Best Way to Pay Yourself from Your Ltd Company

Directors can pay themselves from their limited companies either in the form of dividends or salary but following changes in 2016/17 to the treatment of dividends, they now need to give a bit more upfront consideration and attention to which they pick so that they are able to remunerate themselves within the most tax efficient manner.

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Autumn Budget 2017: Key Announcements

After much speculation around what will be announced the Chancellor delivered his Autumn Budget to Parliament on 22nd November 2017.

Here is an overview of the key announcements.

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Tide: The Bank Account for Consultants and Freelancers

Sometimes it feels like high street banks don’t care too much about small businesses, consultants or freelancers. However, here at Cottons we do! And we’re always on the hunt to helpful solutions that will help our clients manage their money in a simple, more efficient way.

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Pensions: Updates to Auto-Enrolment

Under the Pensions Act 2008, every employer in the UK must put certain staff into a pension scheme and contribute towards it; this is called ‘automatic enrolment’, or more commonly, ‘auto-enrolment’. If you employ at least one person, then you are an employer and you have certain legal duties in line with this legislation.

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How to Hire and Pay Seasonal Workers

The final quarter of the calendar is packed with events and increased demands which subsequently cause many employers to require seasonal staff in addition to their usual workforce. Seasonal workers are often employed on a short-term basis tasked with fulfilling their duties in a small window of time, this means that the way they are paid differs from full-time staff.

Here’s what you have to consider…

Contracts

It’s vital that employers agree some terms of employment with their seasonal staff and though there is not a specific contract for short-term personnel, it’s common for businesses to draw up fixed term contracts for their temp workers. Normally these contracts state that seasonal staff work until their duties are complete or until the agreed termination date.

It’s also important to acknowledge that seasonal staff are covered by the same employment laws as part-time and full-time workers.

Workers Rights 

Temp workers on fixed term contracts are normally entitled to the same contract conditions as their full-time colleagues after twelve weeks. Therefore if seasonal workers are required for over three months they must receive the same breaks, holidays, working hours and wage as their counterparts.

Furthermore, the ‘Prevention Of Less Favourable Treatment’ regulations, which were introduced in 2002 in relation to fixed-term employment, stipulates that any temporary employees working with an individual company for four years or more should be considered permanent staff once their contract is renewed.

In terms of tax, seasonal staff are subject to standard arrangements, so it’s of the utmost importance for businesses directly hiring temporary personnel to obtain and keep all of the necessary documentation as they would with employees on permanent contracts.

That being said, there are some mitigating circumstances with regard to this legislation, for instance if a company needs to lengthen the original contract terms as part of a collective this may nullify the effects of these guidelines.

Seasonal Staff via Temp Agencies 

Businesses employing temp workers through an agency may experience both advantages and disadvantages from outsourcing their human resources. One benefit of hiring via an agency is that they act as a hallmark of quality as they deal in skills and are expected to select the most qualified workers on their books.

Another clear advantage of recruiting temp staff through agencies is that the agency is responsible for making sure that fixed-term employees are granted at least the minimum wage as well as their statutory rights as stated within the ‘Working Time Regulations’, thus limiting the business’ responsibility.

Furthermore, not only does this depend on the agency’s judgement but it also relies on the number of prospective employees the agency can offer and their availability. For this reason, it’s advisable that employers do some research and comparison to ensure that their seasonal personnel are suitable for the role.

However, employers do not pay temporary staff directly, but rather pay the agency. Thereon it is the agency’s responsibility to account for any holiday, sick days or national insurance contributions. This can potentially be more expensive than hiring directly as agencies often charge admin fees and service charges.

Finally, businesses are required to send their terms of employment as well as details regarding pay, this ensures that seasonal workers are given the rights that they are entitled to. However, this can take a lot of administrative effort and time depending on the amount of temp staff that’s required.

Assistance with paying your employees:

You can contact us if you would like to discuss paying seasonal and regular employees.

We are Cottons Chartered Accountants, a connected accountancy firm with local offices in NorthamptonRugbyDaventry and London too. We offer a fully comprehensive range of tax and accounting and business services for small businesses.

Business Funding With Invoice Factoring

For most businesses, there will come a time when an injection of funds is required, but in such a fast-paced, metamorphic business landscape, it’s no surprise that the financial world favours immediacy.

So how can a business get the finance it needs? What are the options? And how can it get organised to ensure it gets a yes from the lender? Let’s think about Invoice Factoring.

What is Invoice Factoring?

Invoice factoring is a form of debt financing which allows businesses to borrow money to the amount of their outstanding invoices. This form of funding grants businesses quick access to cash and is relatively low-risk in comparison to other forms of debt financing.

Invoice Factoring is commonly used by businesses as a short-term cash flow stabiliser, rather than for making a large capital investment.

Factoring invoices are usually suitable for businesses offering contracted work or companies that trade with other businesses or government agencies.

How Does It Work?

The first step in invoice factoring is completed when the borrowing party issues a bill to their customer on an account due in a 90-day time frame.

The business then sells their accounts receivable to a lender e.g. a lender gives the business the cash due on the invoice before the client pays. When the client pays the lender then receives their cash back. There is a fee and the application process varies depending on the provider you choose.

It should be noted that once you submit your application the lender will assess how eligible you are as a debtor – criteria to consider include; the amount the business wishes to borrow, the sum of their open account(s), the credit history of the business’s customers and any other credit risks.

Once an application is approved, the factor can then release a portion of the requested fund to their debtor, this is typically 80% of the borrowers’ pending invoices – this is referred to as the ‘advance rate’. Risk factors that can affect the advance rate are the debtor’s industry and the size of the transaction.

Following approval, a business’ customer will be notified that the company has assigned receipt of outstanding invoice payments to the factor, this is known as a ‘notice of assignment’ and allows remittance to be dispensed into a lockbox account.

If a client pays the sum of the unsettled invoice and meets the terms of the original invoice, the factor is then able to forward the borrower the remaining invoice amount. This will include the deduction of factoring fees also referred to as a ‘reserve amount’.

Advantages

Invoice factoring is a great way for businesses to release tied up funds from unpaid invoices.

This process saves time as businesses don’t have to wait for their customers to pay their bill. Furthermore, admin time is saved as most factoring providers will pursue invoice payment directly from the client.

Invoice factoring also allows the business to manage their cash flow more easily as the payments are dispensed in instalments.

Disadvantages

Like most other forms of debt financing, factoring providers charge disbursements monthly in addition to other extra fees.

Factoring companies can set stipulations for debtors based on how many regular customers a business gets and how much foreign trade they do.

Small businesses often prefer to maintain working relationships with their clientele, and this can be made difficult if factoring companies manage credit control as they take over the customer liaison role.

Is Invoice Factoring Right for Your Business?

The Asset Based Finance Association (ABFA) have reported that over 45,000 businesses across a range of industries are currently using invoice factoring in the UK. If your customer base trades on credit terms, you would like to increase your working capital or grow your business and you need an immediate cash flow boost, invoice factoring may be worth considering.

Cottons Chartered Accountants and Invoice Factoring

Cottons understand what a business needs to do to secure invoice based lending. Recently we notably assisted a client in achieving invoice finance in less than three weeks through Close Brothers and enabled a company takeover.

Talk to us about getting your business in shape for finance and introducing you to the correct lenders.

Cottons have chartered accountants in LondonNorthamptonRugby and Daventry. Our local offices support local businesses of all sizes with a firm understanding of their individual economic areas. Contact us if you would like to know more about our reliable tax and accounting services for your business.

Business Finance Options: Debt vs Equity

Sourcing funding can be difficult when you are trying to run a business simultaneously. Further to their time-consuming nature, funding procedures have been made more troublesome still by economic austerity which has made funding for businesses, and start-ups in particular, harder to obtain.

However, a well thought out business, with the right personnel in the driving seat, will be able to obtain funding by providing a robust business plan and targeting the correct type of funding for their enterprise.

Of course, there are many types of funding but, unless you are receiving a grant, you will always be looking at finance repayments in the form of debt or equity. In this article we discuss both debt and equity and their relative pros and cons to assist you with your business funding objectives.

Debt Funding

Debt financing entails a business or entity taking a loan from a financier with the intention of paying back the loan amount with interest. This works in similarly to a mortgage or credit card, whereby lenders must outline a payment plan including a minimum interest rate.

The most conventional form of debt financing is a bank loan. Banking criteria means that businesses with a good trading history will stand in good stead. Nevertheless, a good business plan and leadership team is needed.

‘Invoice factoring’ is another form a debt based lending. This is where a lender provides finance for a business against an individual invoice instead of a business signing a long-term agreement. It is more suited to businesses based on contract work as it alleviates fluctuations in cashflow whilst a company awaits outstanding payments. Future invoices dictate funding and the lender is repaid when these are settled.

Funding through Equity

Alternatively, small businesses can opt for financing in exchange for equity to grow their operations. Equity financing requires capital investment in exchange for shares in a burgeoning company. In contrast to debt financing, equity financing provides entrepreneurs with capital upfront with no immediate repayment, but rather long-term return on investment.

The most common form of equity financing comes from venture capitalists or smaller angel investors, like what you might have seen BBC’s ‘Dragon’s Den where entrepreneurs invest in profitable ideas.

Crowdfunding is an alternative and increasingly popular form of equity financing, whereby capital is raised by a pool of ‘micro-financiers’ for a small stake in a business. Examples of these platforms are Kickstarter and Seedr, but due to the breadth of businesses seeking capital injection, only the most promising ideas receive investment. Crowdfunding is particularly popular amongst app developers, digital start-ups and innovative inventions.

Pros and Cons of Debt Based Funding

The disadvantages are that debt financing relies on a debtors ability to pay back the loan at the pre-agreed interest rate, which in today’s climate can be hard to guarantee. In contrast to equity financing, lenders require a fixed repayment schedule and failure to do so potentially impedes your business growth. Furthermore, when personal assets are used to guarantee a loan it could be that these become collected by debtors from you and your family.

The most obvious benefit of debt financing is that once a business has repaid their debt, it retains all its profits.

Other advantages of debt financing are that lenders have no control over operations in the business they have lent to and, the sum of interest paid by a business is tax deductible and therefore reclaimable.  As repayments are often broken down into instalments, debt financing allows small businesses to budget more effectively and forecast their expenses.

The Pros and Cons of Funding in Exchange for Equity

The major advantage of equity financing is that investors are liable for the financial risk, taking the pressure off small business owners and allowing them to focus on the day-to-day running of a company rather than repayments. Also, as business owners are not mounting up debt they are able to use their profits to further grow their enterprise.

As the majority of private investment comes from entrepreneurs, their financial backing comes with useful contacts and in-depth industry knowledge. Conversely to debt financing, equity financiers take a more long-term view to business and are more likely to be patient in awaiting return on investment and input along the way.

However, downsides include the fact that a business’ investor is entitled to a share of profits even after the initial investment amount has been repaid.  As investors retain a share of the company they must also be included in decisions regarding the business.

Finally, in order to regain proprietorship the business owner must buy back shares from their investor, often sold at a higher fee than they were bought.

Making A Decision 

The type of funding that’s right for you largely depends on your business. If you are in the very early stages of establishing your business, it is advisable to consider a loan from family, friends or a bank. As your business grows and your market expands, equity funding may become a more viable option. It’s also worth noting that these modes of finance are not mutually exclusive and various businesses choose a combination of debt and equity financing in order to lessen the negative impacts that comes as a result of either option.

Cottons Corporate Finance

Cottons Chartered Accountants offer a range of finance support services. Most recently we assisted a company takeover by helping the client achieve funding in less than three weeks.

Talk to your local accountant or our Corporate Finance Team about funding options for your business.

A Guide to Making Tax Digital

The advent of digital media has brought challenges and opportunity in equal measure. As we continue to make technological advancements, the way we conduct business must develop accordingly. The Office for National Statistics reported that 83% of British businesses had internet access and an online presence.

However, it appears that HM Revenue & Customs has left a lot to be desired when it comes to digital business management with a system of taxation described by many business owners as ‘outdated’.

Moreover, the amount of uncollected tax has risen due to taxpayer error as well as flawed protocol. The figure of tax not collected is now in excess of £8bn per year which costs Britain’s public and its businesses respectively.

Why Make Tax Digital?

In a bid to make the process of paying taxes more accessible and efficient the Government announced their ‘Making Tax Digital’ initiative as part of their 2015 Autumn Statement.

This announcement also outlined their plans to ‘transform’ the tax system and scrap tax returns by 2020.

Although unprecedented in the UK, digital tax systems have been already been effectively implemented in countries such as Australia, Brazil and Estonia.

There are plenty of benefits to digital record-keeping, for instance, taxpayers using an online tax account are able to get a clearer picture of their tax affairs in real time. Digital tax management also reduces hassle, making it possible for anybody with internet access to remotely monitor their taxes. The web-based service allows business owners to budget more accurately and save time by placing all of their taxes in one place.

Financial Secretary to the Treasury, David Gauke later highlighted more benefits of a digital switchover, adding that introducing digital record keeping and quarterly updates for businesses will eradicate around 10% of taxpayer error.

How are they Making Tax Digital?

MTD is set to be introduced in phases, giving all business owners and landlords at least two years to make the adjustments required to manage their taxes using the new digital service.

The proposed changes are due to take action for VAT purposes from 2019 onwards.

Who is Affected?

Businesses must make an annual turnover that exceeds the VAT threshold, currently set at £85,000 to qualify for digital VAT record keeping. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to make the switch to the new digital system.

As VAT already requires a quarterly update, this won’t be a major adjustment and taxpayers will not need to report to HMRC more frequently than they already do.

‘Smaller’ businesses turning over £10,000 or less will be exempt from the change in legislation, but will be allowed to submit reports and quarterly updates on a voluntary basis.

There are proposed changes to the submission of Corporation Tax however, exact details and dates are yet to be confirmed at this stage. Most British businesses will be required to keep digital records and update HMRC on their income and expenditure every quarter.

What are the benefits?

The implications of a fully digitised tax system are that businesses have more flexible basis periods. This means that traders more suited to shorter accounting periods can submit quarterly reports to HMRC, rather than reporting annually.

Need Help Making Tax Digital

If you need help with Make Tax Digital then talk to us. Our accountants in LondonNorthampton, Rugby and Daventry are experienced in small business tax and accounting and can help you effectively manage changes in processes and legislation which affects you.

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