies that produce energy from renewable sources. Although these tariffs have now been reduced the direct costs of delivering renewable energy have also come down, thus making investment in the sector very attractive.

When this type of underlying investment is linked to the government Enterprise Investment Scheme (EIS) the benefits become exceptional. So what is EIS?

In order to promote economic growth and development the government creates an incentive for individuals to invest in smaller UK companies with generous tax relief.
EIS allows investors to access 30% tax relief on investment into qualifying companies which is given up front. Hence a £50,000 investment in EIS will actually cost £35,000 as tax will be repaid or not paid at all on income used for the investment. If the underlying investment achieves 5% growth then £52,500 will be repaid after 3 years (the minimum holding period for EIS investments to achieve relief without being clawed back).

This equates to a 50% return over 3 years. (£52,500 - £35,000 = £17,500 return on original investment of £ 35,000 being 50%). The beauty of such an investment is that the underlying return is low risk due to the guaranteed nature of the sale proceeds of the renewable energy generated. Incidentally maximum investment in Enterprise Investment Scheme is £500,000 per tax year. Capital Gains can also be deferred indefinitely by continual investment in EIS. You can even shelter gains made up to 3 years ago. All gains in EIS are tax free.

EIS investments are also free from Inheritance Tax after 2 years which is an excellent way of preserving family wealth especially if health is poor.

There are risks associated with EIS and so advice should be sought prior to making any investment. However, I think I’ve demonstrated that there are some very attractive and relatively low risk EIS investments around. If you are interested in tax advantaged investments such as EIS, VCT or even pension then give me a call.

Andy Parker
Chartered Financial Planner, Birmingham

Cutting through all the detail the following highlights form the relevant points for businesses:

Economy

• OBR 2011 economic forecast revised down to 0.9% from 1.7%
• 2012 forecast revised down to 0.7% from 2.5%
• Economy expected to pick up in 2013, 2014 and 2015, forecast growth at 2.1%, 2.7% and 3%
  

Transportation and infrastructure

• £5bn guaranteed spending over three years on roads and rail
• Plans to release billions more through pension funds
• 35 road and rail projects approved in total
• Fare rises to be capped at one per cent above RPI inflation
• Early 3p rise in fuel duty scrapped
  

Business stimulus

• Credit easing programme to underwrite up to £40bn in low-interest loans to small and medium-sized firms
• £1bn business finance partnership to raise money for medium-sized firms
• Regional Growth regeneration fund to get £1bn in extra funding
• £250m support package for energy-intensive firms, £500m for science
• Business rates holiday relief for small firms extended to April 2013
• New time limits for planning applications
• £1bn ‘youth contract’ to subsidise six-month work placements for 410,000 young people
• Qualifying period for unfair dismissal to be increased from one year to two years from April 2012
• Bank levy to be increased to 0.088 per cent in January
  

The Director General of the CBI seemed to cautiously welcome the announcements when he said “The Government’s dogged commitment to budget deficit reduction remains the only way to maintain the UK’s triple A credit rating and low interest rates on international money markets.” Whilst John Walker of the Federation of Small Businesses was more positive “Taken as a package, the announcements in the Autumn statement address many of the concerns raised by small businesses and are therefore welcomed. The key role for the Government now is to be consistent, and set to the task of translating policy intentions into tangible actions on the ground.”

As always with these statements the devil’s in the detail. We’ll be picking over the fine print to learn more about the real value of the benefits available for our clients.

Andy Parker
Chartered Accountant and Chartered Financial Planner