Small Business Finance

Applying for Small Business Finance is a problem where the big banks have already rejected a loan.

Small Business FinanceFrom the beginning of November 2016, nine of the UK’s biggest banks will have to pass on the details of small businesses they have rejected for finance to three Government initiated finance platforms. This can only be carried out with the permission of the Company concerned. But if granted, these are:-

  1. Funding Xchange
  2. Business Finance Compared
  3. Funding Options

These platforms will then share these details with alternative finance providers and go on to facilitate a conversation between the business and any provider who expresses an interest in supplying finance to them.
This makes it easier for businesses to access finance when they have been turned down by traditional lenders.

There are nine banks which have to conform with this. They are:-

  • RBS
  • Lloyds
  • HSBC, Barclays
  • Santander
  • Clydesdale and Yorkshire Bank
  • Bank of Ireland
  • Danske Bank
  • First Trust Bank

Applying for Small business finance

There is evidence that most businesses seeking finance only ask one lender and, if rejected for finance, many simply give up on investment rather than seek alternative options.

In year 2015 there were 324,000 small and medium sized business who sought a loan or overdraft, 26% of these were initially declined by their bank and only 3% of those declined were referred to other sources of help.

The Government view

Small and medium-sized businesses are very important to Britain’s economy and they should have access to a wider range of sources of finance.

Endorsements

Without going into too many meaningless testimonials, these moves have been approved and endorsed by:-

Keith Morgan, CEO of the British Business Bank

This new government initiative, supported by the British Business Bank, has the potential to make a real difference to smaller business finance markets in the UK. It gives businesses additional opportunities to secure funding, alternative providers access to a bigger market of potential clients, and major banks an extra service to offer their business clients when they cannot themselves provide finance.

Mike Cherry, National Chairman, Federation of Small Businesses

Small firms struggling to access finance will now automatically have a new way to get the support they need to invest and grow. FSB pushed hard for these reforms, and today’s announcement is good news as the government delivers on them. This change will boost alternative lenders, bringing more competition and choice in the market beyond the big banks.

Small business finance conclusion

The Government has provided alternative finance platforms designed to help small businesses access the finance they need to invest and grow.

Combined with the SME (Small and Medium Enterprises) credit data sharing scheme, which requires banks and credit reference agencies to share SME credit information equally with all providers, increases competition in business lending by making it easier for challenger banks and other lenders to make good credit decisions on businesses to help them get the funding they need.

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Making Tax Digital

Making tax digital (MTD) was first announced in March Budget 2015. It heralds the introduction of a modern tax system using digital technology e.g. smart phones enabling businesses to comply more easily with their tax reporting and compliance obligations. Arguably these changes are the most significant to be made to the operation of the UK tax system since the introduction of self-assessment in 1997.
Making Tax Digital
In the Autumn Statement 2015, the government announced that, by 2020, it would require most businesses, self-employed people and landlords to keep track of their tax affairs digitally. This will involve updating their personal digital tax account with HMRC through the Government Gateway on a quarterly basis. It will engender a discipline for taxpayers to keep their paperwork up to date alongside issuing invoices to customers for the payment of goods and or services.

It does not mean, however, filing 4 Tax Returns per year as we understand is being reported in the Media but replaces the need for filing annual Tax Returns by keeping HMRC up to date more frequently. It should simplify the process as taxpayers are building up their reporting position throughout the year and reduce the pressure onfacing a year end cut-off point and receiving unexpected tax bills.

Making Tax Digital Consultation Documents

HMRC issued six detailed consultation documents on 15th August 2016 with closing date for comments due 7th November 2016. We will publish further details of the operation of MTD as they come to hand.

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EU Referendum – UK Funds Industry

EU Referendum

The Leave outcome of the EU Referendum suggests the UK is very polarised. However, the major Funds centres in the UK voted overwhelmingly to Remain. Some back office services are carried out in Northern Ireland who had a Remain majority of circa 12%.

Overall London had a turnout of in excess of 80% with some 75% in Remain camp; Edinburgh had a turnout of 82% with 74% Remain; and Aberdeen and Glasgow with lower turnouts also had significant majorities in Remain1.

If Scotland obtains another Referendum to leave the UK union but remain in the EU alongside say, Northern Ireland would this be good news for the UK Funds industry who market their collective investment funds into Europe2.

In anticipation of a Leave outcome from the UK union UK funds could be re-domiciled to Scotland ahead of or after the Scottish Referendum and retain their cross border marketing passport.

Many UK based Funds groups have separate ranges of funds in the UK for our market and Luxembourg and/or Dublin domiciled funds for marketing into Europe. In this respect Switzerland has negotiated separate rights with the EU to enable their funds to be sold across the EU.

EU Referendum and Gibraltar

Gibraltar which is part of the EU had a Remain victory in excess of 90%. Perched on the southern tip of Spain, the Rock and its 32,000 residents view Britain’s EU referendum result with trepidation: their thriving economy, built around financial services and the port, is based on access to Europe’s single market – and Brexit could reignite a centuries-old sovereignty row with Spain3.

The writer is studying the outcome of the EU Referendum Vote for UK Funds industry and will publish further articles in the forthcoming weeks.

1Source The Times Saturday 25 June 2016 “How Britain voted”
2EU Undertaking for Collective Investment in Transferable Securities (UCITS) dealing with the pass porting of marketing of savings income products – equities and interest
3Source The Guardian

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Global Financial Corruption

Global Financial Corruption

In May 2016 the British Government hosted an international anti corruption summit in London as part of a drive to expose, punish and drive out global financial corruption. At the same time an Anti-Corruption Summit Communique was published dealing with the areas to be covered by setting out a common approach to tackling global financial corruption, as agreed by participating countries and, where appropriate, international organisations.

It was announced that foreign companies who own UK property will be forced to make public who are the real beneficial owners who resource the acquisitions. Currently in a number of offshore financial centres it is only necessary to publish the legal owner of the shares in a company often referred to as a nominee. However, some jurisdictions e.g. The Channel Islands (Jersey and Guernsey) require disclosure of the beneficial owners on establishment of a company and under Tax Exchange of Information with various countries including the UK could be asked to disclose such owners by an interested third party tax authority.

Global Financial Corruption and offshore companies?

In general, the use of offshore companies can be carried out for a number of financial planning reasons other than what is perceived to be money laundering, funding terrorism and/or engaging in tax crime (tax evasion). Many offshore arrangements have been executed in the past by Eastern European, African and Middle East domiciled investors.

Many beneficial owners of an offshore companies are domiciled in countries where they fear their assets may be taken or impounded by Government Authorities of their country or they wish to ring fence them away from other family partners or members. In my view this is a legitimate use of so called tax havens provided the people concerned comply with their local tax reporting requirements. Also in the case of some countries e.g. the UK the use of offshore vehicles was carried out to avoid local inheritance or gift tax taxes.

Typically, Middle East investors in UK property would use a double Jersey Channel Islands structure to fund the purchase of UK property in a tax efficient manner while perhaps enabling compliance with their own country regulatory matters e.g. Shia law.

Going forward any foreign company that wants to buy UK property or bid for central government contracts in the UK will have to join a new public register of beneficial ownership information before they can do so. This will be the first register of its kind anywhere in the world. It should be noted that the UK Government have many current powers (weapons) at their disposal to unfold the ownership structure of an offshore company. A further article will be published on so called “Google tax” relating to a number of big brands paying little or no UK tax.

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Savings Income Taxation

Savings Income taxation

From 6th April 2016 there is a new personal savings income taxation allowance of up to £5,000 in addition to the tax free personal allowance of £11,000. In addition, the first £1,000 of savings interest income is exempt from tax. This means that a person can have up to £17,000 of income before paying any UK tax. Non savings income such as earnings and pension is taxed first followed by savings income.

Savings Income taxation Example

State Pension £8,000
Other earnings £3,000
Savings Interest Income £6,000
Total £17,000
Less Tax Free Personal Allowance £11,000
Less Personal Savings Allowance £5,000
Taxable income £1,000
Tax rate nil% on first £1,000 of taxable savings income
Tax due £0

In addition, the first £5,000 of taxable dividend income is exempt from tax so it would be possible to have up to £22,000 of income in a mix of non-savings income and savings interest and dividend income. Savings income and dividends within an ISA wrapper are, however, exempt from tax.

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Salary vs Dividends

The payment of Salary vs Dividends is an area to consider for Business owners when drawing money out of their Company.

Under the current tax regime drawing out Dividends will definitely result in the individual paying less Income Tax than they would incur if the amount was paid as Salary.  However, to pay entirely (or even largely) in Dividends may be likely to be seen by HMRC as aggressive tax avoidance and may then make the individual liable for investigation.

The Salary Vs Dividends examples below are arbitrarily based on an individual taking out £150,000 from their company in the course of a year.  It shows the tax comparisons for taking the money out entirely in Dividends, entirely in Salary and some mixes of both – namely:

  • Scenario 1 – salary only
  • Scenario 2 – dividend only
  • Scenario 3 – half salary half dividend
  • Scenario 4 – one third salary two thirds dividend
  • Scenario 5 – two thirds salary one third dividend

We cannot comment on what may be best in any individual case without knowing all of the surrounding details, but our feeling is that in general to obtain a satisfactory tax reduction without offending HMRC is likely to be a fairly even mix of Salary and Dividends.

In the following example the tax bands and rates are shown on the left of each example.

Salary Vs Dividends

Notes on Salary Vs Dividends examples

  • Personal Tax Free Allowance £11,000 withdrawn all cases
  • Dividend income comprises top marginal income for tax i.e. pay uses up basic and higher rate band first
  • *MPR/MLP national insurance contributions (nics) pay. MLP Nics are deductible for corporation tax
  • **no MPR/MLP nics
  • ***Starting savings rate of £5,000 reduces basic rate band in all cases – effectively you have had little benefit as your pay over £27,000 attracts higher rate tax – normally £32,000
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Entrepreneurs Tax Relief

Entrepreneurs Tax Relief
Budget 2016 has extended Entrepreneurs tax relief to long term investors in unlisted trading companies. This new measure could approve attractive to commercial and residential property developers as the need to be a qualifying trade has been removed.

Entrepreneurs Tax Relief Rate

This relief will apply a 10% rate of capital gains tax to gains accruing on the disposal of ordinary shares in unlisted trading companies or unlisted holding companies of trading groups held by individuals that:

  • were newly issued to them and acquired on or after 17th March 2016
  • were obtained for genuine commercial purposes and not for tax avoidance purposes
  • have been held for at least three years from 6th April 2016
  • will be subject to a lifetime limit of £10M gains to qualify for this investor relief
    Current law

Section 3 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that individuals pay capital gains tax on their chargeable gains net of allowable losses and all other reliefs that exceed the annual capital gains tax exempt amount currently £11,100 for the tax year ended 5th April.

Ordinary shares are assets for the purposes of Section 21 TCGA and gains on disposals of such assets are subject to capital gains tax at a rate of either 18% (basic rate taxpayers) or 28% (higher rate taxpayers) reduced by Budget 2016 to 10% or 20%. However, where shares qualify for entrepreneurs tax relief the first £10M of gains accrued on disposal of shares in a trading company by an individual who has worked for the company and owned at least 5% of the ordinary shares in the company are taxed at the rate of 10% capital gains tax.

The need to be an employee and hold at least 5% of the unlisted trading companies shares has been removed for the application of the new relief outlined above.

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Lifetime ISA The Young Generation

In his recent Budget speech the Chancellor introduced a new flexible Lifetime ISA aimed at the young generation to give them a measure of independence from the State in future years. This appears to have replaced his desire to make significant changes to pension tax savings where it was reported that he was considering reducing tax relief to a flat rate.
Lifetime ISA The Young Generation
From 6th April 2017 every adult under the age of 40 will be able to open a new lifetime ISA. HM Treasury have published a discussion document setting down the parameters of the scheme to ensure that it works in the simplest way for both savers and providers of savings products.

An individual can save up to £4,000 each year with the Government adding a 25% bonus making a total of up to £5,000. Money paid into the new Lifetime ISA account will not receive any tax relief at source as would be the case with pension savings but has the advantage that money can be withdrawn tax free. Money withdrawn from a pension pot is generally subject to income tax at the time of withdrawal. Over the lifetime savers will be able to contribute up to £128,000 receiving a bonus from the Government up to £32,000 making a total pot of £150,000 to which one can add accruing growth of the pot from income and gains on the underlying investments made.

Lifetime ISA Usage

Money put into this account can be saved by an individual until the age of 60 and used as retirement income and/or withdrawn in whole or in part earlier to help buy a new first home with a market price up to £450,000 located in the UK. If funds are withdrawn for any other purposes there will be penalties.

The total amount an individual can save in all ISA accounts will be increased to £20,000 per year from 6th April 2017. The current allowance is £15,240.

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Advisory Fuel Rates

HMRC has updated its Advisory Fuel Rates with effect from 1 March 2016.
Advisory Fuel Rates
The Advisory Fuel Rates are mainly used where an employee pays for fuel used in a company car and then claims back from the Company an amount for business mileage. Or, when the Company pays for all fuel used by the Employee (e.g. via a company fuel card or account at a petrol station) and claims back from the Employee the cost of the fuel used for non-business mileage.

When using Advisory Fuel Rates the company does not need to work out the actual cost of fuel per mile for each of its company vehicles. It can reimburse their employees knowing that HMRC will accept that the payment does not incur any tax or NI payment for employee on this amount.

New Advisory Fuel Rates

With fuel prices having fallen in the last few months, HMRC has reduced the pence per mile advisory fuel rates for all petrol and diesel cars. The rates from 1 March 2016 are:

Engine size Petrol Diesel LPG
1,400cc or less 10p 7p
1,600cc or less 8p
1,401cc to 2,000cc 12p 8p
1,601cc to 2,000cc 10p
Over 2,000cc 19p 11p 13p
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Dividend Tax Allowance changes

The current dividend tax allowance is repealed from 6th April 2016, meaning the end of grossing up dividends received (dividend received plus tax credit).
Dividend Tax Allowance
Owner managed businesses will be adversely impacted by the change while many savers and pensioners may come away with lower tax bills. Typically owner managers draw out dividends instead of salary from their businesses to avoid the need to pay employer national insurance contributions of up to 13.8%.

Current Dividend Tax Allowance

Currently if you receive a dividend of £1,000 you would also receive what is known as a notional 10% tax credit. This means you may have to report these component parts on your personal self assessment tax return i.e. Dividend received £1,000 tax credit £100. You would be subject to income tax on the gross amount of £1,100. Such notional tax credit would be set off against income tax due resulting in no further tax due for most taxpayers.

Where a taxpayer is subject to higher rate tax then a further £250 will be payable to HMRC being effectively 25% of the dividend received. Additional rate taxpayers would pay a further £361 being effectively 36.1% of the dividend received.

Many owner managed businesses benefited from the current regime as they could draw dividends out of their business profits and pay no further tax at a personal level.

The new regime is complex and clearly designed in most cases to raise the tax take for the Chancellor but the writer can point to significant tax savings for individuals including pensioners with savings income.

New Dividend Tax Allowance

The first £5,000 of any dividend received will be subject to tax at 0% – “the nil rate band” This may benefit some savers and pensioners. Typically on an investment portfolio of £125,000 yielding 4% no further tax would be due.
Up to the next £27,000 of any dividends received will be subject to tax at 7.5%. These two figures combined make up what is called the Basic rate of tax threshold.

Any dividend received above £32,000 will be subject to either the dividend upper rate of 32.5% or the dividend additional rate of 38.1%.

Example 2016-2017

Michael who runs an owner managed business draws a salary of £11,000 to take advantage of the personal tax free allowance of £11,000 and pays out dividend income of £32,000. £5,000 will be taxed at the nil rate and £27,000 will be taxed at the dividend ordinary rate of 7.5% making tax due of £2025. In 2015-2016 no further tax would be due as it is covered by notional 10% tax credit mentioned above. Any additional dividend income would be taxed at 32.5% or 38.1%.

There are still benefits to owner managed businesses to continue to pay out dividends but they must balance the overall dividends tax outcome with employer national insurance contributions saved.

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