The ethics of the low-salary high-dividend route

As I wrote in a comment on Richard Murphy's blog last week, my own personal jury is still out on how ethical it is for small limited companies to pay their owner-directors a salary equal to, or just over, the personal allowance, and the rest of their remuneration in dividends.

This is of course perfectly legal. It rewards the owner-director for both the work they do (salary) and the risks they run in owning the business (dividends), and who's to say how much the individual should receive for each. And it's highly tax-efficient, because there'll be little if any PAYE and NIC due on the salary, and even though dividends come out of post-corporation-tax profit, there's no NIC on them, of either kind.

And I have to admit, in all honesty, that I do it.

But I can't help a feeling in my stomach that while this complies with the letter of the law, it doesn't comply with the spirit of the law? Is this how the system is designed to operate? Were small companies, and their directors, really meant to pay so little tax and NIC?

Richard suggests that small businesses should be run as LLPs rather than Ltds, so that the low-salary high-dividend route is closed. But that's not an option for one-person businesses like mine. To start an LLP you'd need a business partner.

The only other option, if you're in business alone, is to be a sole trader, in which case you lose the protection of limited liability. There's no such thing as a LLST.

Part of me says that if the Treasury felt that low-salary high-dividend was a real problem, they would close the loophole by extending National Minimum Wage legislation to all company directors, or putting NIC on dividends from close companies.

After all, the situation has been on-going ever since the 0% tax rate on all small company profits under £10,000 was introduced in April 2002, just before I sat my finals. Dozens, hundreds, of small businesses incorporated to save tax. And even though the 0% tax rate is a thing of the past since April 2006, over three years ago, there's still a distinct tax advantage to trading through a limited company, because there's no NIC on dividend income.

For me this is a real ethical conundrum. I'd be interested to hear what others think of it.

The Google Mail glow

My accountancy-practice-in-the-making needed a new e-mail address and a new website.

So I registered a domain www.homebusinessaccountant.co.uk* with 123-reg.

Then I decided to try their webmail to read my e-mail on info@homebusinessaccountant.co.uk.

I'm afraid I wasn't very impressed.

When I opened a new message, it hung for ages. Several times I had to forward messages to my Google Mail account before I could actually read them.

The final straw was with the joining messages from WiRe, Women in Rural Enterprise which it wouldn't even open. It said something about "a measure of data" I think. Bleurgh.

So I set it up to forward to my Google Mail account and set the Google Mail account up to receive it.

And Google Mail went and picked up all the old messages, as well as receiving any new ones coming in. Brilliant.

Now all my business messages come into Google Mail and I can reply with either of my addresses.

Cool.

* My website isn't live yet - hence there's no link here yet. To be updated.

The Revenue do it better

I've had my fair share of problems dealing with HM Revenue.

But in one respect, they deserve a gold star.

That's how they let anyone file a Tax Return online, using approved third party software, so long as the filer (not sure that word exists) has the right reference number.

And a Return can be filed on someone else's behalf, too. So I can file Tax Returns for my mum and dad without having to go through the giant holding bay that is the 64-8 submission process.

Companies House, on the other hand, deserve a slap with a wet fish for being in the Dark Ages.

To file accounts online with them, you have to download and fill in their abbreviated accounts template. That's after you've already spent [put in the number of hours here] completing accounts using third party software like IRIS, Digita and VT (my own favourite).

And, you can only do that if you know two different codes for the company, as well as the company's number.

I guess an extra layer of security is a good idea because company accounts are on the public record, which Tax Returns are not.

But does the process have to be so laborious? Surely, if HM Revenue can approve third party software for filing Tax Returns, Companies House could do the same for filing company accounts?

P.S. I tried downloading the accounts template for my own company. That was about 20 minutes ago and the page has stuck. Maybe it doesn't like my company because the next accounts filing date is in the future...

Crunch it up

I heard mention on the grapevine of a new venture called Crunch.

From their website, Crunch reads as an end-to-end SaaS and accounting service for small limited companies, up to year end accounts.

There are several features of the system which sound great. For example, an automatic text message when a customer pays you.

But what the Crunch website doesn't explain (or if it does, it's well hidden), is who does the company's and directors' tax returns, and whether they're included in the monthly fee. Accounting doesn't stop at accounts.

Also, there's no demo of the software that I could find, neither a video nor access to a demo account. I'd have liked to see what the software looks like.

And Crunch seem to be doing all they can to encourage sole traders earning over £25k per annum to go limited.

Yes, that will save tax. Yes, that will give the benefit of limited liability.

But it does come with its drawbacks.

For one thing, if you work from home and want to keep your address private (i.e. not have to put it on your website / e-mail signature / business cards), there's no doing that if your business is a limited company.

For another, you have to understand the concept that you and the company are two separate legal entities. Any sales the company makes is money that belongs to the company - not to you. You can't take money out of the company as freely as you can from a sole trade, which is legally the same entity as you.

So what's my verdict on Crunch? I'd have to know a bit more before saying that. And I guess they're not going to put the negative side of being a Ltdco in their marketing - but I hope they warn customers of it first...

Paddi in the UK!

Regular readers of my blog may have seen mention of Paddi Lund before.

For anyone who's not heard of Paddi - he's an Australian dentist who also has some fantastic ideas about business.

How many dentists (or other businesses for that matter) do you know who'll only take on new clients if they're referred by a chosen existing client?

Who keep the front door locked, and sawed up the front desk (and replaced it with a cappuccino machine)?

Who offer their clients tea or coffee in bone china cups, and freshly baked Dental Buns, in their own personal space in the surgery?

And yet... Paddi's working week is only 23 hours and he still makes lots of money... and most of his customers love paying him.

No that's not a gag. I've spent a lot of time recently working with Paddi's material, and there's a large part of me that says "This might just work!"

And some of the points he makes really make me sit up and say, "Yes, that's true!". Like when he says:

An explanation given before the problem occurs is a reason. An explanation given after the problem occurs is an excuse.

Paddi has not only written 6 books, he's coming to the UK and Ireland this October to deliver workshops and seminars about how he built his business - and share how businesspeople here can do that too.

I'll be attending the Birmingham seminar. And I'd urge anyone who can, to come along to one of the seminars too. I've seen a video of Paddi presenting and he's a great speaker - fun, lively and interesting.

Hope to see you at the seminar.

You are the boss... eh?

In the Work section of last weekend's Saturday Guardian was one of Karren Brady and Paul Trevillion's "You are the Boss" cartoons.

These describe (and illustrate) a workplace problem and then give three possible solutions.

Here's last week's problem:

One of your staff prides herself on her punctuality, arriving 5 minutes early. However, she is in the habit of eating breakfast when she gets in, then finishes her makeup, and by the time she has checked her social networking, she is the last to start work. What do you do?

And the suggested solutions:

a) Enforce strict adherence to contractual start times - for all staff.
b) Reschedule meetings to breakfast time and get the team starting work with the most important meal of the day.
c) Clear the kitchen before she arrives.

The given correct answer was a).

But I disagree. My correct answer would have been "none of the above".

I'd have said that the manager should have taken the errant member of staff aside for a quiet word with her alone.

a) would create a bad atmosphere in the office for two reasons. The punctual team members get upset because they feel they're being picked on even though they've done nothing wrong, and the lady in question would probably think "this doesn't apply to me" and carry on exactly as she has been doing.

What do other people think?

Update: Always read the small print

Further to my last post, the ICAEW have now realised that the guidance notes should have said "haven't had a certificate in the last 3 years and haven't had the exemption before" - they'd put "or" instead of "and".

Oops.

And no wonder I couldn't find that anywhere else on their site.

They've put it right now in the guidance notes, after I pointed it out to them.