ER Grove - Are your Accountants Superheroes?

Chatting up the bank manager

I have been talking to a number of bank managers recently and the message is ��.We are open for business and have money to lend��. Odd thing for a bank to say.

If you went into your local butchers and he said �I am open for business and have meat for sale� you would probably leave.

Dig a little deeper and what the banks are actually saying is we are open for business and have money to lend on our terms. They should have been saying that years ago. Now the banks want three things security, sound management and a history of business performance.

The days of credit committees nodding through recommendations from the bank or relationship manager are gone. So if you need to visit the bank manager to borrow money what do you need to do? Turning up with an out of date budget just wont do any more. Any request for finance is going to met by tough questions that will need sound answers.

My advice is don�t approach the bank until; you have spoken to your accountant; you have clearly defined what your borrowing requirements are for; you have up to date accounts; you can produce accounts for the last three years (if you�ve been trading that long) and you have a forecast cash flow and profit and loss for the next 3 years.

Finally you need to so some sensitivity analysis: if Z doesn�t happen what will happen to X etc, everything should be checked and there should be no mistakes in spreadsheet formulae.

Hazel....you should be ashamed

Hazel Blears has said she will pay �13,332 in capital gains tax on the sale of her "second home". Good, but what about the rest?

She was accused of changing the property she designated as her "second home" twice in one year - first claiming her Salford home was her second home, then changing it to a London flat which she sold before buying another London flat and claiming expenses on that.

It emerged that she had not paid Capital Gains Tax on the �45,000 profit she made on the sale of the London flat claiming there was "no liability" for CGT on the sale. It�s called flipping.

So can we get away without paying CGT on the sale of second homes? Can we start flipping? No because the HM Revenue & Customs have legislation in place to prevent these tax dodges. OK technically it can be done and HMRC have even issued guidance on how it can be done legitimately but there has to be a valid reason to designate a second home as your main residence. Tax avoidance is not a valid reason.

Blears said she had acted within the rules of the Commons and HMRC, but she had decided to pay the money anyway after public uproar. How honourable. Hazel, all is forgiven.

�What's really important to me is what people think about this issue and what people think about me�

Clearly not! What would happen if you or I �omitted� to pay tax? Well, we would have to pay the tax, just like Hazel. Then HMRC would apply penalties, which could be as much as 100% of the tax outstanding and on top of that interest would be charged, very expensive. Finally just to rub salt into the wounds Mr Darling announced in the budget that HMRC would name and shame those of us who fail to pay tax (admittedly when the tax exceeds �25,000).

So come on Blears, if it�s that important to you, do what the taxpaying voters do and pay the rest.

Better safe than sorry

When Tax Credits were first introduced, there was some debate as to whether everyone should make a claim, even if their income was apparently too high for them to have any entitlement, on the basis that income was to be averaged over the (tax) year, so that a future fall in earnings might retrospectively reduce the weekly average. As claims can only be backdated for a maximum of three months, accessing the benefit for earlier weeks would depend on a protective claim having been made.

Hitherto, the general view has probably been that a protective claim is simply not worth the trouble. However, now that it is becoming more likely that earnings will fall sharply, perhaps the balance between the trouble of filling in the forms and the potential benefit needs to be reconsidered.

HMRC do not object to protective claims � to the contrary, they have posted a webpage positively encouraging the public to �Protect your right to Tax Credits by claiming early� (www.hmrc.gov.uk/taxcredits/claiming-early.htm). Essentially, this recommends that anyone who thinks his income may fall, or who is waiting to hear whether he will qualify for disability benefits, should claim by 5 July in the tax year.

Because of the recession, it is quite likely that some people will find that their income falls sharply during the 2009/10 tax year. Also, some self-employed people may find that their taxable income is lower because of the availability of 100% first-year allowances for purchases of vans and equipment for their businesses. In some cases, they will find that they are, for the first time, entitled to claim Tax Credits.

There is a potential trap here, because of the interaction of two Tax Credit rules. The first is that income, for Tax Credit purposes, is averaged over the tax year (or, for self-employed people, is taken as being the income of the accounts year ending in the tax year). The second is that claims can only be backdated for a maximum of three months.

For example, suppose that an individual, who has not previously claimed Tax Credits, realises on 1 December that his income for 2009/10 is likely to be much lower than for 2008/09. If he submits a claim immediately, he will be entitled to Tax Credits for September onwards, but will lose the Credits he could have claimed for April to August.

If the same individual had submitted a protective claim, estimating a higher income, by 5 July 2009 (three months into the new tax year), he would in the first instance have been sent a �nil award� notice. However, if his income falls, that award can be adjusted retrospectively, and he will be paid Tax Credits backdated to 6 April 2009.

We would therefore strongly advise any clients not already claiming Tax Credits carefully to consider whether they should make a protective claim. Further information on how to do this is posted on HM Revenue & Customs� website at www.hmrc.gov.uk/taxcredits/claiming-early.htm.

Of course, many higher-income families with children will already have claimed Tax Credits for 2009/10, in order to obtain the basic �545 �family element� payment (which replaced the old tax allowance). But it is probably not wise to assume that everyone entitled to the �family element� will have claimed it, as some may have considered it was not worth filling in all the forms, or simply �never got around� to doing so.

Another point to watch is that if an individual claims Child Tax Credit, his claim to both Child and Working Tax Credit will be backdated automatically. However if he claims only Working Tax Credit, his claim will not be backdated unless he specifically requests this. Backdating can be requested by telephoning the Tax Credit Helpline.

The above paragraph is based on the Minutes of the Tax Credits Consultation Group meeting of 4 December 2008 (www.hmrc.gov.uk/taxcredits/minutes041208.htm). It was further explained that the Helpline should �refer claims to the backdating team�, though it was noted that some callers had incorrectly been told they would have to write in. Presumably, following the Consultation Group meeting, Helpline staff have now been reminded of the correct procedure. HMRC are also considering ways of making backdating claims easier, perhaps by including a tick box on the standard Tax Credits claim form.

Innovation - in threes

At E R Grove we are committed to providing our clients with wide ranging, business focused and innovative support. Times are not easy and we strongly believe that those businesses that embrace innovation will weather the storm better, and emerge better equipped for the future.

The following short article by one of our associates will, we hope, provide you with food for thought � if you do want to know more, please don�t hesitate to call us.

Innovation � in threes

There's an old joke that describes two men walking across the savannah in Africa when they spy a hungry looking lion. The lion starts to approach them and they fear for their lives. One of the men takes off his rucksack, produces a pair of track shoes and starts to put them on. His companion is dumfounded � "What are you putting those on for," he asks, "you�re never going to outrun a lion".� "No", the first man replies, "but with these I can outrun you!"

As jokes go it�s about a six, but in just a few words it captures the situation in which many businesses suddenly find themselves. The message: to survive in today�s jungle, don�t focus on the downturn, focus on doing better than your competitors - whoever and wherever they are.

Few businesses, it appears, are immune to the downturn, so what can �innovation� teach us, and where can it help?

In terms of addressing the downturn, characterised for many by falling sales and a squeeze on credit, I suggest that innovation can help in tackling three separate issues:

Addressing the day-to-day issues: slow payment, problems with the bank, cancelled orders, the need to focus on CASH.
Increasing Sales: taking a growing share of a shrinking market - running faster than the guy without the track shoes.
Preparing for the future upturn: making sure that when it happens you�re ready, and that your products or services are the best.

The first of these is difficult, not least because time isn�t generally on your side. The message is to try and get in control. Don�t panic � think and think innovatively about your response to each issue.

Cash. In difficult times, cash really is king. The old homily �

Turnover is Vanity
Profit is Sanity, but
Cash is Reality

... is particularly true in these times.

So can you reduce your fixed costs? Brainstorm what you could do, and don�t rule out wild suggestions � they often lead to workable and effective ideas.

Can you get better deals (perhaps just by asking!) from your suppliers? Lower costs and better payment terms? But a word of warning � if you have key suppliers, suppliers who, were they to go to the wall, would seriously embarrass you, then you need to do all you reasonably can to keep them in business.

Really focus on your best customers � you do know who they are, don�t you?

Get the money that you are owed, in, quicker. Get in control � it�s your money!�

In terms of the second task, increasing sales, take a close look at customer service. Do you really do what it says on your tin? In my experience, an awful lot of businesses with an okay product are let down by poor service. This is a real opportunity area for a quick win!

Ask your clients: "Where could we do better?" If service in your sector is poor, then differentiate yourselves as a company by delivering peerless customer care.

The trick is look at what you do�from your customers� point of view!

Small increases to the volume of your trade can have a big impact on your bottom line, so think about what the marketing people preach. The only options are � sell more things, to more people, more often!

Can you increase your price? Sounds like a crazy idea at the moment, BUT are you just selling on price? If not, then it is worth a careful thought?

Businesses �trapped� within a supply chain, totally dependent on a few big customers, have particular problems. Perhaps now is the time to explore the idea of a product of your own? Key questions are about the skills you have and the industry knowledge you possess. Options include working in partnership with another business or licensing an existing product.

Finally, preparing for the future. Will you have your track shoes on when things improve? In normal times, businesses that decide innovation can work for them find themselves taking action on three levels:

What can we do now to increase our sales or reduce our costs?
What can we do in the medium term?
What can we do in the longer term?

The immediate, the �now� is discussed above, and in terms of the medium and longer-term actions, I think the car industry has a model worthy of consideration.

Every year models are updated � often just minor changes to the look of the front of the vehicle or the inclusion as standard of a feature previously only available as an extra cost option. But changes that allow the word "new" to be used!

The longer-term changes are new models � the Mark 6 replacing the Mark 5, or an extension to the range � a mini MPV or sports model. In truth though, the �new� models are very similar under the skin!

So where do the ideas come from? Is it all about ideas?

Space prohibits a full answer, but ideas are the starting point. Equally important is selecting the right idea � the one that makes commercial sense and is judged to have a high likelihood of delivering to the bottom line. The commercial element is absolutely critical � the idea MUST be worthy of investment, with clear exploitation options and proven / accessible markets.

Monitoring progress and spend in a relatively formal way is also part of this important commercial mix.

Ideas can come from all sorts of routes � your workforce, customers and suppliers, even from your competitors. But start small, first look for the ideas that can save you money or make your existing products or services more attractive.

Then move on to look perhaps further afield, in other industry sectors or countries, for ideas that pass the commercial test and offer a real step forward. Finding the pain or the gain can be a very good first step, since an alternative solution to a long-standing problem can really pay dividends. In the past, a lot of innovation focussed on saving people time; in the future, saving people money may come to the fore? In terms of step changes, it�s not a perfect example, but the blade drier from Dyson� is one example.��

So three characters (don�t forget the lion), three approaches to the credit crunch, three aspects of business (turnover, profit and cash), three options to increasing sales (more things, more people, more often) and three steps to the future.

But one number to call if this article has raised questions and you�d like more help - E R Grove on 0121 559 1071.

Roger Browne
MD
Futurology Limited

Checking and Improving Credit Ratings

Ensuring timely payment for goods and services is not only good business practice, but also helps improve relationships between you and your customers.

The late payment of invoices can result in cashflow problems, reduced profits and extra work in recovering the loss. So how can you ensure potential customers will pay you and pay you on time?

The answer lies in credit checking. This enables you to find out about the customer�s credit history and their financial reliability.

One of the best ways of doing this is to require potential customers to fill in a credit request form. This should includes details such as the full name and legal status of the business, bank details and the names of the managing director, finance director and person responsible for payments, as well as a request for consent to make bank reference checks, credit checks with a credit reference agency, and obtain at least two trade references.

A basic report from a credit agency can tell you if your prospective customer has ever been taken to court for non-payment, if they paid any summons received, if they are registered at the address they gave you, and how promptly they pay their other accounts.

There is normally a charge for bank references, but you should be able to reduce this by writing to the customer�s bank and asking them to reply via your bank. Alternatively, you can ask your bank to handle the enquiry on your behalf.

When you request a bank reference, you need to ask specific questions, so that the bank knows the information you require. The same applies to trade references, from whom you should be requesting the level of credit they allow for the customer and if payments are regular and on time.

If a business is new and therefore has no credit history, you could run a personal credit check on the owner, although you will need to obtain their permission first.

So now we have looked at credit checking your customers, how can you improve your own credit rating? Well, there are a number of things you can do.

The first, and most obvious, is to always pay on time. The payment experiences of your suppliers form a key part of your credit profile.

Secondly, ensure that your business is listed in telephone directories, and, if you are a limited company, that your company registration details are up to date, and your accounts filed on time. This will all help to confirm that your business is genuine.

Next, aim to build relationships with companies that will establish credit for your business and report positive information when asked for a trade reference request.

And don�t forget about yourself! As stated above, people have the option of reviewing the personal credit profiles of key people within your business, so it is important to keep on top of your finances.

Paying tax

As accountants and tax advisers, we are experienced in all aspects of taxation. We also appreciate that tax can be confusing and involve some complex issues.

To make life a little simpler, we�ve produced a quick guide to the taxes that are likely to affect us in our business and private lives, including details of how to pay the various forms of tax.

This guidance is an overview only and the circumstances of each taxpayer will be different. Seeking professional advice is a wise step to ensuring that your financial affairs are as tax-efficient as possible.

Because we also understand that the current financial climate is causing real hardship, we have also included information on the government�s Business Payment Support Service, which works with businesses, the self-employed and self assessment taxpayers in financial difficulty to help them pay taxes owed to a timetable they can afford.

To find out more, click on the tax that interests you.

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Profit Improvement Strategies

A key part of running your business effectively is to know where you make your money and which areas of the business just aren�t pulling their weight. Then you can put into place strategies to improve your bottom line.

It can be hard to look at your business objectively, which is why seeking the advice of experienced professionals can add real value to the process. Some straightforward steps you can take include:

Look at how your business�s profitability compares with the industry average. If you�re falling behind, you need to find out where you are going wrong.
Review your fixed and variable expenses. Cut back on things you can do without, such as new office furniture, but think very carefully about losing personnel � redundancy is not a cheap option and in a year or so, you may need the skills and experience of people who are no longer with you. Recruiting staff to replace them will then be another substantial cost.
Target a ten per cent saving through �bottom up� budgeting, involving everyone with financial control over an area of the business.
Get your employees involved in expense and cost-cutting efforts. Asking for their suggestions will help them to feel more involved in the business while offering incentives for helping you to reach profitability goals will help to build morale.
Review your list of products and services and eliminate those that are unprofitable or not central to your business.
Consider adding extra products or services that complement your current portfolio without adding to marketing or advertising costs.
Think carefully about accepting every contract and consider how it will generate cash and add to your profits. Be wary of taking on non-profitable work that simply increases turnover.
Get rid of �can�t pay, won�t pay� clients if necessary and build on relationships with your better customers
Review your main business processes (such as sales processing or shipping) to see you can make them more efficient or can outsource some activities.

Avoiding and Resolving Workplace Problems

The legislation governing how businesses deal with disputes with their employees has changed. The new simpler and more flexible system is intended to save you time and money.

Acas, the employment relations service, has issued a new Code of Practice, which lays out the principles and provides practical guidance on procedures for handling disciplinary and grievance matters in the workplace.

This:

Repeals the mandatory three-step process for discipline/grievance issues.
Allows employment tribunals to adjust awards by up to 25 percent if an employee or employer has acted unreasonably in not following the principles in the new code.

For further guidance and advice, you can contact the enhanced Acas helpline on 08457 474747, open 8am-8pm Monday-Friday and 9am-1pm on Saturdays. You can also access the new early conciliation service through the helpline, to help resolve seemingly impossible workplace problems.

The Government is providing additional help for all employers to get the maximum benefit out of this new system by working with Acas.

So as an employer, what changes should you be considering?

Review your disciplinary and grievance procedures so they are compatible with the new law.
Identify where a more relaxed and informal approach to dealing with problems at work may be appropriate.
Include a mediation stage in your internal processes.

Train your managers in how to deal with problems at an early stage to stop them from escalating.

Employing family members

It is usually advantageous to pay a wage just above, rather than just below, the Lower Earnings Limit:

There is a band of earnings which are subject to �nil rate National Insurance contributions� � this apparent contradiction in terms means that no contributions are payable, by employee or employer, but the employee�s contribution record is still franked for pension and benefit purposes. For 2009/10, the �nil rate band� runs from the �Lower Earnings Limit� of �95 a week (�412 a month) to the �Earnings Threshold� of �110 a week (�476 a month).

Where family members work part-time in a family business, it is important to remember that worthwhile pension rights can be accrued, at no cost, by paying them a salary just over, rather than just under, the Lower Earnings Limit. If you are already doing this, watch that the Lower Earnings Limit rises slightly each April � this year from �90 to �95 a week � so you must remember to increase wages accordingly.