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How to cope with big costs, when you’re a small business

The cost of running a small business seems always to be increasing and as costs mount, some struggle to ‘keep up’ financially.

According to research commissioned by the Federation of Small Businesses (FSB), the UK small business community is collectively spending 15 per cent more on taxes, levies and employment obligations than it was back in 2011.

Late payments, rising business rates and employment costs, interest rates, Making Tax Digital (MTD), Brexit-related uncertainty and declining sales are just a handful of the challenges that businesses are currently facing. Unfortunately, these are also challenges that are unlikely to be resolved over-night.

Moreover, it is particularly well documented that small and medium sized enterprises (SME’s) are often disproportionately impacted by these challenges. This can be due to a lack of resources, experience, awareness or available revenue.

So, how can small businesses help themselves, when it comes to handling big costs?

 

Understand your accounts

Understanding your accounts is key to running your business effectively, no matter the state of the economy. At the very least, you should be aware of what’s coming in and what’s going out. 

When it comes to extracting and interpreting more detailed information, this is where many businesses benefit from involving a team of professionals to take care of the number crunching for them.

We can help you to produce regular, up-to-date accounts and we can help you to extract meaningful data from these to inform cashflow forecasts and performance projections. 

Armed with valuable insight, your small business will have a better chance of surviving and succeeding in the long-term.

 

Make the most of tax reliefs

When it comes to the outlays that businesses have to account for, tax is undoubtedly one of the biggest. Making the most of tax reliefs is key to compliantly reducing your liabilities. This in turn will ensure that you keep more of what you’ve worked hard for. 

Without professional advice, it can be tricky to identify exactly which reliefs you’re eligible for. Engaging an experienced tax adviser could, therefore, save you a significant amount of money further down the line.

 

Don’t be afraid to invest in your small business

Waning confidence in the economy and worries about the future can put many small businesses off investing money back into their business. Instead, they opt to sit on their profits ‘just in case’. 

It isn’t always the perfect time to invest and you should always assess the risk before making a decision. However, if you have the means to do so, you shouldn’t be afraid to invest in your business.

Without investment, how will your small business ever move forward, remain competitive and continue to make money?

 

Switch to digital

Making Tax Digital aside, the benefits to your business of embracing digital extend way beyond tax. As time goes on, technology is only going to continue to advance. In essence, this will make doing business easier for those willing to engage with it.

Cloud accounting software, faster payment technology and mobile apps (to name just a few) are designed to help you streamline your operation and save money. 

 

Monitor debtors 

Monitor your debtors carefully!

A big bad debt could seriously impact upon your ability to fulfil any number of your financial obligations.

Make contact with debtors regularly and resolve disputes quickly. If they are having difficulties making payment, discuss potential solutions early on.

 

Product vs. Service

If you are selling a product, it is important to know what your break-even level of sales is and also at what point the business is profitable. With pressure on prices the break-even point may be higher than you realise, and you need to be aware of this.

If you are selling a service, consider the number of hours you are invoicing out each month. Though you may feel busy, it’s essential that you understand whether this is generating billable income.

 

Outsourcing

When you’re already feeling the pinch, outsourcing key business functions may well be the last thing on your mind. However, outsourcing can be a great way to streamline operations that are eating up your time, money and resources (perhaps without you even realising it).

 

Plan, plan, plan

We know we talk about planning a lot, but it’s because it’s so important. Without planning, there is no direction, no way of benchmarking your performance and no way of knowing where you might end up.

Proactive planning can help you to better protect your finances, it’s a fact. Look ahead, make note of financial obligations that you know you will definitely need to fulfil and how you plan to fulfil them and come up with a sound contingency plan for those that may crop up unexpectedly.

 

A suitable structure

Consider whether the financial structure of your business is appropriate. For example, you might be relying on short term finance to fund long term projects. Take time to assess your financial requirements and the funding you currently have in place – if the two are at odds then it may be time for a re-think.

 

How can George Hay help your small business?

Those small businesses which dedicate little or no time to understanding their income and outgoings, or to managing their cashflow, can easily succumb to financial pressures and find themselves floundering. The strategies we’ve discussed above can indeed help you to cope with increasing costs; however, before making any long-term financial decisions, it is wise to take professional advice.

We’ve been working with small businesses for over 80 years, across a range of industry sectors, and we understand the issues they face. We work with you and tailor our services to your needs, not just at year end but at all times, to make running your business a breeze. 

Whilst ensuring you are compliant is always our first concern, we also pride ourselves on the consultative approach we take with all our clients. We won’t just help you to crunch the numbers, but also to interpret them and turn them into actionable insights.

To find out how we can help your small business, call us today on 01462 708810 or email letchworth@georgehay.co.uk

 

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Subsistence expenses: Do you know the rules?

Travel and subsistence expenses are an amount paid out to an employee, by their employer, to cover costs associated with official visits or business travel. These expenses typically include travel, food and drink and lodging, as well as other associated outlay.

Typically the employer will pay the actual amounts expensed by the employee. However, paying subsistence expenses under the flat rate scheme can often appeal to employers and employees alike. These are calculated based on HMRC approved flat-rate amounts and are tax-free.

Subsequently, employees know exactly how much they’ll be paid and employers need not worry about reimbursing the exact cost.

What are the rates for subsistence expenses?

HMRC set benchmark scale rates, which can be used to calculate subsistence payments that are to be made to employees. The rates, which represent the maximum amounts that can be paid tax-free, are as follows:

Minimum journey time = 5 hours / Maximum amount of meal allowance = £5

Minimum journey time = 10 hours / Maximum amount of meal allowance = £10

Minimum journey time = 15 hours (and ongoing at 8pm) / Maximum amount of meal allowance = £25

For these purposes, a meal is deemed to be the combination of food and drink. Where the £5 or £10 rate applies and the qualifying journey continues beyond 8pm, a supplementary rate of £10 can be paid tax-free.

This supplementary amount is expected to cover added and unavoidable expense incurred directly as a result of working late.

Employers can choose to pay out less than the advisory rates, should they deem this to be more appropriate. However, should an employer wish to pay an employee more than the advisory rates, they must first consult HMRC. They must also be able to prove that actual outlay exceeds the benchmark rates.

If a higher amount is paid without prior HMRC approval, the excess is liable to tax and National Insurance contributions.

What is deemed to be qualifying expenditure?

The benchmark rates must only be used to make tax-free subsistence payments, to employees, where all qualifying conditions are met. These conditions are as follows:

  1. the travel is in the performance of the employee’s duties or to a temporary place of work on a journey that is not ‘ordinary commuting’ (i.e. the normal journey between home and work);
  2. the employee is absent from their normal workplace, or home, for an uninterrupted period in excess of five hours or ten hours, as appropriate;
  3. the employee has incurred costs on a meal (food and drink) after the journey has commenced and retained appropriate evidence of their expenditure.

A change to the ‘checking’ rules

Under current rules, employers are required to have a ‘checking’ procedure in place. In other words, the employer must be satisfied that the employee has incurred the outlay for which they are being reimbursed. This is typically done by checking receipts or credit card statements.

The system used by an employer will depend upon the size and nature of the business. Regardless, it should be adequate enough to ensure that expenditure meets the qualifying conditions, only includes allowable items and is not disproportionate.

From 6 April 2019, however, the requirement to implement a checking system will be no more. New legislation, announced at Autumn Budget 2017, will remove the requirement for employers to check evidence of amounts spent when making benchmark scale rate payments.

Instead, employers will only need to carry out checks to ensure that employees are undertaking qualifying travel, before making payment.

What about overseas travel?

Overseas Scale Rates (OSR) are amounts that employers can pay to employees who travel abroad on business. These can also be paid without deducting tax or National Insurance contributions and need not be reported to HMRC. The amounts cover accommodation and subsistence costs. However, they are dependent on the country and city the employee visits, as well as the duration of the visit.

For advice on anything we’ve discussed in this blog, please contact us today to speak to one of our experts.

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Making Tax Digital: Software, spreadsheets or sheets of paper?

Making Tax Digital (MTD) is a Government initiative that represents a fundamental change to the current UK tax system. It is part of a plan to establish a more efficient, effective and user-friendly tax system. The Government anticipates that the taxpayer will benefit from a more streamlined means of record-keeping and of providing information to HMRC.

On the back of harsh criticism from businesses and industry professionals HMRC announced, in July 2017, that it would be amending the timeline for implementation to give businesses more time to prepare for the changes.

Initially MTD will apply, from 1 April 2019, to businesses whose turnover exceeds the VAT threshold (currently £85,000). These businesses will be expected to keep digital records and make quarterly submissions to HMRC, for VAT purposes only.

The scope of MTD will not be widened before the system has been shown to work well and not before April 2020 at the earliest. 

New digital requirements

A business that falls within the scope of MTD must use ‘functional compatible software’ to fulfil the new requirements. Software must be able to connect to HMRC systems via an Application Programming Interface (API), to be fully compliant with MTD.

When considering what you need to do to comply with MTD, you will likely fall into one of three categories: 

• Currently using software

If you fall into this category the transition to Making Tax Digital may be a little easier, but this doesn’t mean you should be complacent. You must ensure the software that you are using is MTD compatible. If it is not compatible, you must act to ensure that you are fully compliant ahead of your implementation date, whether by purchasing new software or upgrading your existing platform.

• Currently using spreadsheets

HMRC has said that most businesses can continue to use spreadsheets for record keeping but these must be combined with compatible software, capable of connecting to HMRC systems via an Application Programming Interface (API), when making submissions to HMRC.

• Not using spreadsheets or software

Businesses will no longer be able to use manual records, subject to limited exemptions. Instead, businesses must use ‘functional compatible software’, as aforementioned. Transitioning from manual to digital record keeping will be challenging for some. Hence, businesses should prioritise preparations now and seek professional advice where appropriate.

Decisions, decisions, decisions…

When choosing accounting software for your business, you should consider factors such as ease of use, pricing and key features. Distinguish between features you require and those you would like; it’s essential that the software meets the fundamental needs of your business. In addition, to satisfy HMRC, software must be able to:

• preserve records in digital form;
• create a VAT return from those records;
• achieve two-way communication, with HMRC, via the API.

We can help you when it comes to choosing and implementing a system matched to your businesses requirements and we can provide professional advice throughout the transition and beyond. We support a range of online accounting software packages. So, when it comes time to take the leap, we have trained advisers on hand to provide as much or as little assistance as you require.

To find out more visit: www.georgehay.co.uk, email us at letchworth@georgehay.co.uk or call us on 01462 708810.

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Looking ahead at Accountex 2018

Last month, we travelled to the ExCeL London for Accountex 2018. For those of you who aren’t familiar with the event, it is the UK’s largest exhibition and conference dedicated to Accountancy & Finance Professionals.

The exhibition provides the perfect opportunity to network with peers, discover new products and technology and listen to insightful talks from industry leaders. Held over two days, thousands of people turned out with their questions and notebooks at the ready.

This year, the focus was on the big changes that lay ahead, not only for us as accountants but for our clients too – namely, Making Tax Digital (MTD).

Making Tax Digital (MTD), as we know, is a key part of the Government’s plans to make it easier for individuals and businesses to get their tax right and stay in control of their affairs. It aims to achieve this by constructing a modern tax system that is more efficient, more effective and more user-friendly.

HMRC’s initial plans were heavily criticised in respect of the pace of implementation as well as the scope of the regime.

As a result, in June 2017, the Government announced a new timetable that will see the following conditions apply:

  • From April 2019, only businesses with turnover above the VAT threshold (currently £85,000) will need to keep digital records and only for VAT purposes;
  • businesses will not be required to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.

Most recently, it was revealed that several of HMRC’s current projects would be put on hold, or else subject to significant delays, because of Brexit preparations. Find out more here.

However, HMRC are confident that MTD for VAT is still on track to be delivered, as expected. Read more in our article ‘MTD pilot ongoing as Brexit causes reprioritisation of HMRC’s projects’.

Live piloting of MTD for VAT is now underway. Initially, HMRC have invited VAT registered entities with the most straightforward affairs to sign up. More complex businesses and public bodies will likely join much later in the year.

With this in mind, you can imagine the vast array of products, solutions and new technology – all designed to make the transition to a digital tax system easier – that we were met with.

There was a real buzz in the room, with everyone eager to engage and share their knowledge with one another!

Ever-improving technology is opening the door to a new way of working for many businesses already. So, as we continue to move towards a digital age, those who resist will surely miss out.

We enjoyed our visit, coming away with plentiful notes and new ideas to improve the way we work with our clients, as MTD draws closer.

Here at George Hay, we keep up to date with all the latest changes to tax and accounts legislation – including announcements relating to Making Tax Digital.

We support a number of online accounting and bookkeeping software packages, including KashFlow™ and Xero™. When it comes time to make the transition, our team of expert advisers will be on hand to provide you with as much or as little assistance as you require. From introducing you to your chosen platform, getting you set up and providing training to assisting you with incorporating the software into your usual accounts routine.

Our aim is to assist our clients with choosing and implementing a system to best suit their business, and to offer professional support and advice throughout the transition and beyond. To speak to one of our experts about Making Tax Digital and what it means for your business, contact us today.

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Directors can be held personally liable for a company’s insolvency

We would like to remind all directors that they can be made personally liable for their company’s debts by law if the company goes into insolvent liquidation. A director of a company that is wound up because it is insolvent can be made personally liable for those debts that the court sees fit, if ‘wrongful trading’ has occurred.

There has been ‘wrongful trading’ if, at some time beforehand, a director knew (or ‘ought reasonably to have concluded’) that there was no reasonable prospect of avoiding the insolvent firm winding up, yet they did not take ‘every step’ to minimise the potential loss to the company’s creditors. In deciding whether a director took every step to minimise the loss to creditors, the court assumes he knew there was no reasonable prospect of the company avoiding the insolvent liquidation, even if in fact he did not.

The aim of the wrongful trading laws is to make directors of companies that are getting into financial trouble stop and think carefully about whether they are being overly optimistic about their company’s prospects, instead of just trying to trade their way out of trouble.

When judging what the director knew, or ought to have concluded, and the steps he should have taken, the court asks two questions:

  • Firstly, it looks at the director’s functions. It asks what a reasonably diligent person with the general knowledge, skill and experience required of someone exercising those functions would have concluded and the steps he would have taken. This is an objective test, under which, for example, a finance director would be expected to reach the minimum level of competence required of all finance directors.
  • Secondly, it looks at the general knowledge, skill and experience that the director actually has ― a subjective test, under which a director with specialist skills or experience is expected to apply them, and is therefore subjected to a higher standard than a director without those skills or experience.

Directors of companies in financial trouble who wish to avoid allegations of wrongful trading should take the following steps:

  • Ensure they always have adequate and timely financial information
  • Be alert to danger signs, such as pressure from creditors
  • Draw conclusions from the circumstances that a reasonably prudent business person would have drawn
  • Hold regular board meetings to discuss/review the company’s situation
  • Ensure they consider the interests of creditors as well as comply with their statutory directors’ duties
  • If there is a prospect of insolvency, do not incur new liabilities as if there was nothing wrong
  • Record conclusions
  • Take specialist, professional advice, consider it carefully and follow it unless there are very good reasons not to
  • Consider stopping trading and starting appropriate insolvency proceedings before creditors do

If you require any further information about any of the above, please email a member of the George Hay team on info@georgehay.co.uk

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