3rd June 2020
In business, certain things fall under the bracket of ‘you’ve just got to do it’. There are legal and financial obligations that every company in the UK must meet and as an owner / director of the business it is your responsibility to ensure that these requirements are met.
These obligations may vary depending on your company structure and size but ensuring you understand the requirements will not only ensure that you meet your responsibilities but also that you will set your business up for future success.
It’s not always easy to stay on top of these things. But in this article, we'll take a look at the different financial responsibilities for pre-revenue, an early-stage startup, scale-up, SME and corporate group businesses.
We’ll examine not just your statutory responsibilities, but how to use digital technology to make things more efficient, easier and compliant too. And, crucially, how completing your financial responsibilities can set your business up for success – no matter what stage it's at.
As Ben Horowitz, the influential VC and entrepreneur, explained starting and running your own business can be euphoric, but “more often than not, it's terrifying”.
You’re running on adrenaline, it’s a race against time, perhaps you’re a little sleep deprived or running low in capital: in short, it can be hard to see the bigger picture. When resources are limited, it’s easy to put some things on snooze.
Often, year-end filings is one of these things. But that’s a mistake. If you’re in this for the long term, compliance is integral for the longevity and success of the business. You may not have profits yet – the necessary ingredient when paying tax – but you can get ready now.
Luckily, this doesn’t require enormous amounts of extra legwork. Simply an understanding of your finances from your business’s data and information. A financial dashboard can help to achieve this and bring your finances to life[BJ2] .
The tool you use should connect with your cloud accounting package and other business tools. From here, you can visualise cash flow and performance. Having a proper grasp on your current finances are will enable you to be proactive to changes in finances and is big step towards getting compliance right in the future.
Not to mention ensure you have enough money to pay suppliers and staff.
It’s all about thinking ahead. In particular, you need to consider tax when issuing shares or share options. Shares in pre-revenue and pre-funding startups aren’t recognised as having a value in the eyes of HMRC – so they’re not taxable. But it’s critical to know precisely when this stops being the case, or you might land your newly hired CFO with a big tax bill.
When you’ve hit your stride as a business, year-end filings and tax has to take front-and-centre. That’s a difficult mental shift to make – but falling foul of HMRC can be a crippling blow to your startup.
VAT, in particular, should be given careful consideration. All start-ups should know when to register for VAT and in what circumstances it might be advantageous to register early for VAT.
In most situations where you are dealing largely B2B, you should seriously consider registering for VAT either immediately or as soon as possible. First off, in the UK, there’s a threshold where the choice is taken from your control. Once your vatable turnover exceeds the VAT threshold – set at £85,000 – you’re obligated to register. That sounds complicated but for most businesses, your actual turnover is your vatable turnover.
You can register for VAT early – and in some cases, it’s highly advisable you do this. If you trade largely B2B, you should register for VAT either immediately or as soon as possible. Doing this means you can reclaim VAT on the goods you are buying, but also all the VAT on your overheads and your set-up costs. For more information on VAT take a look at our dedicated article on common VAT mistakes and how to avoid them.
Cloud accounting software will make the process of tracking and paying VAT simple. The best software will make tracking VAT automatic and at minimal cost to you.
When it comes to completing year-end tax, an important factor for developing startups to consider is going concern. This is the principle that accounts are submitted on the basis the business will be operating for the foreseeable and has enough capital to do so.
Naturally early stage startups have less funding, investment, sales revenue and with external factors such as Brexit and Covid-19 that have impacted ways of doing business it’s important to evidence the ability to sustain the business often by preparing a future focused cash flow forecast.
In recent times, the script has flipped somewhat when it comes to starting and growing a business. It used to be that starting out was the biggest impediment, but now it’s arguably harder to grow your business.
Starting-up is now fairly cost-effective. As Hubspot’s co-founder Brian Halligan explained that when he set the business up in 2006, it set him back over £200,000. A similar endeavor now, Halligan says, would cost a more modest £1,019.
Scaling-up, on the other hand, remains an altogether tricky endeavour. There are simply more moving parts to manage and as your headcount increases, there’s the potential pitfall of expenses.
Managing expenses is not a sexy or fun job. But it’s a big part of maintaining a healthy relationship with HMRC. Technology can help make sure employee reimbursements are legitimate and tax compliant.
You can link a receipt scanning app to your accounting package too. This automates the expense capture process and makes it easier to manage.
As a scale up its likely you’ll have funding or revenue but ensuring you have enough capital to sustain the business is an important principle. Tools that enable you to build a cash flow forecast can help to prove this during the year end accounts process.
Getting your expenses wrong is liable to trigger an HMRC audit or investigation. Once the tax authority’s attention is on you, not only will it eat up valuable time, it could lead to fines and strife further down the road.
The term ‘SME’ gets thrown around a lot. That’s because it’s quite a broad definition: The EU, for example, defines an SME as a business with fewer than 250 employees, and a turnover of less than €50 million.
Barring a few very big businesses, that’s a substantial chunk of businesses. As a complex entity, you’ll require a full suite technology to stay on top of your compliance requirements. There’s simply too much information for the human brain to handle by itself.
A decent cloud accounting software should be the centerpiece of your financial operations. Feeding into this software, you ideally will have a receipt scanning app to manage expenses and a forecasting tool to manage your cash flow.
And, of course, you’ll need professional support to prepare statutory accounts, Corporation Tax returns, VAT returns, Bookkeeping and advice and guidance when other things inevitably crop up.
At the corporate level, tax and statutory reporting will often be an international affair. Other considerations like group structures will complicate matters further.
You will require a fully bespoke compliance strategy tailored to your needs. This may include developing an overall group tax strategy and closely tracking key tax risks on a rolling basis.
Once you trade internationally, you will also need a global compliance reporting solution. An off-the-shelf software will not cut it, and specialist advisers are required to implement software across your whole business.
An opportunity for all business stages
Compliance (year end filings/annual statutory accounts is obviously important at every point of your business journey. But what’s important is that it’s never just seen as a chore. Compliance is also an opportunity to know your business better.
Technology has eliminated a lot of the repetitive, mind-numbing tasks related to compliance. By investing in good tech, staying on the right side of the law has never been simpler.
Don’t stop there, though. All of this data that’s funnelled into your accounting software and into your forecasting tool can help you make better decisions. And while your competitors scramble to catch up, you’re already ready to take the next leap forward.