October 2020 - TaxAgility Small Business Accountants

Small Business: Managing business risk

Knowing how to identify and manage risk is essential for a small business to survive, operate and prosper amid competition and uncertainty.

A concept illustration of taking risk

“Tell me about the biggest risk you’ve taken in your life.”

If you were to ask this question to small business owners, chances are you would hear them all talking about taking risks to launch their respective business.

Entrepreneurs tend to embrace risk, and successful business owners also know how to identify and skillfully manage both internal and external risks that their business is facing. In this article, our small business accountants look to explore a few common types of risk and discuss how small business owners can benefit from a risk management plan that works for them.

Common types of risk

While it is obvious that every company faces its unique set of risks, there are a few common types that most of us face, given that we operate in a well-connected world. These risks include:

Financial, such as managing rising costs, depreciation of assets, cash flow issues, bad debts, repayment of loans, problems associated with erroneous company accounts and paying an incorrect amount of taxes.
Legal, such as not filing the appropriate documents with Companies House and HMRC, not applying for or renewing appropriate licences, and failure to carry out contractual obligations.
Health and safety, such as dealing with workplace accidents and equipment failure.
Global events, such as a sudden political deposition in another country and a global pandemic that restricts travel movement.
Market, such as changes in consumer behaviours and purchasing habits.
Reputation, such as damage to your brand.
Security, such as theft and fraud.
Staffing, such as the challenge of finding the right people for the right jobs and conflict management.
Technology, such as network interruption, email server failure and a breach in cyber security.
Natural disasters, such as floods, heat waves and earthquakes.

Some of the risks mentioned above might seem indirect or even unlikely to some businesses. For example, if you have no suppliers or customers outside of a town or a city, then it is easy to assume that what goes on elsewhere isn’t going to affect your business. The truth is all businesses are actually more connected than ever, and consumers today can be personally affected by world events that seem far away. Consequently, it is better to prepare for indirect risks than to ignore them.

Managing risks

Risk management is the process of identifying risks specific to your business and coming up with strategies to deal with the risks and recover from the impacts should the unfortunate happen. You can develop an effective risk management plan by following these steps:

Identify the risk
Assess the risk
Manage the risk
Review and update

You can certainly get assistance from various specialists to help with your risk management plan. For example, when assessing financial risks, involve your accountant or speak to a small business accountant like us. Our team of chartered accountants can work with you to review financial risks related to your company, including but not limited to:

Risks from how your company is structured
Risks from incorrect financial transactions
Risks from cash-flow shortage and how to overcome them
Risks from changing customer trends
Risks from inaccurate tax calculations

Essentially, what a risk management plan does is to help you identify issues in various business situations and from there, you develop practical ways to protect your business. To guide you through the process, here are the four steps involved.

Identify the risk

A good risk management plan starts by asking a series of ‘what if’ questions that could affect your business. A few examples are:

What if my key supplier went out of business?
What if my website was hacked?
What if a new competitor opens on the same street?
What if I add eCommerce to the website?
What if a customer sue me?

Assess the risk

Assessing the risk is about the likelihood of any particular risk happening and the consequences it would have on your business.

Here’s an example: let’s say you run an e-commerce site so you need your website to be available 24x7. You have a good hosting contract and the risk of your website going down is low. However, should the unfortunate happen, your costumers cannot reach you nor buy from you. Consequently, you may suffer a financial loss during the period when your site becomes unavailable.

Now you have thought about the risk and the consequence, the next step is to manage the risk.

Manage the risk

The common ways to manage risks are:

Accept them – if the risks are very unlikely to happen, too expensive to mitigate, or impractical, you may choose to accept them and have a recovery plan to manage the consequences should they happen.
Avoid them – you could avoid the risks by not proceeding with an activity or by using an alternative method to achieve the same outcome.
Reduce them – you could reduce the likelihood of the risk occurring or you could reduce the impact if the risk occurs.
Transferring them – you shift the responsibility to another party, such as your insurance provider, through outsourcing or new partnerships.

In the UK, you must get Employers’ Liability insurance from an authorised insurer as soon as you become an employer. Your policy must cover you for at least £5 million. Apart from this statutory obligation, you may consider other types of insurance that are useful to small businesses. They can include content and stock insurance, business interruption insurance, cyber cover, and audit insurance.

Review and update

Just like other business processes, your risk management plan should be reviewed and tested as risks can change, as your business and the environment you operate in.

Developing a recovery plan

Going hand-in-hand with a risk management plan is a recovery plan. The idea here is about how your business can recover and minimise losses should an unfortunate incident happen.

Cyber security is a good example to illustrate this. Small business owners are often targeted by ransomware, malware and malicious emails. The risk is real and it may even occur regularly. To mitigate the risk, you may already have established strict procedures like installing the latest security software to keep your network and devices secure, regularly backing up your data and educating your employees. Despite the best effort, hackers and cyber criminals may still gain unauthorised access to your system. Accordingly, you need to have a recovery plan, detailing anything from stopping the incident from getting worse, calling up experts who can help you resolve the incident, informing the authority if necessary, and considering what legal advice you should take if the incident causes a significant impact on your business or customers.

Tax Agility can help you mitigate risks related to company finances

As leading chartered accountants for small businesses in London, Putney and Richmond-upon-Thames, we tend to involve risk management as part of our daily activities and discussions with our clients.

An obvious activity is that we can help to reduce your financial and compliance risks by managing your company accounts accurately and making sure that your business is tax-efficient.

We are also the person you can bounce ideas with, as we can help to evaluate risks and opportunities that are drawn upon financial data so you can make informed decisions accordingly.

If you are thinking of buying another business or selling an existing one, you can also count on us to assess the value by reviewing the business’s assets, operations, financial performance and tax compliance, to name but a few.

In short, by incorporating risk management, our goal is to make sure that your business is financially sustainable. You will also receive qualified insights that can help in your decision-making process and meet financial compliance.

Our services:

Accounting & Bookkeeping: leave your day-to-day finances to us. We will also provide monthly management accounts, prepare statements and help you set-up cloud accounting.
Tax: if you are tax-efficient, you will have more money to invest, expand and create jobs in your community. Let us help you with tax planning, tax computation and tax returns.
VAT: from VAT returns to manging VAT on import and export goods, we take care of them so you don’t have to.
Payroll: As your team grows, outsource your payroll administration to us so that you and your team can continue to enjoy accurate and on-time payslips every month.
Management consultancy: take your business forward with practical advice based on financial data and benchmark analysis.

Call our small business accountants today on 020 8108 0090.

Alternatively, you can use the contact us form to get in touch.

Trusts and Income Tax

A concept of protecting valuable items We explain six main types of trusts preferred by UK residents and the different Income Tax rates of these trusts.

In the UK, there are six main types of trusts, namely:

Bare trusts
Interest in possession trusts
Discretionary trusts
Accumulation trusts
Settlor-interested trusts
Mixed trusts

For non-residents who want to protect their assets here or want to make sure that their dependents living in the UK are taken care of, the type of trust applicable would be a non-resident trust.

Before we go into each trust type and their tax obligations, let’s get familiar with these terms:

A settlor is a person who puts assets into a trust
A trustee is a person who manages the trust
A beneficiary is a person who benefits from the trust

1. Bare trusts

Bare trusts refer to a simple structure where the trustee holds the assets and incomes of the trust on behalf of the beneficiary. The beneficiary of a bare trust is responsible for paying tax on income from the trust.

Here is an example: you want to provide for a young child, so you set-up a bare trust and create an investment account or a saving account. All funds in the account belong to the child. Once the child reaches 18, they have the absolute right to the money.

Whether your child is 8 or 18, they enjoy the same standard Personal Allowance as everyone else, which is £12,500 a year currently. Anything beyond this threshold is subject to Income Tax.

Here is a snapshot of the income tax bands:

No tax to pay if the taxable income is below £12,500
20% basic rate for taxable income between £12,501 to £50,000
40% higher rate for taxable income between £50,001 to £150,000
45% additional rate for taxable income over £150,000

2. Interest in possession trusts

An interest in possession trust means the trustee must pass on all trust income to the beneficiary as it arises (less any expenses). Who pays the Income Tax depends on the arrangements. If the trustee ‘mandates’ the income to the beneficiary (meaning it goes to the beneficiary directly instead of being passed through the trustee), then the beneficiary will need to include the income on their Self Assessment tax return and pay tax accordingly.

If the income is passed to the trustee first, then the trustee will be responsible for paying the Income Tax.

The tax rate depends on the type of income:

Dividend-type of income is taxed at 7.5%
All other incomes are taxed at 20%

If the beneficiary is a disabled person, special tax rules may apply. It is best to speak to our personal tax accountants if you find yourself in a situation which you aren’t sure.

3. Discretionary trusts

Discretionary trusts are often used when you want to safeguard your assets for the future generations, including descendants who have yet born. Depending on the trust deed, usually trustees of a discretionary trust can decide:

What gets paid out (income or capital)
Which beneficiary to receive the payments
How often payments are made
Any conditions to impose on the beneficiaries

Trustees are also responsible for paying tax on income received by the discretionary trust and the tax rates are as follows:

Dividend-type of income is taxed at 7.5% (below £1,000) and 38.1% (above 1,000)
All other incomes are taxed at 20% (below £1,000) and 45% (above £1,000)

There are two accompanying notes here. The first is that if the settlor has more than one trust, the £1,000 threshold is divided by the number of trusts they have. But if the settlor has set up five or more trusts, each trust is allowed to have the standard rate band of £200.

In addition, trustees do not qualify for the dividend allowance (which is set at £2,000 a year currently). This means trustees must pay tax on all dividends depending on the tax band they fall within.

4. Accumulation trusts

In an accumulation trust, trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay the income out. For example, the beneficiary may be an infant, so the trustees will accumulate the trust’s income until the beneficiary is legally entitled to receive the capital and all incomes.

Accumulation trusts are subject to the same taxation as discretionary trusts discussed above.

5. Settlor-interested trusts

As the name suggests, a settlor-interested trust benefits the settlor or the spouse or civil partner. The trust could be an interest in possession trust, a discretionary trust, or an accumulation trust. Settlor-interested trusts are becoming popular, given that ageing is affecting health care and social costs. What most people do is that they set up a discretionary trust and put their assets in the trust – doing so will make sure that they have money in the future when they can no longer work.

When it comes to taxes, the settlor is responsible for Income Tax on these trusts, even if some of the income is not paid out to them. But because the trustee is the person managing the trust, they have to pay the Income Tax on behalf of the settlor first.

Here’s how it works:

The trustee pays Income Tax on the trust income by filling out a Trust and Estate Tax Return.
They give the settlor a statement of all the income and the rates of tax charged on it.
The settlor tells HMRC about the tax the trustees have paid on their behalf on a Self Assessment tax return.
How much tax to pay depends upon what type of trust the settlor-interested trust is.

Give our Personal Tax accountants a call on 020 8108 0090 when you want to make sure your Trust and Estate Tax Return is correct.

6. Mixed trusts

When you combine more than one type of trust, you are setting up what is called a mixed trust. In this situation, the different parts of the trust are treated according to the tax rules that apply to each part.

Non-resident trusts

If you a settlor and you don’t reside in the UK and are not domiciled in the UK, and you have a mixture of resident and non-resident trustees, or you have trustees who all live outside the UK, then you may have set-up a non-resident trust to protect your assets in the UK. The tax rules of non-resident trusts depend on many factors and can get complicated quickly. It is best to speak to one of our personal tax accountants and discuss your situations, so we could advise how to handle capital gains arise from a non-resident trust.

Experienced Trust and Income Tax accountants

When you set-up a trust, you generally have a few objectives which could be:

You want to look after someone who can’t manage their money
You want to safeguard your assets for your children and grandchildren
You want to have enough money to pay for health care and social costs when you can no longer work
You want to lower the Inheritance Tax your estate is liable for

Accordingly, you will need to choose a trust that can best address your needs and think about how the different tax rules may affect you. This is where our personal tax accountants can help. We will listen to your situations and explain the characteristics of each trust in detail, including:

Advising on the tax advantages and helping you to select the most suitable type of trust
Transferring assets into a trust
Advising on wills to ensure tax efficiency
Maximising inheritance tax reliefs and exemptions
Planning lifetime gifts and making full use of exemptions and lower tax rates available
Advising on adequate life assurance to mitigate any inheritance tax impacts

Call us today on 020 8108 0090 to discuss your situations and how a trust and its tax rules can best match your financial needs. The first meeting is free and no obligation.

Alternatively, you can also use the enquiry form to get in touch.

Important note

The Provision of Services Regulations 2009 requires us to advise you that our professional indemnity insurer is HCC International Insurance Company PLC, 35 Seething Lane, London, EC3N 4AH.

Our territorial coverage is worldwide except for any professional business carried out from an office in the United States of America or Canada and excludes any action for a claim brought in any court in the United States of America or Canada.

We are not authorised financial advisers but will introduce you to suitable firms or individuals when you are considering transactions that would benefit from authorised advice.

We are not regulated by the Financial Services Act and will refer you to an FSA-regulated provider if that will benefit you.

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by Robin Brown

Small Business: Planning and optimising your workforce

The aim of workforce planning is to align your people strategy with short-term changes and long-term goals.

TA staff

As dedicated small business accountants in London working with entrepreneurs from various sectors, we have the privilege of meeting driven small business owners to exchange ideas and share knowledge. One of the topics that crop up regularly in discussions is human resources. Specifically, how does an entrepreneur know when it is the right time to hire and how to go about planning and managing employees effectively.

Successful small business owners, we find, tend to have a workforce that can meet two objectives. Firstly, the workforce is efficiently managed to meet short-term changes which may be related to growth (hiring more staff as you get more clients), decline (having less staff as clients leave), or when there is an increase in competition (having versatile staff who can achieve more with less), to name but a few.

Secondly, smart small business owners also have a long-term plan with specific goals. The plan tells them when they need the right people with the right skills at the right time.

In essence, we view workforce planning as a systematic way to identify what skills are needed, how to find the right people for the right job, and what alternatives are available to address gaps or skill mismatches. As this is a highly fascinating subject, we look to explore it more in this article and see how workforce planning can benefit us all.

When it is time to hire

Should you hire someone because you have just received a new contract? The answer depends on the situation you are in. In general, you know it is time to hire someone when:

Your current workforce cannot cope with the workload or does not have the necessary skills to cope.
You can generate more money if you hire someone.
You have calculated the costs and you are certain that your business can afford it.
The people you hire can support your long-term business goals.

In other words, before hiring, you must understand your current workforce capacity, you are aware of any skills gap in your company, you know how to get the most out of your (current and future) employees, your decisions are guided by financial data, and most importantly, you never lose sight of your future goals.

Labour cost is an area that is worth mentioning. In the UK, employers are required to pay salaries, National Insurance and pension contributions. In addition, business owners also need to spend time and money training the person, as well as offering staff benefits like paid holidays, sick pay and gym membership, to name but a few.

Finding the right people for the right job

Every small business owner is keenly aware that hiring the right people is vital for the success of your business but finding the right people can be challenging. Here are a few good tips that may resonate with some small business owners:

Look for a team player

In many small businesses, employees are required to work cohesively on a project or several projects at once. In this case, look for a team player who is genuine, committed and supportive.

Long-term potential

Job-hopping may be on the rise but it doesn’t mean that companies like it – because turnover is disruptive and it costs money. Look for traits of commitment, particularly if the new hire is vital to your future workforce needs.

Skillset

Test the candidate to make sure they have the ability to perform the tasks required. You can test both technical and soft skills. Technical skills are related to a particular occupation. Soft skills, on the other hand, cover a wide spectrum of traits that shows how one interacts with others.

Getting the best out of your employees

Small business owners know that working longer hours does not necessarily mean more productive or increased efficiency. To get the best out of your employees, a few useful tips include:

Make it clear what you and the business want from them.
Encourage them to take responsibility for their actions; show them how their efforts are tied into the bigger picture or the overall goals of the business.
Create a culture that promotes honesty and strong work ethics.
Incentivise them when a milestone is achieved. This can be something small like taking them out for a meal or something substantial like cash bonuses.
Train and develop people who are keen to contribute. Show them how they can achieve career progression within your organisation.
Provide mentorship, particularly to young workers. Mentorship involves one-to-one discussions that focus on transferring knowledge and connecting at a deeper level.

Alternatives to address skills gaps

It is highly common for small business owners to hire new employees to address skills gaps, but alternatives such as hiring contractors and upskilling current employees should be considered too.

Hiring contractors or freelancers is definitely something that can benefit small business owners as the advantages are obvious:

It is usually (but not always) cheaper to hire a contractor as you don’t have to pay National Insurance, pension, and benefits.
Areas of expertise such as database management and cybersecurity are best left to specialists who know what they are doing (unless your business is based around these disciplines).
You can respond to market changes quicker by hiring or letting go of contractors with short notices.
Contractors have their own insurance to cover for all eventualities.

For more information, follow the link to the article Hiring specialist contractors can reduce SME costs.

Another effective way to address skills gaps is to train your existing staff. Research has shown that upskilling can improve employee job satisfaction and engagement. There are various methods to develop skills, including:

On-the-job training
Accredited or non-accredited training
Attending special industry events
Mentoring and coaching

Don’t forget payroll and benefits

Although studies have shown that employees may not be necessarily motivated by money, every employee still expects to be paid fairly, satisfactory and on time. They also look for benefits like paid holidays, gym memberships and other goodies.

While it is essential to make the pay package attractive to your employees, you also need a robust payroll team in place to calculate individual payslip and deduct PAYE, National Insurance, pension and other items like student loans, along with handling ad-hoc items like bonuses and commissions. But having an in-house payroll team is expensive – fortunately, this is where the outsourced payroll services from Tax Agility can help.

Our complete payroll services are designed for small businesses, helping small business owners like you to manage the payroll function and compliance. We can take over the entire payroll process, help with ad-hoc payroll exercises, manage TRONC Scheme Management for restaurants, bars and hotels, as well as keeping you informed of any changes to the payroll regulations.

Tax Agility promotes small businesses

At Tax Agility, we are chartered accountants specialising in small businesses across London. We’ve helped many entrepreneurs grow from a one-person business to a successful enterprise with dedicated teams in place.

Our services to small businesses in London, Putney and Richmond-upon-Thames include:

Management consultancy is an area worth mentioning if you are looking to grow your business substantially in the near future. At its core, management consultancy is about analysing the financial data of your company and allowing you to use the data to make informed decisions that spur growth.

If you would like to know more about what we can do to help your business – be it to support your bookkeeping, provide tax advice, manage your payroll services, or work with you to grow your business – get in touch by calling 020 8108 0090.