Ask the Accountant

I can guarantee that not a week passes by that every accountant in the land does not receive one or more of the following questions from their clients.  Unfortunately, the “right” answers are more elusive because they frequently depend on the individual circumstances of the person asking the questions.  Let’s start with the most common one:

1. Salary or dividend?

Superficially, a very easy one to answer.  Dividends are taxed at a lower rate than salary (7.5% for basic rate tax payers and they attract no NIC, compared with 20% income tax rates plus employers/employees NIC on that salary).  And even after you have done the sums to allow for that fact that salary costs are tax deductible for company tax purposes (whereas dividends are not), you will still be significantly ahead by going down the dividend route.  Some subtle issues, however, then need to be factored in:

  • R & D claims can be enhanced by salary costs, but not dividends.
  • Some mortgage providers attach little weight to taking your income as dividends, viewing salary as more secure.
  • Tax efficient pension contributions are linked to salary levels.
2. How should I finance my next car?

Really two questions in one.  The first one is should I own it personally or through the company?  For at least 20 years, the tax rules have been written to make private ownership more tax efficient, but it seems the British still love their company car and are happy to pay through the nose for it.

As to the method of acquiring it:  as a rule of thumb, if you have the spare cash, use it.  Every other option involves finance costs or entering the lottery of its residual value in 3-4 years’ time.  The only winners in this game are the motor retailers who have all the statistics at their disposal to make the right call – for them.

3. How do I sell my business?

The precursor to this question is:  what’s my business worth?  But I will deal with that in another blog.  Let’s assume you think your business is worth £1.5m – how do you find someone to take it off your hands?  You have a simple choice:

Either: do it yourself (best done with the help of an experienced accountant) by approaching competitors, suppliers, customers – someone already operating in your sector.  And keep your fingers crossed. 

Or: use a specialist organisation or corporate finance boutique to do it for you, but beware, you can easily run up a bill of many tens of thousands and get precisely nowhere.  The marketplace is highly imperfect even in the internet age.  It depends on making a random connection of willing seller with someone who is interested at the right time and at the right initial asking price.  Again, keep your fingers crossed. 

4. How should I own my business property?

You already own a business property for your trading activities or are thinking of moving from rental to ownership.  Here are the 4 most common methods with a brief appraisal of each:

a)    Buy the property in a separate, newly formed company – currently the most common approach and probably best in terms of flexibility.

b)    Keep it in the trading company – fatal weakness is that if the company fails, you lose the property too.

c)     Hold it in a pension wrapper – SSAS/SIPP.  Gone out of favour in the last 10 years for reasons of inflexibility and professional fees.

d)    Own it personally – similar to (a) but income stream (from renting it to the trading company) will be taxed at your highest (personal) tax rate.

There is no absolute “right” answer – it depends on what your starting position is – but (a) and (d) are current favourites.

5. Where do I raise extra business finance?

I will keep this simple:  start with your existing bank because they already know you and want to keep you as a customer.  With everyone else, they start with a blank sheet of paper about you = enhanced risk = higher charges.