Making Tax Digital: What They’re NOT Telling You

You know, you might be able to get away with charging a premium, but if you do that, then you've got to provide a Rolls-Royce service that you vacuum up the debris after you finish working for the day or after you finish the job that you're working on. Just little things like that, you know, giving customers that little bit of added value, extra service. Yeah, we, we say very simply, Basically, there's 4 ways to grow a business, and that is to increase your prices, increase the number of customers, increase the number of times your customers buy from you, and—

This is the Field Rocket Podcast. I'm Tulik, this is Aaron, and we're joined by Jed from Accountancy for Growth. Welcome to the show.

Thank you very much. Thanks for having me.

Yeah, it's good to have you here.

Hopefully I won't bore you too much. Not at all.

Could you tell us a little bit about, you know, your background?

Well, if we take you right back to the very start, I actually started in the profession from work experience and then did all my training in practice. And then I had a little 10-year gap where I actually worked in industry, and the world of black and white accountancy became various shades of grey. I took that transitional step into industry and commerce. Then after that, I came out and set up my accountancy practice in 2003, so 21 years ago now. And in that time, I have made 4 acquisitions and 1 merger, and now I've reached the peak. I'm actually on the other side of the hill and starting to downsize, and only last Friday I completed a deal on selling off one of my offices. But in all that time, it's always been accountancy-focused. And yeah, now it's all about helping small businesses to develop and grow. But a lot of our work is compliance-orientated. Clients will come to us, engage our services in helping them complete their annual accounts and do their tax returns. But accountancy has far more to offer than that. A lot of times we can actually sit as like a silent financial director and help advise clients which way to go, what to look out for, and for whatever pitfalls there might or might not be, and hopefully focus on the growth aspect of the business as well.

So you kind of do a lot of compliance, which is, you know, is that just the tax returns, is it?

For sole traders and partnerships, the compliance element is more to do with the tax returns. HMRC insists on small businesses producing a set of accounts which have to be filed with your tax returns. But then if you incorporate your business into a limited company, then you are regulated by company law, the Companies Act of 2006. So then you have to produce a set of accounts in a company law format and then file those at Companies House. And that's just going through an overhaul at the moment as well in terms of the information that's got to be disclosed at Companies House. We seem to be going through a cycle there at the moment. So up until now, for the last 15 years, you've been allowed to file abbreviated accounts, but they're switching back now to full accounts, it seems. But we're just keeping an eye on that and how it all progresses. So yeah, compliance is driven by HMRC for sole traders and partnerships, but for limited companies, it's driven by company law.

And did you say that we're kind of— for the limited companies, it's going to switch back into kind of the full accounts. Has that kind of come into place, or is it just kind of a work in progress, or what state is that in?

It's fairly close to being implemented. It's going to be sometime this year. So companies will have to file— at the moment they're just filing balance sheets, but going forward they're going to have to file profit and loss account as well. Now what I don't know at the moment is this is going back to a system that they had back in the 1980s and the 1990s. I expect there's one or two of us here in the room that can't remember the '80s or '90s because they weren't around, sadly. But you know, you had to make those disclosures back then, then they cancelled them, and now we're going back to how it used to be. And so it will cause a bit of concern amongst the more private entrepreneurs out there who like to keep certain things to themselves, like turnover and overheads and stuff. But back in the day, if I can call it that, you're allowed to file what we call the statutory profit and loss account. So it had very minimal information, so it was just turnover gross profit, overheads, operating profit, and that was it. So what we don't know is whether we're going to be asked to file in any more detail than that.

What do you think brought that on, like that decision to go, right, we need more detail now? What do you think brought that on?

Money laundering. Okay, basically, um, there's been a huge proliferation of, uh, companies incorporating and not making full disclosure of how they're generating their income. And what costs they're incurring to generate that income. So it's all driven by anti-money laundering legislation, getting businesses to be more transparent.

Okay, and do you think that will affect what you can download from Companies House?

Well, it will do for credit referencing purposes and performance measurements, because as you know, when you register a company at Companies House, you have to supply a SIC code standard industry classification. And this more detailed profit and loss will give the analyst a lot more data in which they can benchmark certain categories of businesses. And I guess from that, information is power basically. They'll be able to give a lot of information on how successful businesses perform and give an indication of how much they spend on certain costs and stuff.

And how will it affect the, you know, like if I was a limited company now, well, you know, our company is a limited company, you know, is it sort of extra work or is it mainly on the accountant side or, you know, What kind of impact would it have to a limited company owner?

So it's all about regulations. So in company law, there's a prescribed format and that's got to be followed, and reporting standards as well. And also coming in for limited companies, it certainly already happened with much larger organizations, but it's filtering down to the grassroots level where companies are going to have to start reporting on their social environment and governance aspects of the business. So what are you doing for your local community? What are you doing about your carbon footprint? What are you doing about compliance with all regulations, etc.? And companies are going to have to start reporting on those aspects as well as just the, the financials. So in terms of the regulatory framework, it's going to be more burdensome, I would say.

Yeah, would you classify it as like a huge burden, or is it just going to be like a couple of extra questions, which are, I would guess, semi-optional?

I think it'll be significant. I don't think it'll just be a question of a couple of extra questions. Uh, you know, I think organizations, um, in the last 20 years I've seen a lot more rules and regulations come in And there seems to be an industry out there now where people are just basically administrators. Companies, or businesses rather, are engaging individuals just to make sure that they're compliant with certain rules and regulations. Health and safety, for example, you've got to do a risk assessment on everything. You know, we've got risk assessments on paper cuts and how to set up your workplace environment. So, you know, the height of your seats, positioning of your screen, and making sure that nothing is out of reach, etc. Of course, if you're in the construction industry, health and safety is a real minefield. And then the banks, they're all regulated. They're being forced to, um, with regards to know your client checks, anti-money laundering stuff. So the banks are becoming more and more investigative with their information, and then insurance companies as well. They're drilling down into more and more detail of your, of your business. So this whole regulatory framework is becoming more and more time-consuming. And I came across a financial advisor at the beginning of the year, and I was having a chat with him. He started around about the same time as I started started my practice, and he was very much hands-on advising his clients. And when I saw him at the beginning of the year, he said he stopped all of that because he, he's now having to spend all his time on making sure that, uh, he and his fellow advisors are all compliant with the regulations that have come into place surrounding their industry.

Okay, so it's more just Just being, you know, I guess as you say, completely compliant as opposed to actually doing the work.

Yeah, I asked him questions. So, you know, can't you bring somebody in to do all that for you? And he said, well, I could, but my particular problem is it's my name above the door, and if there's something that goes wrong, it means that it goes to prison. And this is the thing, it's It's like the carrot or the stick, but it's more about the stick. If you don't comply with these regulations, then you'll get fined and potentially faced with a criminal conviction, ultimately go to prison.

Is there anything, kind of any big changes coming for the sole traders or the partnerships that you're aware of?

Only from a tax aspect. I'm sure most people who are self-employed have heard of the Making Tax Digital So a lot of sole traders and partnerships, at one time of day, if you started business on the 13th of March, you accounted for all your business affairs through to the anniversary date of 12th of March 2025. But now everything is being rebased, so all sole traders and partnerships will have their financial year end ended on either the 31st of March or the 5th of April, and so most will be 31st of March. So that'll, um, from a sole trader's partnership's point of view, um, it makes sense, ties in with the end of the tax year. But from an accountant's point of view, you're going to be busy for 10 months of the year and then you'll have no work for the last 2 months.

Is it easier for them now in regards to like, so you know, Making Tax Digital. I hear adverts on the radio for it. I think there's even TV adverts, especially around this time because it is coming up to that time. Um, is it easier for them now with Making Tax Digital?

Um, no would be the correct answer to that.

You kind of paused and you kind of— I was thinking, oh yeah, maybe there is, or maybe there's kind of like it's a close call.

But no, but I'm looking at it from an accountancy point of view. And these adverts that Aaron's just referred to, um, they're the bane of our lives because it just makes it sound so easy, uh, that a sole trader can just buy a piece of software and they can link it into their bank account and all of a sudden they can produce their own accounts. But there's so much more to it than that, and, and from an accountant's point of view, it's quite frustrating. If you know something about double entry bookkeeping, then it's manna from heaven. But let's face it, the majority of sole traders and partnerships do not have a clue about bookkeeping. So if they did, they'd all become accountants, and there won't be anybody out there doing any kind of trade or anything like that. I do think personally that anybody that does go self-employed should be made to take some kind of formal training and get some kind of certification before they can register as being self-employed. And it's just things about knowing your responsibilities and what you should be doing. So just things like keeping simple bookkeeping records, registering with HMRC for income tax purposes, or possibly payroll or VAT. As well, and making sure you keep valid insurances. Now there's organizations out there like the Chamber of Commerce who will run a startup program, and anybody that's under the age of 30 can actually enroll with the Prince's Trust as well, and they'll have a startup business program. And if you go to somebody like the Prince's Trust, there's grants available as well. In case you need any equipment or any support or whatever.

So, so if, if you were leaving, like if you're say employed at the moment and you wanted to go as a sole trader, um, you know, your recommendation would do one of these courses before actually leaving the employment, get yourself kind of set up, because, um, especially if I'm guessing if you're doing like a company house It takes a little bit of time setting up the bank accounts, you know, all of those kind of things. If you don't do some of these things, like if you, let's say you are self-employed, you're actually employed at the moment, you go self-employed and you don't keep good records, what actually happens? Or what's the stick in this scenario?

You can get in a mess very, very quickly. Again, it's realizing what your obligations are, and you alluded to it earlier, Tullock, when we first started the conversation, that people get to the end of the year and then realize they've not actually provided anything, put anything aside for their tax. And in the first year of being self-employed, your first tax bill is the most punitive tax bill you'll ever get because of the way the tax system works. So you can actually go a period of 18 months before you face your first tax bill, and it's humongous.

Um, why is it a lot bigger on the first sort of one? Because it kind of seems quite counterintuitive. You're just trying to get started, you're kind of up and running, you're trying to do marketing, all the other stuff that you haven't done before, and then—

yeah, and then you get whacked with a huge tax bill. So it's the way that the self-employed system works. The self-employed only pays tax twice a year, once every 6 months, 31st of January, 31st of July. The payment on the 31st of January is what we refer to as a balancing payment. The 31st of July payment is a payment on account, so you don't know what your tax bill is, but you've got to make some form of a payment towards the tax office. And then the 31st of January payment is a combination of a payment on account and a balancing payment of the previous year's tax bill. So when you're just starting out in your first year of business, you miss that first payment on account because you've got no figures in which to base it on. You then go through your first financial year end, and then you come to the following January and you've got to start making the payments on account plus the balancing payment. So that balancing payment is actually 12 months income tax, plus it's another 6 months payment on account towards your following tax bill that's based on 50% of the previous year. Probably not explaining that the best.

No, I, I, well, I kind of get the idea. So that you, you go through, you get taxed on your first year of actual money that you actually got in your hand.

Yeah, and you made one payment for that.

Yeah, so that, so that's fine, you're paying some tax on that. But then you're also paying— is it, if I understood correctly, you said more, I guess, of, or that half of that which you haven't actually received yet because that's in the future. Is that correct?

Yeah, in a nutshell. Yeah, that first tax bill is, is, uh, quite punitive. And, um, The construction industry have a scheme called the Construction Industry Scheme, CIS, and you get an approval from HMRC, but basically it says that you have to— a contractor has to stop the subcontractor 20% of their turnover to go towards their tax bill. Now, in my view, where any clients that come to me for advice, I I tell them the same thing. Doesn't matter whether they're a local shopkeeper, butcher, a shoe shop, or an IT consultant, whatever. Say, put aside 20% of your turnover to cover your income tax bill, and then when it does eventually arrive, you'll have more than enough to cover off your tax. It's a discipline, it's difficult to do, But it's a very easy trap to fall into. You raise a sales invoice, you get paid, and you think, "That's great, I've worked for that money, it's all mine," and completely forget that you've got a tax bill to pay out of that at some point in time. So by putting 20% aside will more than cover any tax bill when it arrives, to the point where you'll find you'll probably have a little bit of a bonus because you've put a bit too much aside. And, you know, we all like a little bit of a bonus, pays for a nice holiday or something like that.

It was going to be one of my questions. I was going to say, like, what is a rule of thumb if I've earned £1,000 in my first year, or like from an invoice, sorry, um, you know, how much of that should I then put aside for tax purposes. So you're saying about 20%, £200 of that should go towards the tax and just leave that and wait until the end of tax year?

Yeah, yeah.

And record keeping, like some of the other things that you mentioned, yeah, that we need to register for the sole traders, they need to register with HMRC. Um, you mentioned good kind of bookkeeping. What is actually book— what, like, what's the— I'm trying to avoid the word minimum But what do you actually need to do for, you know, like, because in the first year you are incredibly busy, you're trying to learn everything, you know, we just need something to kind of get you through.

Well, exactly, and you tend to levitate to do something that you're good at. And like I said before, if you're good at bookkeeping or accountancy, then you get into that field. But, you know, everybody to their strengths. So if we take a plumber or electrician, for example, he's good at that. He knows the industry inside out, back to front. He goes off and does his day's work. The last thing he wants to be doing is any kind of paperwork, because let's face it, it's boring. However, I do tend to recommend what I refer to as my 15-minute-a-day rule. And if you can just sit down for 15 minutes at the end of your working day and just write up a basic cash book of, of your incomings and outgoings for the day, what invoices you've, you've raised and what expenses you've incurred, in just a very simple cash book, which is what we refer to as a single-entry book. Um, it saves an awful lot of time and trouble down the line. It's fresh in your mind, you know what you've received in for the day, what you've invoiced, you've fresh in your mind what you've spent your money on. But 15 minutes a day, if you leave that to the end of the week, you're looking at an hour and a quarter to sit down.

Plus you won't remember everything.

Plus you won't— even at that stage, you won't remember everything. And if you're self-employed, I defy anybody that can sit down for an hour and a quarter without any kind of interruption. Now, if you leave that to the end of the month, you're talking 6 hours. No. And then, you know, the next stage of somebody being a sole trader is probably registering for VAT. Now, once you've registered for VAT, you've got to supply a VAT return every 3 months. So we go back to our 15 minutes a day, 6 hours at the end of month 1. If you leave it to the end of the quarter, that's 18 hours. So you've got to sit down. Well, 18 hours for somebody self-employed, that's 2 whole working days. You can't afford to take 2 working days out of, out of your work time. And then if you're not VAT registered, a lot of people leave it to the end of the year. And you know, you're talking about 72 hours then, you know, for almost 2 weeks. This is where I get a little frustrated in that a lot of people come in and dump a bag full of records into us and expect us to do 2 weeks' work of for record keeping, produce a set of accounts and a Self Assessment tax return for about £500.

So if, let's say, the scenario was I'm a new business owner, sole trader, what— I think you've touched on a couple of them, but what are 3 things that you should do or remember when you're starting that first year? Do— is it, would you say, do the introductory course, keep a single entry cash book, and then something else, or is there some different things?

Put aside 20% of your income for paying your tax because HMRC are very unforgiving, and the best they'll ever offer you is maybe a time-to-pay arrangement. But before you get to that stage, they'll pretty much ask you to remortgage your house. And, you know, if you do get a time-to-pay arrangement with them they'll charge you interest. So it's like, if you can be disciplined enough to just put some money aside, and so you, you're saving the money. Even open up a deposit account. If you go to a lot of these challenger banks now that are online, so people like Starling, Tide, Monzo, you know, you go on to them and they— you can set up what they call pots. So like a deposit account, so you put that 20% aside into a deposit account, you don't touch it until you need it, and with interest rates they are now, you can earn yourself a couple of hundred quid, your money doing nothing. You know, you just build up that little pot to pay your tax. Now when your tax bill does come, like I say, you'll find that you've probably got more than enough there and a little bit extra to treat yourself to something nice and/or useful.

When the company grows a little bit bigger, what kind of needs and stuff happens at that point? Or, you know, like if you've been running for a few years, you know, as a, say, partnership or possibly back into sort of into a limited company, what are the kind of— yeah, I guess the needs and, you know, how— because you kind of mentioned at the beginning that you you do the compliance, which is the end-of-year tax returns, but you also mentioned, you know, you can help a company grow. I guess the question is, you know, how could you actually help them grow when they're sort of at that growth stage?

Okay, well, it all starts off with sitting down with a client and then asking them a very simple question: what's the purpose of you being in business? A lot of people will probably say it's to have a certain lifestyle, to put a roof over myself and my family's head, put food on the table. And other people will recognize that they're actually building an asset, and they're building a business that at some point in time that they could either potentially sell to to an investor, or they might have a succession plan. Their children will take over the, the running of the business, and they can enjoy a share of the profits going forward into their retirement. And they're the kind of people that we would like to, to work with— those who recognize that potentially their business is an asset in itself. And they develop on building that asset. So they start off on their own and then they recognize that they've got the same resources as everybody else, i.e., 24 hours in the day and one pair of hands. So they've got to start leveraging their business, and the only way you can do that is start by employing staff or outsourcing subcontracting to third parties and building your business up. So it's then sitting down with the client and basically formulating a business plan. Doesn't have to be anything sophisticated. I produce business plans for clients that are only 4 pages long, and it just captures the key essence— is the, what's the purpose of the business, um, how you're going to deliver the product or service What you need to deliver that product or service, and who's your target market, how you're going to market it, and, and what, um, what you need to bankroll finance that business. And you need to go to a bank or a third party to, to finance with, or do you have sufficient working capital to, to make it happen anyway. And then it's just revisiting that. We have a phrase within the profession that what gets measured gets done. So you start bringing in KPIs, key performance indicators. So you start monitoring those, what are the key drivers behind the business, and ask the business owner what information what is it that they need in which to manage their business effectively. It's not all about how much money you've got in the bank, it's recognising that if you're starting to offer credit terms, how much people owe you at any one time, how much money do you owe to your suppliers, to the VAT man, to the tax man, to the PAYE, and it's bringing all that into one place. And working with the client to understand how all those interact. And like I say, identify what the key drivers are. A lot of people look at turnover. I'm sure you've heard of the, the phrase turnover is vanity and profit is sanity. So it's again working with the client to stand all of that. It's 4 o'clock, I told you. Here it is, my cup of tea.

That's right on time.

I do have a question just around like businesses. Is there a business structure or that can make a business more tax efficient? You talk about like great, cool, like helping them be an asset. Is there any ways that they can be more tax efficient?

No, no, next question.

Fair enough.

Um, there was a, a time of the day not so long ago where incorporating your business was tax efficient, but since they've started taxing dividends, which is a company equivalent to National Insurance to a sole trader, and the tax gap between being a sole trader and a limited company is very marginal. Now what I will say is that if you are successful enough to the extent that you are creating surplus profits, so you're creating that much money that you can't spend it, then you're better off, um, within the confines of a limited company. But if you are of the habit of spending all the money that you generate, um, then you probably as well just stay as a sole trader, um, for tax point of view.

Is that just because it's easier to, to manage and less paperwork, or, uh, yeah, you're just using that, uh, losing that regulatory, uh, framework.

For a sole trader, for example, the best example I can give you is running a motor car. You can put through the cost of running a motor car and you put through a little bit of a private adjustment, but once you go into a limited company, you're talking about benefits in kind and they're very punitive. We try to steer clients away from operating a company car from a limited company format. At one time in the day, it was a tax-efficient way of doing it, but tax legislation has changed so much over the years that it's more punitive than being a benefit. And unfortunately, the tax situation we have at the moment is that, as I say, if you are of a mind to spend every penny that you generate then it's probably not worth thinking about incorporating your business for tax purposes. What I will say is, because of the world that we are living in now, where everybody is becoming more and more accountable and people are being prosecuted for health and safety failures, There's a lot more risk to being in business, and if you want to minimize that risk, then you probably want to think about limited liability and forming a company.

No, so the advantages mainly on the risk side as opposed to, you know, tax advantage then?

Massively so, yeah. The tax advantage is probably just like 1 or 2%. But for the risk, it's worth thinking about incorporating your business. And as a general rule of thumb, I advise personally, I advise clients that once you start turning over more than your house is worth, you want to incorporate your business. Because while you're a sole trader or in a partnership, all your personal assets are vulnerable. So if you incur a bad debt and you can't meet your bills and you owe suppliers, and technically they could take you to court and you could lose your home, and you know, you've got to sell up your home to, to pay your bills. Whereas of course in a limited company, you're limited by the amount of shares, your liability is limited by the amount of shares you hold in the company.

How do you advise people on you know, registering for VAT, because that— is it £80,000 with your turnover? Is that right?

So, um, well, you'd be pleased to know, Tariq, last week we had a budget and the Chancellor was very generous and he increased the VAT registration threshold from £85,000 to an enormous £90,000.

Do I detect a little bit of sarcasm in there somewhere?

Just a touch. It's one of those things that's been referred to as a stealth tax. It's a bit like our personal allowances and the higher rate tax thresholds all being frozen until 2028. So in another 4 years' time, with the effect of 10% or 4% inflation now, £12,500 is not going to be the same in 2028. And all these economists are forecasting that there'll be so many more millions of people, pensioners paying income tax than they did before, and so many more paying higher rate tax simply just by holding back the thresholds. Now, the VAT threshold is being held back for a good number of years, and this is the first increase that we've had. And I think that had they increased it by the rate of inflation over the years it's been frozen, the VAT threshold should be closer to something like £200,000 than £90,000.

Well, there's quite a difference. Um, what about the— like, from a sole trader's point of view, or is it, is it worth registering for VAT early, or is it is it worth kind of waiting and/or delaying it as much as possible?

It depends on the nature of your business. Um, so if, uh, if, if the nature of your business is supplying labor, then it's probably worth just holding back, um, a little bit more. Um, but if the nature of your business is buying in a product and processing it and reselling it, when you're buying that product, you're going to incur VAT on the purchase of it. And being VAT registered means that you can offset the VAT that you've paid against the VAT that you have to charge your customers when you do become VAT registered.

Okay, so if let's say if you're a gas engineer and you are doing mainly installs where you have to purchase the boiler, etc., you know, that would be— well, I guess that would push you towards being over the threshold quite quickly versus just doing like servicing or something like that.

Very true. Yeah, exactly. So you're better off registering for VAT sooner rather than later. And also, in that particular example you gave, uh, Tolek, your customers are going to be individuals who are not going to be able to claim the VAT back. So if hairdressers as well, they fall into this category. We have so many problems with hairdressers who are very successful and they get up to £80,000. It's not a lot of money this day and age. You know, you can very quickly get up to turning over £80,000, and if your customer base are private clients who cannot claim the VAT back and you've not registered your business, it comes to a point where you're going to have to increase your prices by 20%, and your regular customers aren't going to like that when you register for VAT. So you're probably as well to register sooner rather than later so everybody gets into that mindset that they're paying VAT and you know, you don't have to increase your prices by 20% when the time comes.

Okay, yeah, that's a good idea because otherwise it's, you know, 20% is quite a jump and then the customer's not really seeing any other benefits. And you know, the engineers, you just don't have a choice, you have to do it.

Well, exactly. So you get to the VAT registration threshold of £90,000 and to stand still, to be neutral, you've got to jump from £90,000 turnover effectively to about £108,000 just to stand still. Because if you don't increase your prices by £90,000, it means you've got to take that hit. You know, you're registering for VAT, you're not going to pass it on to your customers, so— but you've got to pay that cost to the VAT man. To Customs Excise. So you, you've got to be prepared.

Okay, I see. So if you're at 90 and then you don't register when you're 90, and then maybe you weren't aware of it or something like that, to actually be at the same profit margin, or they make the same amount of money as you were at 90, you, you have to get to 108.

Yeah. Okay, so that's So when you, when you're approaching the threshold and, um, and the VAT registration, the trigger point is when you expect to go over £90,000, not after you've got to £90,000.

Okay, so you can— you might not even be at £90,000 and you trigger it and then you pay tax from that point of view, or—

yeah, as soon as you expect to go over that threshold, you have to register. Yeah, of course, you know, it's down to proving it. You know, it's very subjective. And the thing with VAT as well, it, uh, it's not a figure that coincides with your financial year end. It's a rolling 12 months. So, you know, here we are in March 2024, so I'm thinking that I need to check my turnover for the past 12 months. And the past 12 months, I'm up to £80,000. I'm okay, I don't need to register. But come next, uh, come next month in April, um, last March I turned over £10,000. Next April I turn over £30,000. That rolling 12-month period suddenly takes me into the VAT threshold.

Okay, so again, it can catch you out.

Yeah, so you have to monitor it on a month-by-month basis.

So your recommendation is just sign up for it early and then just lower the risk, you know, from the customer's point of view as well. Okay.

And also from a marketing point of view, Tolek, it gives your customers a bit of confidence in you. If they come across somebody who's VAT registered and they know something a little bit about tax and VAT and think, 'You know, this guy must be doing okay for himself. He must be turning over in excess of £90,000 to be VAT registered.' Nobody thinks about— you can actually voluntarily register before you get to that figure, so you can register for VAT from day one if you so wish. You're going back to your example of a plumbing and heating engineer that supplies the boilers. He would be as well to register from day one because then he'd be able to claim claim the VAT back on his costs.

For, you know, companies that have been sort of established for a while, they're a limited company, they've got say 5 or 6 engineers, a couple of sort of admin staff in the office, from a tax point of view, is there anything they can do to be slightly more efficient, or any kind of suggestions you can make, or is it pretty well kind of bottled up?

Or is there any areas that a company might spending in regards to like different areas or something like that.

If you're a director and shareholder of a company, most accountants would advise them to structure their remuneration package where they take a combination of a salary and dividend rather than just all salary, and simply because you're saving on a massive amount on National Insurance as an employer. You automatically have to pay an extra 13.8% National Insurance for the privilege of employing staff. So if you can look at— if you're a director shareholder, it's a very easy tax to avoid. Plus also, by Being a director, you're exempt from the Working Time Directive, you're exempt from the National Minimum Wage, and you're exempt from workplace pensions. So, and all these are adding costs onto, onto any business, doesn't matter whether you're limited company or sole trader partnership, if you're employing people. So Being a director shareholder, it can save a lot in National Insurance and pension contributions. However, unless you're going to become a cooperative, or the, like the John Lewis partnership, so to speak, you're going to end up with an awful lot of directors with shareholders. Now, you can structure your business with what we refer to as alphabet shares. And so shares have certain rights attached to them, mostly voting rights, dividend rights, or capital rights. So you can create a class of share with any kind of rights attached to them. And generally what we tend to do with some of our clients is issue key employees with Alphabet shares, they only have dividend rights attached to them, so they don't have any kind of voting rights. So therefore they don't get a say in how the business is managed or run, and they don't get any capital rights. So if the business is sold and somebody comes in and offers you several million pounds, the shareholders with just dividend rights don't get to enjoy a slice of that pie either. So that can be a good way of incentivizing staff by, instead of paying them a bonus through the payroll, pay them a bonus by dividend, which for basic rate taxpayer is taxed at, uh, 8.75% or something.

But if you were, um, would you would you pay, like, the directors themselves, I'm guessing, would take, you know, whatever the tax-free salary is and the rest would be on the dividends. And for the Alphabet shares or for the key sort of staff members, would they get a, like, a kind of a normal market rate and then also get a, you know, just have like the bonus or something through the dividend?

Um, yeah, because if, uh, if your employees are not directors, then they're regulated by the national minimum wage. So, um, that's going up next month. Uh, I think the equivalent is that, um, basic salary average working week, it's gonna be something like £22,000-£23,000 a year. Um, whereas if they were a director and they'll be exempt from that, and you could just pay them the equivalent to the free pay allowance of £12,500. So you could potentially— let's say you've got an employee on £40,000 a year, you give them an alphabet share and say, right, we're going to drop your salary now to national minimum wage, £22,000, but we're going to give you this alphabet share of just one share and we'll pay you a bonus of £18,000. So your remuneration package is still the same at £40,000, but we're just structuring it differently. That is not necessarily tax efficient, but it's more National Insurance efficient.

Is it National Insurance efficient for the company? So that's the employer's National Insurance that's missing. Is it also impacting the employee's National Insurance as well? Is that correct?

It is, yeah. There's, um, employees pay National Insurance at 10%, whereas dividends are only taxed at 8.75% or 8.25%.

Okay, so the total saving is, is it what, something like 18%? Is that right?

Yeah, well, the company will benefit from a 13.8% saving in National Insurance, which you could split 50/50 between the employer and the employee if the employee is savvy enough to negotiate with you.

There's some hints there. Okay, so there's 23%, so it's quite a big difference, a really big difference.

Yeah, National Insurance is one of the most avoidable taxes, whereas income tax is not so really.

Um, sorry, you go ahead. I was gonna just— I was gonna ask, is there anything else that's kind of would be good to know?

Well, the thing, the thing is what you need to be careful of is, uh, if your employees have got mortgages, um, because the mortgages are based on salary. And not investment income. And as soon as you switch to dividend, it's classed as investment income, and it can impact on their ability to get a mortgage. That's the downside. And then of course, depends on what their future aspirations are. Of course, you're familiar with workplace pensions. If you've got an employee you've got to pay 3% into a workplace pension as an employer, they've got to pay 5%. Of course, if you— in the example we've just spoke about— if you drop their salary to £22,000, they're not getting as much into their workplace pension as they once did. Well, I contend, you know, if you're a 20, 30, 40-something, your focus is more on about paying off the mortgage than worrying about your future and pensions. And it only tends to be when you get into that latter stage of your career where you replace your outgoings of paying off a mortgage with all of a sudden I've got this surplus amount of income, so you whack it into a pension instead. But the government say that UK PLC aren't doing enough to provide for their retirement. So, um, they bring in legislation such as the workplace pension to start getting everybody to prepare for their retirement from when they first start work, basically. So while you're looking at these tax-efficient modules, or models rather, um, you need to be mindful of the wider picture and the implications that that unintended consequences is probably the phrase that we're looking for, such as the ability to secure a mortgage. You know, and if they want to upgrade and move from their terraced house into a semi-detached or into a detached house, you know, and they're looking to, quite rightly so, get a, a better, uh, standard. You know, the family might grow and they need a 4-bedroom house instead of a 2-bedroom house. They're only on £22,000 a year, um, then they don't stand a chance basically. So you just need to look at the bigger picture. There's, uh, sometimes saving tax is not always the right road to travel down.

And is it expensive to kind of sort of give the shares and those kind of, you know, like if you have an employee, key employee, and then, you know, for some reason something changes and they depart, is it easy to kind of give them the shares, take it back, etc., or is there quite a bit of admin involved?

If you're going down that route, we'd recommend you have a shareholders agreement in place. From the very start. So the shareholders agreements will outline what happens in the event of— so if an employee leaves, then they are obligated to relinquish that share and the company will buy it back off them. That makes the whole process easy, and where if you don't have the shareholders agreement and you've got a disgruntled employee he's quite entitled to keep hold of that share, clinging on to the hopes that you might inadvertently declare a dividend on that class of share, which you're unlikely to do, of course. But the complications come when you come to sell the business and an investor will come along and say, yeah, we'll buy all share capital including all the Alphabet shares Um, but of course, years ago, you've got a disgruntled employee that left, it's clinging on to their one share, um, out of badness, but it stops you from selling your business because the new owners want complete ownership of all the share capital, you know.

Yeah, so definitely that share policy in place at that point, make it easier for yourself.

Exactly, yeah, yeah. And it doesn't have to be anything complicated, um, you know, you can go on the internet and download a shareholders agreement and tailor it. Of course, you only, you only prove their worth when you go to court, uh, and, uh, you know, you get to that stage, you'll only ever be one winner anyway, which is the lawyers. Um, and generally it's the person with the biggest checkbook that wins anyway. Because they'll just outspend the other party to get the right result. But having a piece of paper in place and making it clear that if you leave this company, you are obligated to give up your share, so everybody knows what they're getting into.

Um, nice and easy. Yeah, you would— yeah, yeah, that must have helped, you know, if you did go to court. I would imagine.

Yeah, let's say, there's only ever one winner, and if you go to court, it isn't you or I.

So we probably have a lot of companies, uh, sole traders, partnerships, whatever, looking at, um, you know, what— that have accountants or are going into the business and looking to get an accountant. What should they look for in an accountant?

Being comfortable with the person you're sat in front with and seeing if you can have an open, honest relationship with them. I don't mean that in a perverse kind of manner, but purely professional. So it's important that you can open up and be honest with each other. Accountants don't enjoy legal privilege like solicitors do, so if you tell an accountant something in confidence and HMRC come along, the accountant will be obligated to mention about anything that you spoke about, where of course solicitors with legal privilege you can tell the solicitor something in confidence and they won't be legally obligated to just make any kind of disclosures. So you need to bear that in mind a little bit. But it is important that you are comfortable with the person that you sat in front of. And there's a two-way street as well. I've sat in front of clients before now, so I'm not, I'm not comfortable in dealing with you, And so kind of encouraged them to go and look somewhere else. You know, it's a very easy thing to do. You know, you might charge a client a couple of £3,000 for doing their limited company accounts, so their fee will go up to £7,000 or £8,000 or £9,000 or even £10,000 just to try and discourage them. But You want somebody who is qualified, so even just an AAT qualification, Association of Accounting Technicians, right through to a professional qualification with either the ACCA, Association of Certified Accountants, or the ICAEW, which is the Chartered Accountants. So you really do want somebody with some kind of qualification. Rather than somebody that fancies a crack at it and thinks he can set himself up as an accountant because he's been in business and knows everything that there is to need to know. But like I say, for me, it's the most crucial aspect is being comfortable with the person that's sat in front of you and whether you can have an open, honest working relationship with them.

And maybe if we looked at it from another way, let's say there's a company that's maybe struggling a little bit, how can a good accountant help them?

Experience, I guess, Aaron. Um, you know, if an accountant is experienced, it's not necessarily about having the, the qualifications, um, because I've worked with people before now who can sit down, read a textbook take an exam and pass it 100% doesn't necessarily make them an expert in their— in that particular field. So somebody that's had experience and been around the block a little bit can be a massive help. So somebody that has, um, in the example you've just given, if they're struggling a little bit and down on their luck and they need to put in some kind of process on managing their affairs, then yeah, somebody with a bit of experience would help. So that could just be something as simple as sitting down and talking with suppliers and setting up time-to-pay arrangements and doing a kind of a business rescue. So putting a time-to-pay arrangement and then again sitting down with the client and what we alluded to earlier in the podcast about having a business plan. How are you going to upscale your business and turn things around so you're increasing your sales, increasing your profitability? So these things, just like a simple business plan— again, doesn't have to be sophisticated— and then putting in certain internal controls, credit control being the biggest one. Come across so many clients that owe so much money because they're too shy, too embarrassed to ask their customers for payment. We have quite a stringent credit control ourselves simply because we'd look a bunch of idiots if we didn't, and we're expounding to clients, you know, you need to sort out your credit control So we have a strict routine ourselves, and it's talking to the clients and saying, you know, what's your process with regards to credit control? Don't be embarrassed to ask for your money. You've done the work, so why should you be made to wait to pay for it? You know, if you don't like speaking to people, then send them a statement at the end of the month. But generally, picking up the phone and saying to them, look, 'Appreciate times might be a bit difficult, they are for me. Is there any chance we can come to some kind of arrangement that you can pay me off maybe in installments, 2 or 3 installments? Prefer you to pay me in full, but you know, we all need to work together on this.' So it's just little things like that. So a good accountant that's got experience of such affairs, um, accounting good and just having that base, you know, some basic qualifications to prove that they do know something about accountancy and tax as well.

Just kind of follow-up question to that, so you can actually set up an accountancy agency without having any qualifications?

Yep, so good luck, and where do I sign the letter of engagement?

Okay, I wasn't aware of that. I just kind of assumed that you would, you know, but like you would have to have some kind of thing. I don't know.

No, there's been a campaign for a good number of years by the associations campaigning the government to make it compulsory that, um, preventing anybody from setting up as, uh, as an accountant or tax advisor I mean, some kind of qualification and then being affiliated to a professional organization. But anybody can set up as an accountant.

And the affiliation, sort of being linked to a kind of an organization, I'm guessing that's for, you know, if there was a complaint or anything like that, at least there's some kind of recourse for the customers. Is that correct?

Yeah, it's just, it's like any, any trade association. So in the, in the accountancy world, uh, we have the ICAW, Institute of Chartered Accountants of England and Wales, very highly regarded. We have the ACCA, the Association of Chartered Certified Accountants. We have the AAT, Association of Accounting Technicians. Um, there's the, uh ICB, International Chartered Bookkeepers, or something. So there's lots of accountancy-related trade organizations. Some of them have real charters, so they can refer to them, their members, as being chartered. So like the Institute of Chartered Certified Accountants or the Institute of Chartered Accountants. So they have a Royal Charter which gives them added credence. So having, uh, looking for an accountant that's affiliated, uh, that has a practicing certificate, uh, would be good. But anybody can set themselves up as an accountant.

And I guess, sorry, just going back to the, the, a good accountant, how it can help a struggling business. I guess it's not too far away from how it would help a company grow as well if they were doing, you know, fine for themselves. They're doing the same things, just, you know, all right, we'll help you push forward. It wouldn't be too much different between the two.

Bang on the money, dead right. Yeah, it's, uh, very similar processes. Um, you know, you're either starting from zero to be successful or you're starting from minus zero to turning things around and becoming successful. So yeah, the same principles. Um, you know, I've got involved with several organizations before now where they were operating in the red and they were struggling to pay their suppliers. First thing we did was negotiate time-to-pay arrangements with all their suppliers. Um, so a lot of organizations generally, they'll buy services, products, whatever on account, and then at the end of the month they'll make a big payment to their supplier. So break it down into paying off an invoice instead of paying off a batch of invoices. Instead of just making one payment a month, make 3 or 4 smaller payments over a period of time, you know, one a week or something like that. So it's just changing the customs and practices a little bit just to get you out of the red and start turning into the black. So once you've got some time-to-pay arrangements in place, then it's looking at, well, what's caused this in the first place? You know, are you selling your products or services too cheap? You know, you've got to then put a price rise in You know, you're buying your, your raw materials in too expensive. Now, you might not be able to get around that because a lot of suppliers might have already stopped supplying you by that stage. So you could be struggling to find efficiencies in, in suppliers. It's about passing those costs on, and it's looking at the difference between, you know, marking up your products. You know, if you wanted to, if you wanted to get a 40% gross profit margin, then you would need to mark up your products by 67% to achieve a 40% gross profit margin. So working with an accountant can explain these things for you. One of the things that we tend to do with our clients is, okay, what do you want to get out of this business? You know, how much do you want to sell? Um, sorry, how much do you want to take home? What's your salary going to be? Because your money is going to come out of the profits of this business. So we work out, do a very simple exercise going through what their household outgoings are, what they need to sustain their standard of living, and coming to an annualized figure and say, okay, so that's going to be your after-tax figure. So we need to gross that up to get to your net profit figure. And on top of that, we need to build on your overheads, and then we get some point where near your, uh, your turnover figure. And then, you know, we start looking— when we get to that, start breaking it down into an hourly rate and say, you know, is that attainable? Can you achieve that? You know, are you able to invoice your customers £50 an hour? And, you know, some people say, yeah, I can do that. I might be able to get £60 an hour. Some will come and say, well, I can only really afford to 'Pay customers £30 an hour.' Okay, that's fine, but you're going to have to adjust your standard of living then to accommodate that. Unless, like I say, you've only got one pair of hands and 24 hours in your day, you're going to start leveraging. And when you start doing that, you start hitting the Walmart type of thinking. You know, you're replacing profit margins with volume, and you start becoming a volume-based business and turning out your products cheaply. You've got to turn out a lot of it.

Yeah, I mean, he's talking about like, are you paying too much for your, for like your, your product sort of thing, um, from like suppliers and stuff like that. And, and I, I used to work in the construction industry in the, in the buying department, and special price agreements or that, you know, working out special price agreements with, um, certain suppliers really did save a lot of money and a lot of hassle. You know, you'll make— you know, you said about, well, you're going to need to put this much profit on that to make it, but if you— you don't have to put that much— as much profit on it because it's cheaper, if that makes sense. You know what I mean? Or it will come down. Everything sort of goes down by itself from that special price agreement. So I do totally agree with what you're saying about, you know, looking at both ends of the stick, as it was.

Yeah, we say very simplistically there's 4 ways to grow a business, and that is to increase your prices, increase the number of customers, increase the number of times your customers buy from you, and efficiencies. Which is just what you've referred to there in terms of looking at your suppliers and thinking, can I get the same quality material from an alternative supplier at a cheaper price? And it could be something as simple as renegotiating your energy bills and finding a cheaper form. But the thing is, there are small gains, um, however the cumulative effect of those small gains can be quite significant. But you need to be mindful of not spending a significant amount of time on making small gains where you can maybe put the equal amount of effort in winning a new customer, which would be far more rewarding.

Do you find that pricing is kind of the main kind of area of improvement for the small It's hitting that sweet spot, isn't it, Torek?

You know, it's being able to gauge your market and find out where the price break lies, and that only comes through research. And then we're getting back to your business plan, into, you know, and your marketing plan. What's the, what's the price breaking in your particular market? What will it tolerate? And then, you know, You might be able to get away with charging a premium, but if you do that, then you've got to provide a Rolls-Royce service. So, you know, I don't know much about electricians or plumbing and heating, but if you're going to somebody's home, how much impressive is it that you vacuum up the debris after you finish working for the day, or after you finish the job that you're working on? You tidy up nicely and make it appear as if you've never actually been there. Just little things like that, you know, giving customers that little bit of added value, extra service.

How surprised, like, once you work through the numbers, like if a tradesperson says, I want to make this amount, and then you kind of work the numbers back, well, this is what your turnover is going to be. How surprised are they at that amount?

Um, very. It's not something that they've even thought about. You know, they think about, oh, I can, I could command £100 an hour and I can work 8 hours a day. Yeah, that's £800 a day. You know, I could, uh, you know, 5 days, £4,000 a week. I'm going to be rolling in it. But what they don't take into account is you've got to travel from A to B, and then you've got to travel to your suppliers and build, you know, pick your materials up. So your actual billable time in a working day drops from 8 hours to something like 4 or 5 hours. So when you start factoring those in as well, We do get at times a figure where the hourly rate is far greater than what they can command or what their particular market is commanding. So like I say, then you have to start looking at alternatives. So you've got to lower your price. Therefore, if you're going to try and sustain this standard of living, then you've got to replace it by volume. And the only way you can do that is by bringing in assistance. But trust me, the first employee that you employ, all your headaches start.

You're not really selling this particularly well, are you?

Well, you know, you're going down a whole route of different employment law, you know, and these people come with rights, you know. You've got to think take care of it seriously and hard. You know, there's a lot of HR advisors out there who— and legislation tends to be weighted more towards the employee than the employer. So I take your point on board, Toluk. Not particularly selling it well, but you've got to be of a certain character being able to take it all on the chin. And you just can't ignore all these things.

Would you say the first person you employ is probably the most expensive in sort of time and investment of like money? Because I'd imagine the second person, where you've already got things in place because of the first person, everything becomes a little bit easier. If that makes sense.

It makes perfect sense, and it's not really something I'd considered until you just mentioned it, Aaron. But, uh, yeah, you're right. Um, you know, you take on your first employee, and that's the point where you start getting all your systems in place. Um, so, you know, your, uh, your contract of employment setting out your, um, your holidays and hours of work, you your duties and responsibilities, etc. And, you know, it's the start of a long journey of systemizing your business. Quite rightly, as you say, second employee comes along, it's great because you've got everything all set up from your first employee. It's a very good observation.

Yeah, yeah. And I think the thing about doing— actually working the numbers up would be incredibly valuable because at least you, you know, if there is an issue, at least you know earlier and you're not kind of wondering why at the end of the year you just didn't make any money.

Well, that brings me very nicely on to, um, the, the most successful businesses tend to be those that have some kind of reporting system in place, like monthly or quarterly management accounts. And as I said before, what gets measured gets done. So if you have a regular reporting system of your key performance indicators, the KPIs, etc., it makes for a very successful business because then you can start identifying trends and patterns, whether they might be seasonal or whether the particular industry that you're in might be going into some kind of recession. Or it's caused by a major change in legislation that the industry's got to get used to first, work out how they can circumvent the rules or the guidelines, as we like to call them, and, and, uh, you know, and then, you know, reset. And once they figured out how the legislation is going to impact them, start again. Um, but as I say, It's no coincidence that the most successful businesses tend to be those that have some kind of regular reporting infrastructure in place. And, you know, I spoke to you before about sitting down with clients and working out what the turnover should be that they aim for. Again, we've said turnover is vanity, profit is sanity. But in my experience, a lot of businessmen, the only number they understand is turnover. And if you can get an accountant or a financial advisor— sorry, a financial director involved in your business that can translate those numbers into a key figure, i.e., turnover, that you understand and say, right, to achieve all of this 'You need to go out and sell this amount in a year,' or break it down, 'You need to achieve this in a month, a week, a day, or an hour.' And in my personal experience, it's generally been the only number that a lot of businessmen understand. If you can get a good accountant or finance director who understands can build the numbers up and say to the business owner, you need to go out and turn over this amount. Um, it's like winding up a clockwork toy. You wind it up and let it go.

Yeah, well, it's— at least if you have such a crystal clear goal, at least you can see, are we on track? Are we not on track? You know? Yeah, it does give that urgency, especially if you break it down to like a daily or weekly, you know, goal. Did we hit our numbers? Did we not?

Yeah, exactly. Um, but it's putting it into very simplistic terms though. But you know what, simple terms works. So KISS— keep it simple, stupid.

Yeah, yeah. The simpler it is, the better it is, I think. You know, if you manage to distill sort of ideas into something simple, at least it's It's clear, there's no ambiguity, you know, it's a lot more actionable as well. Indeed. Well, thank you very much for joining us. It's been very useful. And is there anything else that you wanted to add?

No, just thank you. I found it very informative and yeah, I've learned a lot today. So it's been very good.

Thank you. Good. You're very welcome. Thanks for having me.

No, it was very good. Thank you. Thank you, Jed.