Getting your finance strategy right will help you attract the talent you need, keep them longer and make them happier …
… a bold claim. I’ll be honest with you – my wife works in recruitment marketing and laughed out aloud when I made it. I convinced her, so I must be onto something.
Using your agility to maximise tax free employee benefits
Take advantage of the fact you’re small and agile. There’s a bunch of nice things you can do for your employees that, structured correctly, save you tax and don’t mean extra tax for them.
These are things you should be doing anyway, but the tax saving make it all the sweeter.
Maximising the effect of your workplace pension scheme
A bigger win comes from using your workplace pension scheme smartly. Workplace pensions will always save you and your employees tax. However there are big differences in how tax efficient you can be.
If you don’t optimise how you’ve set the scheme up, you could be missing out on an extra 25.8% that could be going into your valued employee’s pension at no cost to you or them.
The big one, share based payments:
These are very well known in the tech start-up and scale-up space, but more of a mystery to other owner managed business. If you’re not familiar with them:
What is share based payment?
It means giving employees a small shareholding in your business as well as their normal salary. Normally this is done by giving them share options that are linked to them meeting certain goals (e.g. over the next year). You can either give them the shares for free, or allow them to buy them (normally at a discounted price).
Why would I do this?
It’s normally done either instead of, or as an extra boost to, a cash bonus. So you use them to reward high performing staff:
- The obvious benefit is that it saves you money 💲.
- But there’s more to it than this – the option structure encourages your key employees to stick with you (if they don’t the share options are worthless). Even once the options have “vested” (so they get given / can buy the discounted shares) they still want to stick around as they’re now part owners of your business.
- It motivates and aligns your best employees to your goals as the business owner.
- It does all of this very tax efficiently.
Giving away part of my business sounds scary
It’s right to be cautious, but if things are structured correctly any risks can be managed.
- The number of shares you use is kept small, so even if all your key employees meet their targets there’s no risk of you losing control of your business.
- The schemes are structured so that even if your relationships soured in the future, your past employees can’t get in your way. For example, you put conditions in place so that they can’t prevent you from selling your business by refusing to sell their shares.
Won’t this be more expensive than paying them, if my business takes off?
The short answer is yes, it may well be. The smart answer is that you’re better off with a slightly smaller share of a much bigger pie.
- The benefits (in terms of increased motivation and alignment) could well be the thing that helps your business take off.
- It’s better to get 90% of a £1m per year dividend than 100% of a £100k per year dividend.
- A well structured share scheme acts as a pair of “golden handcuffs” that keeps vital staff within your business. This actually makes your business more attractive to investors so they’ll pay more to buy your shares.
I don’t have employees but I do use subcontractors, does this work for them too?
Yes and no:
- Yes – if you have long term subcontractors, then giving them share options will have a similar impact as it would for employees. There are technical differences in how you’d structure things though, and it takes a lot more expertise to get meaningful tax benefits.
- No – if you’re using subcontractors on a short term basis then this may not be strategically optimal. It could be better to set up a joint venture or similar structure, where you both share equity in the JV, while you each retain ownership of your own businesses.
What is a permanent establishment?
Permanent Establishments are a feature of the international tax system. They allow a country to charge tax on revenues 💰 that have been generated there, even if that revenue comes from a multinational company that’s incorporated elsewhere.
You’ll still need to pay UK corporation tax, but there’s (usually) a tax treaty between the UK and the other country. The tax treaty (usually) ensures that one of the two countries refunds, or partly refunds, the tax you’ve paid in the other country.
However, you’ll have to deal with a lot of additional paperwork (and accounting fees). What’s more, if the tax due in the other country is higher than that in the UK you’ll usually pay the higher amount overall. Whereas, if the other country charges you less tax, you’ll not see that benefit – the total tax you’ll pay in that situation is usually the UK amount.
Why’s this a problem for tech start-ups and scale-ups?
Well, international tax law is complex and slow moving, whereas the tech industry in particular is very dynamic. Which is an accident waiting to happen 🚑.
The problem is that even very new tech start-ups can quickly be generating international revenue. No problem there …
… except that the tech industry is also a trailblazer at flexible and remote working. And increasingly this means looking for global solutions at finding the talent you need.
It’s this confluence that can find you getting unexpectedly caught up in the Permanent Establishment rules.
[meanwhile, those originally meant to be targeted 🏹 spend a fraction of their swag 💰 on clever tax structuring].
So, what can be done about it?
If you’re aware of the problem there are plenty of things you can do to ensure you aren’t caught up in this unfairly. On the other hand, if creating a Permanent Establishment is what your business needs, it’s important to be on the front foot in managing the situation and making sure you’re using all the available tax reliefts. As with most things tax related, those steps can’t be applied retrospectively, so it’s important you’re getting the advice and support you need on an ongoing basis.
Budgets…they’re boring…a waste of time…never pan out…they’re just for big corporates, not owner managed businesses…
Just some of the excuses I hear when I ask why budgeting doesn’t get the love❤️ it deserves. In fact, budgetting is one of the most powerful tools around for developing your business ideas and increasing the probability of turning your ideas into reality.
👎🏻 Budgets are boring
Is developing your business ideas and goals boring? Budgeting crystallises your thinking by forcing you to focus on and quantify the £ financial impact of your ideas. It moves your strategic planning from v1.0 to v.2.0
👎🏻 They’re a waste of time … and never pan out
Firstly, they aren’t supposed to be accurate. If you need absolute certainty in your life, you shouldn’t be a business owner.
However, if the exercise is too painful, or the results grossly inaccurate, that’s probably because you don’t have a solid grasp of your business’s financial mechanics. In that case you’re not wasting time, you’re investing it to deepen your understanding of your business.
How do you do this? By putting together a budget, even if it’s time consuming and you aren’t confident it’s robust enough, then monitoring how things actually turn out and analysing the variances. The lessons you learn during that analysis will be invaluable and lead to genuine insights into your business.
👎🏻 It’s just for big corporates
Budgets bring direction to your entire team, so you’re all pulling towards the same clear, unambiguous, goals. That’s just as true for a smaller owner managed business as it is for a FTSE 100 PLC.
If anything smaller businesses need that clear lodestar⭐️ more than a large corporate does. Growing a small business is tough, you’re buffetted by market forces far more than larger businesses, and, typically, founders have a 100 things on their to-do list that they aren’t experts in and don’t have anyone to delegate to.
Your budget helps provide clarity and focus about what you need to do to stay on track.
👍🏼 Convinced it’s worth the effort?
If I’ve changed your mind, and you want to give budgetting a try – here are two things you can do to create a better budget:
1. Check out my free guide to cashflow forecasting. Budgetting and forecasting are very similar activities, so a lot of the steps I outline there can be applied here.
2. Get in touch for a free strategy session. I’m always happy to discuss people’s business plans and give some tips about how to turn them into a fully fledged budget for the year ahead. Or, if it turns out we’re a good fit, you can always become a client and get much more substantive help!
One of the best things about being a business owner is the freedom to choose your own path.
But sometimes we lose site of this.
I was reminded of this a few weeks ago – a great client, who’d always impressed me with boundless positive energy, had seemed off his game the last few times we’d spoken.
I knew he’d started a family relatively recently, so it was easy to assume that sleepless nights on top of the general pressures of building a business was taking a toll.
But I’m glad I decided to check my assumption, because it was wrong. After a bit of gentle probing it was clear that what was actually going on was a more fundamental shift in his risk preference.
After spending a bit of time looking at his personal / family finances, as well as his business, we were able to plot a new course.
This one still get’s him the business he wants. It may take a bit longer, but he gets there in a way that suits him better now.
Yesterday I was at a mastermind event with other progressive accountancy firm owners and was asked why, given my background, I bother with year-end and bookkeeping work? Wouldn't I be better off working exclusively as a virtual FD providing strategic advice?
I guess it's a natural question (for that group) since there are some well known virtual FD francises that make it a point of not getting involved in the "grubby, low margin" work (as it was once put to me).
My answer is pretty simple:
✅ Great businesses come from making great decisions.
✅ Great decisions can only be made with great data.
By offering a full stack of services I know that I have the detailed and reliable data I need to provide the quality of advice I want to.
And it means I'm more deeply connected to my client's business - deeper understanding translates to meaningful insights.
Far from being a nuisance I have to put up with to make my client's lives more convenient (which is also important) - it's actually the superpower that lets me deliver more value in my strategic services.