The First Wealth Guide for Business Owners – Part 2

Welcome to part two of our three-part guide for business owners, covering everything you need to know whether you’re launching, running or selling your business.

In part one, we looked at planning and launching your business. Once you’ve got the ball rolling, you need to keep up that momentum. So in this article, we’ll consider all the things you need to do to keep it running day to day and the ongoing responsibilities of a well-run business.

Employment Decisions

Let’s start with what is the primary asset of any successful business: its people. Putting your team together and selecting the best individuals for the roles is an exciting part of defining your company. These are the people who are going to stand side by side with you as you strive for your ambitions.

Will they be employees on the payroll, or do you want the flexibility of freelancers? Maybe you’ll include a combination of both, depending on demand, or the proportions of each will change as the business develops and grows. The responsibilities of the employer are different towards freelancers in terms of things like NI contributions, workplace pensions and so on.

It’s worth noting that HMRC pay close attention to employment status. If someone meets the criteria to be an employee (there are HMRC tests online to ascertain this) then the employer doesn’t have a choice other than to have them on payroll. It’s not a viable option to have a team made up entirely of freelancers if they are effectively working full time for the business for the employer to save on the NI contributions. It’s an area you may wish to take advice on from an accountant or employment solicitor.

Self-employed contractors can provide the certainty and skills of a full-time employee but over a fixed term or on a project basis, sometimes making this option more appropriate. The government website lists a range of different types of employment status open to employers.

Insuring Yourself

You’re pouring your blood, sweat and tears into building a business that’s important to you. Like anything else you deem precious in life, you will want to ensure it properly.

Depending on the nature of your business and the sector you occupy, there can be many insurance options to consider. The Association of British Insurers website is a good place to start to help you work out what you’ll need.

Business insurance is a way to ensure not just the day-to-day running of the company, but also to provide vital protection to shareholders in the event that anything goes wrong.  When we talk to business owners about insurance, there are three particular areas we flag up:

• Key person cover – This pretty much does what it says on the tin and provides insurance cover for the important people in the business. If, for example, your Sales Director is generating £1m of profit every year and they died or were indefinitely absent from work, in addition to the personal impact this would have, there would be a significant effect on the health of your business. Insuring her or him means that if they were to die the policy would pay out a lump sum that you can use to bring a replacement in at short notice, recruit another employee of the same calibre, or any other associated costs it incurs.
• Personal life cover – Taking out key person cover protects your business, but you’ll still need to take out a personal life insurance policy to cover you and your family in the event of your death. However, if you’re a business owner and you currently have a life insurance policy of your own, it may be appropriate to look at a new Relevant Life policy so the company owns the policy and pays your premiums as a benefit. In the event of your death, the proceeds would still be paid to the same beneficiaries but it’s a more tax-efficient option for the business because the premiums are tax-deductible. It’s a tax-efficient way to use funds while providing a future benefit for the owner or employees.
• Shareholder agreement – If a key shareholder dies or wants to leave a business, the existing shareholders will ordinarily want to ensure their shares remain within the company rather than be passed on or inherited by someone outside the organisation. Setting up a shareholder agreement allows you to establish in advance what would happen in these circumstances, and make sure it’s for the good of the business. It’s likely you will need some life cover to make sure there is sufficient cash available to purchase the shares on death. Your solicitor will be able to guide you through this process to ensure the right structure is in place.

Keep on Top of Cashflow

Being on top of your cashflow is vital. It’s the lifeblood of your business and if it’s not flowing with a regular pulse, you’ll have problems.

The most important thing you need to do is to put together a cashflow forecast. This estimates the cash you’ll have coming in and what will be going out. It makes an educated guess at when you when you’ll be paid by your customers and when you will need to make your payments to your own suppliers and service providers. It gives you a reading of the available cash you’ll have at hand in the business at any one time. A firm grip on your cashflow will allow you to keep your running costs – your operational expenditure – in check.

A word on tax. It’s vital that you understand exactly what taxes will be due and when. The specific taxes you will pay will depend on the set up and complexity of your business, but could include Corporation Tax, Income Tax, PAYE, National Insurance and VAT. Your accountant will be able to help you on the timing and the amount of tax due. It’s great practice to put money aside each month for the amount of tax you will need to pay in the future. Please don’t forget! We hear too many stories of good businesses tripped up by their inability to handle their historic or ongoing tax liabilities.

There are plenty of guides on how to put together your own cashflow forecast online, as well as tools to help you do it, but seeking guidance from your accountant is the most effective way to work this out.

Capital Expenditure – Your Growth Engine

As your business grows, you will need to start planning ahead and plotting a future direction. This could mean increasing your services, developing your offering, or extending your commercial footprint. This type of forward motion will need to be funded, and your capital expenditure – the money you’ll invest in your company to see benefits over time – will be the driver of this.

As your capital expenditure generally concerns bigger sums than your operational expenditure and will likely cover longer spans of time, planning it carefully is obviously crucial. It is entwined with the future complexion of your company – think of it as a statement of intent for your ambitions and growth.

The government’s Annual Investment Allowance (AIA) is currently very generous. It allows you to deduct the full value of an item that qualifies for AIA from your profits before tax and it has temporarily increased to £1 million between 1 January 2019 and 31 December 2020. The government’s research and development (R&D) tax credits are also worth looking into if your business is working on innovative projects in science and technology.

Making Your Pension Work For You and Your Business

Establishing the right pension structure can have benefits for both the business owner and the business. Pensions can be a tax-efficient way of moving profits from the company balance sheet into a personal pension whilst reducing the business’s Corporation Tax bill. The opportunity for the business owner is that, rather than paying money directly to yourself (which is taxable) to then pay it back into a pension, for it instead to go straight to the pension pot as an employer contribution. Additionally, growth is tax-free within a pension, so there would be no Capital Gains Tax to pay.

An attractive option for entrepreneurs and small business owners is to set up a SSAS (Small Self-Administered Scheme) Pension – a tax-efficient option for limited companies. A major benefit of a SSAS pension is that it is flexible on where the scheme’s assets can be invested. A common example is property, where a SSAS is able to purchase the company’s trading premises and lease these back to the company. It also offers the opportunity in certain situations to lend money back to the company and purchase the company’s shares.

Max Your Tax Breaks

A final thought on tax breaks. In the first article, we talked about the importance of having your Money Team around you when you launch your business (including a good financial adviser, accountant and lawyer) and how a proactive approach from them can add huge value to your business.

A good example of this is in identifying tax reliefs and incentives that are available to your company. You can find a list of Corporation Tax reliefs and allowances on the government’s website but, again, the guidance of a proactive accountant and/or business adviser who’s fighting your corner will be the best way to make these benefits work for your business.

In the next and final article in our three-part First Wealth Guide for Business Owners we look at everything you need to know when you’re preparing to sell or pass on your business.

If you would like to talk through your personal and business financial planning requirements, please get in touch.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.