I put this poster on my office wall today.
Few things beat working with an exciting new start up business.
This helps remind me.
Get more inspiring mind grenades and artwork from gaping void.
So often, as well as the founders taking little or no cash out of the business as salary in its early days, the first (brave!) employees also end up having to share this pain.
To help ease this, it is common for employees to be offered shares in the company in lieu of salary (in full or in part). This seems like a sensible option, as the first employees they are treated like sort of quasi-founders, and by taking a small slice of the equity they have the potential to share in the upside of equity ownership if all goes well in exiting further down the line.
This can therefore work well commercially, however, it can cause a headache from a tax perspective….
The UK tax rules related to shares issued or transferred to employees are unfortunately tightly drawn. This results in shares passed to employees being treated for tax as if they were received at full market value – even if no cash changed hands – and therefore as ‘earnings’.
So, say I reward you with 500 ordinary shares in my early stage start up company for the hard work and dedication you’ve put in so far and for accepting a reduced salary, HM Revenue & Customs (HMRC) would treat these shares as employee related income subject to income tax (and possibly even National Insurance). Any employment related tax would be due on the market value of the shares at the date of issue or transfer less any amount paid (if any). The logic behind this is that had the company had cash and paid a salary instead then this would have been subject to tax via PAYE in the normal way so there should be no difference…
But so many start up and early stage companies do not think of this – why should they?
In very early stage companies this may be less of an issue but in situations where there has been external investment or where there is valuable proprietary intellectual property (IP) or even where the founders have a track record of success and there is significant ‘hope value’ or likelihood of success (and therefore value) then extreme care is required.
Complex rules like these, quite frankly, should not be inflicted on new and emerging companies, however, they can and do bite so it’s better to be forewarned (and armed) than to risk stumbling into this headache later down the line which could ultimately disrupt investment or exit opportunities – or at least result in a distracting tax investigation!
It is easy to get caught up in ‘doing’ rather than ‘running’ your business.
So many business owners find themselves running simply to stand still – finding new customers, taking and fulfilling orders and addressing (hopefully not too many) customer complaints.
Sometimes its difficult to see the wood for the trees:
I’m really busy so I must be making money – right…?
Understanding your business finances
It is understandable that, at the end of a busy day working in your business, you would prefer not to review your business finances. But if you don’t understand the numbers that your business is producing then how will you know which bits are working (and profitable) and which bits of your daily work are simply a waste of time and effort?
I frequently recommend that owners of new businesses sit down (at least weekly) with a pencil and journal (yes, that technical!) and write out the week’s sales figures and costs by hand. I find that there is something more insightful about using a pencil and paper compared to an excel or similar spreadsheet – perhaps its the exercise of writing by hand that makes you think more deeply about the figures and how they connect (or not…).
At its most basic, to write out your sales income (ideally split across services or products) and associated costs, will give you a much clearer view of what is profitable work and what is unprofitable – the figures rarely lie. You would be astounded how few entrepreneurs do this simple exercise – and by the number of business owners whose jaws hit the desk when they realise why (or even that!) they are losing money you can tell they wish they’d done this far earlier!
Moving on from pencil and paper to the day-t0-day, I’m a big fan of online cloud accounting packages like Xero as they provide a live dashboard view of the health and performance of your business. Now with live feeds across the majority of UK banks, entrepreneurs can get a realtime view of the health (or otherwise!) of their business. The bank balance is clearly there to see plus debts receivable as are costs payable. Cashflow is absolutely king for all businesses so the ability to see how much cash is in the bank, how much is due in and how much is due out at any one time is crucially important if you are to be in the driving seat in running your business.
Don’t get put off by accountancy mumbo-jumbo, simply by taking the steps set out above on a daily or at least weekly basis, you will be streets ahead of many of your competitors who are ‘busy being busy’ with no clear focus or direction on what works for the future of their business. Try it. Let me know how you get on.
If you are a digital, tech or creative business and you would like some assistance in getting a better grip on your business finances then please drop me a line.
Most companies have 31 December financial year ends.
Yet you have a choice as to when your company accounting period runs to in the UK – unlike in some other countries – so there is no obligation to follow the crowd. Actually, there are some quite compelling reasons why you should opt NOT to have a 31 December year end:
So how about having a 31 March company financial year end? Or if you want to be really adventurous you could have a 31 July year end? Wild, huh?
Note that there are Companies House documents to file and certain restrictions can apply in changing accounting periods – check with your accountant first or drop me a line in the contact section (tab at top)
Interesting comments from Ryan Carson of Carsonified in response to questions regarding hidden challenges lurking in global business via the excellent Duct Tape Marketing. He singled out dealing with VAT as one of the single biggest challenges in growing his UK training business to become a global player commenting:
The laws surrounding tax here aren’t written for the Internet age and don’t really make any sense. It was tough getting a straight answer from the tax man about who we needed to charge tax to and how much. Nightmare!
So true. Yet there have been further changes to VAT introduced this year to add to the confusion and administration. ‘Place of supply’ rules for VAT and determining which services are standard-rated, zero-rated, exempt etc are all routine causes for concern for UK businesses – such issues cause much head-scratching for many accountants let alone business-owners.
We need to simplify VAT administration for UK businesses especially when much of it comprises unpaid form-filling for the government e.g. EC Sales List, Intrastat etc let alone unpaid tax collection! And don’t get me started on the ‘reverse charge mechanism’!
Ryan Carson wisely sums up his advice for UK businesses looking to expand beyond UK shores by saying:
Call your accountant and check tax laws. It’s tough, but once you figure it out, it’s a huge new opportunity to grow your business. Just do it.
Expanding overseas is a minefield for the unwary with rules and regulations above and beyond VAT to contend with, however, by following Ryan’s advice in the above order a supportive professional accountant should be able to walk you through the process. Better to invest a little upfront and get it right, rather than have to unpick a series of potentially expensive cock-ups further down the line.
P.S. Get ready for the change in standard rate VAT from 17.5% to 20% from 4 January 2011.
Yet another insightful Techcelerate event this evening in Manchester chewed over whether ‘initial public offerings’ (IPOs) or ‘stock market listings’ are the right capital raising vehicle for growing technology businesses and the process required should they choose to go down this route.
Marcus Stuttard (AIM CEO) delivered a concise analysis of the advantages of listing on the markets including scenarios where this might not be so appropriate and then Anish Kapoor (Telecity LSE listing) and Simon Elms (Warthog AIM listing) delivered warts and all accounts of the IPO process as entrepreneurs who had been through it and managed to live to tell the tale.
Here are my notes:
Any further comments to add?
Here my short (impromptu) video on why I believe many business start-ups fail.
The old adage that “cash is king” remains as true as ever today, however, there is something else that I am increasingly seeing that can put the future survival of new businesses in jeopardy.
This issue is that: many startups fail to define upfront the market need or problem that their product or service will solve.
Seems obvious right?
You would think so but with so many new businesses looking to innovate into new areas and with technology providing an increasingly affordable platform on which to build new businesses, this consideration sometimes seems to get sidelined – typically until businesses seek funding and / or its too late.
So focus now on that particular market failure or wider need that your future business will plug in the world? What need are we anxiously waiting for you solve by creating your business? What frustrates you (and many others?) that your business will crack?
Be clear on the problem and your business solution and you will be one step ahead in defining future revenues and a potentially profitable business.
I’ve been reflecting on the key business learning points emerging from the BVCA’s excellent recent event Financing & funding the digital age held in Manchester on 16 September 2010.
It was a full day of fast moving panel discussions and keynote speeches that kept coming at a relentless pace until almost 6pm – plenty to chew over hence the delay in penning this summary.
There were so many ideas and tips to unpack that I’ve decided to run a series of posts covering different topics. First up is the comments made on VC funding.
BVCA Digital Age 1: 7 tips for start-ups seeking VC funding
Yesterday saw the formal launch of the Regional National Insurance Contribution (NIC) holiday for businesses started between 22 June 2010 and 5 September 2013.
This tax incentive announced in the June 2010 Emergency Budget allows for a 12 month break from paying employer’s national insurance contributions (currently 12.8% going up to 13.8% from 5 April 2011) on the first 10 employees.
The relief is limited to £5,000 per employee (so £50,000 in total) although it is difficult to foresee in practice how the majority of startup businesses will obtain full benefit for this relief given that new recruits would have to be paid approx £45,000 each to trigger a £50,000 employer’s national insurance liability?
It’s a welcome tax saving all the same to encourage new business start-ups (particularly in the North West), although there are plenty of points to watch – here are just a handful:
NIC holiday points to watch:
HMRC have prepared a flexible form to help calculate and monitor the amount available to withhold under this scheme.
So what appeared to be a straightforward initiative to promote much needed UK startups proves to be a little more tricky in practice although, with a little advance planning, this incentive should provide at least some tax cash savings for new businesses during their tricky first year of trading.
The above information is for educational and entertainment purposes only. It does not constitute professional advice. Please seek advice specific to your circumstances and particular facts. You can contact me if in doubt.
When considering purchasing that shiny new MacBook, desk, printer etc (or pretty much any other capital item) for use in your business, you should think about how you can get the best tax result (as well as considering the best model and price).
Purchased computer equipment, furniture and other plant & equipment is not simply deducted from your profits for accounts and tax purposes. Such items are treated as ‘fixed assets’ in your business accounts and depreciated over their useful economic lives e.g. a £600 laptop might be written off against your business profits over say 3 years (at £200 per year). But tax doesn’t necessarily follow this treatment – that would be far too straightforward!
The Capital Allowances tax regime governs the UK tax treatment of fixed assets in order to provide a degree of uniformity given that depreciation policies can differ between different companies.
The good news is that the capital allowances regime has been significantly simplified over the past few years for the majority of UK businesses. Since 2008, the Annual Investment Allowance (AIA) was introduced which allows businesses (except LLPs) to deduct expenditure up to a certain amount each year from taxable profits in Year one ie 100% tax write off immediately against profits.
The AIA originally started at £50,000 per annum, then went up to £100,000 with effect from 1 April 2010 for companies (5 April 2010 for unincorporated businesses) although it has recently been announced that this will decrease to £25,000 from April 2012.
A key tax planning point therefore is to accelerate planned future significant capital expenditure before the capital allowance rates decrease in 2012.
Care needs to be taken in applying these limits in periods where the limit has changed e.g. a business with a 31 December 2010 year end would need to pro-rata the AIA limit given that the allowance changed from £50,000 to £100,000 with effect from 1 April 2010 for companies. The entitlement is broadly £87,500 AIA for a 31 December 2010 year end, however, some nifty legislative drafting ensures that companies that may have already invested the full £50,000 before the 1 April 2010 (as it otherwise would have been permissible pre the Budget announcement) are not unfairly penalised.
Note that cars are not eligible for the AIA – although there is a some simple tax planning available to fund car purchases with significant tax relief, but I’ll leave that for a future post…
As always the above information is for guidance and educational purposes only and does not constitute professional advice. Please seek professional advice specific to your facts and circumstances (as tax law can be pretty complex and changes fairly frequently!).