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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

Why do the self-employed in SMEs earn less than their employed counterparts?

K2 Blog March 14 2017 self employed small businessmanOne of the main reasons why there was so much opposition to the proposal in last week’s Spring Budget to raise National Insurance (NI) payments for the self-employed was that they generally earn less than their counterparts in direct employment.
Not only that, but accepting that the primary purpose of NI is to contribute to the costs of unemployment benefits, sickness pay, holiday and maternity/paternity leave, those in self-employment are entitled to none of these. Therefore, the argument that the measure was aimed at introducing more fairness into NI contributions between the two groups was seen as disingenuous.
According to research from the Resolution Foundation published in October last year, the self-employed earn less than they did in 1994-95. At the same time, they now make up almost 5 million of the workforce and their numbers have risen by 45% since 2001-02.
The research also found that the proportion of self-employed business owners with their own staff had fallen.

Who are the self-employed?

To bring greater clarity to the discussion it is important to define the different types of self-employment.
Firstly, as businesses have sought to reduce their overheads on payroll they have seized the opportunities offered by zero-hours contracts and outsourcing work, which has relieved them of their responsibility for contributing to employees’ NI, leave entitlements and pensions.
Consequently, many of the self-employed are workers who cannot be distinguished from employees such as delivery drivers, taxi drivers, cleaners, builders and IT support workers, who might previously have been directly employed.
There is a second group of self-employed, those who have started their own businesses, whether as sole traders, running micro-businesses or larger and these belong to the category of SMEs. They can provide a range of goods and services from plumbing and heating to house renovation to website development to business consultancy. Some, but not all, may be budding entrepreneurs.
In some ways, it is irrelevant whether their employment status has come about by choice or compulsion as businesses have sought to reduce their payroll costs and obligations.
The main trigger, according to the Resolution Foundation, was the 2008 Financial Crash.  It led to an increase in the numbers of the self-employed, introducing more competition in the demand for their goods or services, leading to a decline in both hourly rates and the working hours available to them.
So, competition and the need to cover the costs that would otherwise be borne by employers may account for a proportion of the lower pay of the self-employed, but another consideration is that many are also responsible for the purchase, running and upkeep of any vehicles and equipment needed for their work. Not all of this may qualify as a tax-deductible business expense.  Not only this but they must cover the costs of administering their business such as maintaining accounts, filing tax returns and business insurance as well as covering professional, compliance and training costs.
Closing the NIC gap is not so fair after all.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

How does the recent business rate revaluation affect you?

business rate revaluation up or down?It has been a long time since business rates were last revalued, but finally the Government’s Valuation Office published draft new rates on September 30, 2016.
They will come into effect from April 2017, leaving a window for businesses to challenge or appeal their new assessment.
In some cases, it was anticipated that small businesses would see a reduction in their charges because they have been based on 2008 valuations and in some cases businesses will be eligible for transitional relief.
Changes announced in March 2016 mean that small businesses with a rateable value (RV) of below £12,000 will be exempt from payment.

Check your business rate revaluation

Businesses can check their new draft business rates online, but the following are some examples:
In Ipswich, a street close to the town centre containing a mix of restaurants and small, independent retailers, one small retail unit of 100 square metres was RV £5,100 (2005), £7,200 (2010) and the draft RV for 2017 is £9,600.
In a small retail mall in Harwood Road, Fulham, London a small retail unit of 54.6 square metres was RV £16,750 (2005), £17,500 (2010) and has remained unchanged in the latest valuation.
By contrast, a large retail unit of 12,754 square metres in Oxford Street, Westminster, London, has jumped from RV £3,630,000 (2010) to draft RV £5,850,000 in 2017.
There is some suggestion that the valuations have been adjusted to allow for a fairer system for smaller businesses taking into account some years of over payment since 2008.
The chairman of the Federation of Small Businesses (FSB) Mike Cherry last week welcomed the review, especially the possibility of relief for some small businesses, but has also called for more frequent revaluations because there will have been a “big jump between the old valuation and the new one”.
The Local Government Minister, Marcus Jones, said “as we make the system fairer up and down the country, nearly three quarters of companies will see no change, or even a fall in their bills, including 600,000 who from next April will have their bills cut altogether”.
We would urge all businesses to check their new valuation online and to share your views on the impact it will have on your business.

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Cash Flow & Forecasting Finance General Turnaround

New dividend tax rules for business owners from April 2016

clock ticking down to tax deadlineAnother April 2016 deadline is looming, this time it is the taxation of income received from dividends on shares.
The new rules are expected to particularly affect owners of small businesses, who previously benefited from the 10% Dividend Tax Credit, which effectively meant that no tax was payable on income for dividends up to the higher rate tax bands.
This tax credit will be abolished from April 1, and replaced by a new tax-free dividend personal allowance.
Under the new system individuals will not have to pay tax on the first £5000 of dividend income.  Beyond that dividend income will be taxed at 7.5% within the basic rate tax band.  Within the higher rate tax band the rate will be 32.5% and within the additional rate band the rate will be 38.1%.
For many the changes will mean that business owners or directors who were able to manage their income between a very low salary, to benefit from the personal tax allowance, and dividend to benefit from the Tax Credit will now become liable for both personal and corporation tax payments.
Dividends received by pensions and ISAs will be unaffected.
With April fast approaching it is important that business owners review their current dividend payments before the end of the tax year especially if they have retained profits in their limited company and can vote through dividend payments before the deadline so as to minimise their tax ahead of the changes.
(Image courtesy of hywards at FreeDigitalPhotos.net)

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery

Regional growth is on hold while we wait for the election

Plainly we’re already hearing political promises ahead of the 2015 election and most noticeably a recognition that the political focus may be shifting away from London.
Small businesses have been saying for many months that the economic picture on investment and their ability to grow is a lot less rosy than in the capital.
Surprise, surprise, Westminster seems finally to be listening with announcements from both Labour and this week from the Coalition on a promised £5 billion of Government investment to be allocated to local authorities and businesses for building homes, improving transport links and for small business support services and new training opportunities.
None of this will happen until after the election at the earliest and that is not helpful for the many small businesses anxious to take advantage of positive signs in the economy.
In the meantime Deloitte has carried out a poll of 112 chief financial officers in bigger companies, which has revealed that while these larger companies were a little more confident about investing and expanding, the respondents felt that the political uncertainty about the election, the Scottish and potential EU referenda were the biggest risks to business.
It would seem therefore that before any “feelgood factor” translates into investment and growth flowing down to small businesses, especially to those in the regions, we need to get the next general election out of the way.
This will provide greater certainty about the future, which in turn influences the confidence about the economy that is needed to justify investment in growth.

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Business Development & Marketing General Rescue, Restructuring & Recovery

Thinking of trading overseas? Where can you get help?

 

Businesses are being encouraged to sell their goods and services overseas as part of the drive to rebuild and rebalance the UK economy after the carnage unleashed by the 2008 crash.

Prime Minister, David Cameron, has set business a target of increasing exports by £1 trillion by 2020, but, if a recent reported comment by business secretary Vince Cable is accurate, businesses cannot expect any help from Government to do so.

So what is a small or a middle-sized business with little or no export experience outside the EU but with the potential to expand overseas to do?

Well actually, there is at least some Government help via the auspices of UKTI (UK Trade and Industry) which acts as a facilitator in organising trade missions to specific countries and pointers to local contacts and to the local issues to be aware or wary of.

Its website also has a very useful page called “where to go next” which details all the issues that a business will need to address to minimise and protect from risks.  These include legal advice on local employment, tax and other issues, insurance, access to export finance (including services provided by UK Export Finance) and specialist advice on risk and security.

While a business may be able to find all this expertise  relatively easily in London, it can be harder for businesses in the regions and the one glaring piece missing from the whole jigsaw puzzle is the existence of experts who can project manage or help a business to organise all these additional aspects.

Has your business considered moving into export markets? How difficult do you find organising all the elements?  Where have you gone for help?

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Is Starting a Business in a Recession Wise or Foolish?

It is no secret that the Government is relying on SMEs to stimulate both the economic recovery and jobs.
Lord Young, senior adviser to the Prime Minister, is on record as saying that a recession may actually be a good time to start a small business on the grounds that wages are low, competition may have fallen by the wayside and premises, too, may also be cheaper to get.
That’s all well and good but there is more to starting a business than having a bright idea and the passion and motivation to get started.
There are a number of other factors to consider, especially where the business is something new and innovative and therefore unlikely to raise finance from currently risk-averse banks and investors.
A start-up must carry out research, identify potential customers, set sensible targets and put all of this into a business plan.  If it needs finance it should consider alternatives to the mainstream sources, whether these are friends and family, partnering with existing firms, seed funding, crowd funding or business angels and also investigate what grants and special concessions may be available that will help in the first year or two of trading.
A mentor or business guardian to help set the path and keep things on track can also make the difference between success and failure.  It’s impossible for a novice to do everything themselves without support and joining local business networks can also be a valuable source of advice and support.
If it is the kind of venture that can benefit from collaboration with other enterprises where there is a synergy, this is an option worth exploring since partnering with existing businesses in a market will help a start-up forge relationships with both a supply chain and  potential customers.
When money is tight, entrepreneurs should explore cash saving ideas such as offering equity, or future work, or future discounts, or other benefits in kind to any business that can provide them with useful services. Examples include introduction to customers, advice, market research, book keeping & accountancy, manufacturing prototypes, provision of office space, use of specialist or expensive equipment, and many more ideas that are only limited by the entrepreneur’s imagination.
Recession or not, starting up a business is all about doing all you can to weight the odds in your favour.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.
It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.
Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.
Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.
To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.
There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.
But all this requires a Government to confront those who view property as their source of security.