Pearl Lemon Accountants

Tag: business accounting basics

  • Wrongful Trading: What It Is and How to Avoid It

    Wrongful Trading: What It Is and How to Avoid It

    Wrongful trading, often known as “trading irresponsibly,” is a civil wrong covered by Section 214 of the 1986 Insolvency Act. As a result, industry professionals frequently refer to it as simply “Section 214.”

    The premise of wrongful trading is that a director of a UK limited company becomes fully aware of their firm’s insolvency, but does not act in a way that minimizes the loss to business creditors. It was created as a counter-measure to fraudulent trading.

    Wrongful trading is described by Section 214 as when a firm’s director allows the company to trade past the point where it:

    ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’; ‘

    did not take “every step with a view to minimising the potential loss to the company’s creditors’.

    Wrongful Trading Vs. Fraudulent Trading

    Wrongful trading differs from fraudulent trading in numerous ways, despite the fact that they are typically lumped together. To begin with, unlike fraudulent trading, wrongful trading is not a criminal offense, though individuals found guilty of either crime face substantial consequences.

    While fraudulent trading is frequently calculated and deliberate, many instances of wrongful trading are undertaken by directors without their full understanding of what they were doing.

    As a director of a limited business, however, it is your job to understand what constitutes wrongful trading and to implement the proper precautions to avoid breaching these regulations. HMRC and the law do not accept ignorance as much of defence!

    An act, or a set of acts, committed by an insolvent corporation is known as wrongful trading. It is vital to emphasize that claims of unlawful trading can only be filed against a firm when it is terminally insolvent.

    When a business realizes it is insolvent and has no reasonable hope of recovery, its directors should take actions to reduce the impact of the company’s insolvency will have on its creditors. This means that directors should avoid doing anything that could put their creditors in a worse position, such as taking on more debt or selling firm assets.

    To avoid further financial harm to creditors (as it is all about them once insolvency looms), it is frequently recommended that the company halt trade immediately – albeit this is not always the case. Trade may well be allowed to continue in some cases if it can be proven that this activity will raise the prospective returns for all creditors. However, because this is a highly complex issue, professional counsel should be sought before taking any action.

    What are Considered Wrongful Trading Actions?

    Making a so-called “preferred payment” is one of the most typical forms of improper trading. When it comes to paying back money owed, this is when a firm favours one creditor above another. Paying money owing to friends and family members before paying your other suppliers or creditors is an example of this.

    When a corporation is knowingly insolvent, it is usually recommended that it make no payments to any creditors in order to avoid undue preference claims. Obviously, some creditors will push harder for payment than others, but it will still be up to the directors to do the right thing and ensure everyone is considered equally.

    Other common examples of wrongful trading include:

    • Trading while knowingly insolvent
    • Paying down loans that have been personally guaranteed before addressing other debts.
    • Taking out more credit (from lenders or suppliers) when you know you won’t be able to pay it back
    • Accepting deposits for products you won’t be able to deliver, or for work you will not be able to complete.

    This list is not an exhaustive one. If you are unsure if your activities could be interpreted as wrongful trading, you should obtain professional advice as soon as possible, preferably before an insolvency is a foregone conclusion.

    What Are the Penalties for Wrongful Trading?

    Wrongful trading only applies when a company is insolvent and there is no way to save it. This means that the company’s liquidation will be overseen by a licensed insolvency practitioner. Investigating the behaviour of the directors in the period leading up to the company’s insolvency is an element of the insolvency practitioner’s job.

    If evidence of wrongful trading is discovered, the insolvency practitioner is required to report this to the Insolvency Service, which will investigate the claims further. If you are proven to be guilty of wrongful trading, you may face personal consequences. The transactions in question may be voidable, and directors may be compelled to make a personal financial contribution to compensate for the loss.

    Avoiding Wrongful Trading Accusations

    As a director of an insolvent corporation, you have a wide range of responsibilities that can be quite challenging. What is evident is that any director in this situation must move quickly to clarify their stance and understand the potential consequences of continuing to trade.

    An experienced accountant, like those who make up the Pearl Lemon Accountants team, can help businesses that are experiencing cash flow problems by giving them the guidance they need to get back on track, avoiding insolvency, and wrongful trading headaches, altogether.

    FAQs

    Who is liable for wrongful trading?

    Directors are liable for wrongful trading. If they continue to practice wrongful trading, they could be personally liable.

    For more information, book a call with our experts today!

    Examples of behaviour or actions they’ll look for?

    They look for money that is owed and should’ve been paid earlier. They also look for those who fail to manage the VAT scheme properly. Essentially, they are looking for those who continue to trade while insolvent.

    If you would like more information, feel free to book a call with our experts!

    What is wrongful trading?

    It’s a kind of civil mistake under the UK insolvency law. Basically, wrongful trading is when a director continues trading despite the insolvent status of the company. In doing so, he is acting against the organisation’s creditors.

  • Understanding – And Using – a Director’s Loan Account

    Understanding – And Using – a Director’s Loan Account

    Understanding – And Using – a Director’s Loan Account 

    If you own a business, you’ve probably come across the term “directors loan account.” Directors loan accounts (DLA) are one of the many tax provisions that you should be familiar with when you start a business of your own. That’s especially true of DLAs, as, if done right, they can offer you personally some significant financial benefits.

    What is a Directors Loan Account?

    A director’s loan account is not a real bank account, it exists only in your accounting records to keep track of the money flowing between you and the limited company. A directors loan account requires you to be a director of a company, as the name implies.

    When you form a limited company, unlike when you operate as a sole trader, the company is treated as a separate legal entity, and the money in the company does not legally belong to you. You can withdraw this money in a variety of ways, and the director’s loan account keeps track of who owes what.

    You are borrowing from the company via the DLA when you take money out of the company that is not a loan repayment, expense repayment, salary, or dividend. Personal spending from the business bank account, cash withdrawals for personal use, or money transfers to your personal bank account are examples of this.

    Putting Money Into Your Business

    The DLA is also used to keep track of any money you lend to your company. In addition, any money you spend on behalf of the company (business expenses) is recorded in the DLA as owing to you. The previous credit entry in the DLA will be cancelled once the company makes payment for the expenses.

    What To Keep In Mind About Directors Loan Accounts and Taking Money Out of Your Business

    Too Much Becomes a Benefit in Kind

    If your DLA account is overdrawn by more than £10,000, it’s considered a benefit in kind because you’re getting a loan with no interest. This must be declared on a p11d prepared by the company, and you must pay income tax on this benefit in kind on your personal tax return. To avoid this, you could pay interest on the money you have borrowed, in which case the loan is no longer a benefit in kind.

    You May Owe the Company Money at Years’ End

    Dividends are paid from reserves as a return on investment, and they are paid after corporation tax. A dividend declaration can be used to settle a directors loan account that is still outstanding at the end of the year, but you must ensure that there is enough profit left over after taxes to settle the account with dividends. If you have an overdrawn director’s loan account and owe money, you must report it on your corporation tax return, and you may have to pay tax on it.

    There is no tax to pay if you repay the loan within 9 months and 1 day of the end of your accounting year; if this is not possible, the company must pay 32.5 percent s455 tax on the loan, which is recoverable after the loan is repaid.

    And by the way, The director’s loan includes what HMRC classifies as associates, which includes husbands, wives, civil partners, relatives, business partners, and investors.

    Why Would I Need a Directors Loan Account?

    There are a variety of reasons why you might need a loan from your company, such as unexpected repair costs or even paying for a personal holiday trip.

    The most important thing to remember is that the loan was not subject to personal or corporate tax, and HMRC does demand what is due!

    What happens if I owe money to my company?

    If you owe your company more than £10,000 (interest-free) at any time, the loan is considered a benefit in kind, and you’ll need to report it on a P11D because it’ll be subject to both personal and corporate tax. On top of that, you’ll have to pay Class 1A National Insurance on the entire amount.

    What if my business owes me money?

    Your company does not pay Corporation Tax on money you personally lend it, and you can withdraw the entire amount at any time, regardless of whether the company is profitable or not.

    If you charge interest on the loan, it will be considered a business expense for the firm and personal income for you. There are specific rules governing the timing of repayments and any interest charged or received, which can result in a tax benefit for both the company and the director, with careful tax planning.

    How Do I Set Up a DLA?

    Setting up – and then properly paying back – a DLA is something that should be left to an accountant, to avoid tax hassles for you or your company. Don’t have one yet? For more information on how a DLA could benefit your company, contact us here.

    FAQs

    How does a director’s loan account work?

    A director’s loan account or DLA is essentially a way to virtually monitor all the funds you have either loaned to or borrowed from your organisation. If the account has credit on its account, the organisation borrows more funds than it’s lending.

    What type of account is a directors loan account?

    It’s just a record of every transaction that has occurred between the director/s and the organisation.

    Is a director’s loan a benefit in kind?

    Yes, but only if it meets specific qualifications, such as not paying interest on the loan, if the interest you’re paying is less than the average beneficial loan rate established by HMRC, and if it’s £10,000 or more.

    Is a director’s loan an asset or liability?

    The director’s loan is considered an asset. Want more detailed information, contact us here!

    Do you pay interest on a director’s loan?

    Yes, however, it is considered an expense on the company’s accounts. This decreases the amount that the Corporation Tax can charge.

  • Shares, Share Capital and More Explained

    Shares, Share Capital and More Explained

    Setting up a limited company can seem like a daunting and confusing undertaking, and, as many new company principals discover, for lots of different reasons. Take share capital for example.

    When setting up a limited company, you’ll discover that you are expected to issue at least one share. However, if you don’t quite understand what share capital is, or why it should be an issue for a new company at all, this can indeed be confusing.

    What is the distinction between a subscriber and a shareholder? Is there a limit to the amount of capital that can be invested in a company? When your shareholders change, how do you notify Companies House? These are just a few of the questions commonly asked, questions we want to answer here, along with a few others.

    What is Share Capital Anyway?

    The total number of shares that a company has issued to its shareholders is known as share capital. When forming a limited company, shares are usually issued in the amount of £1. If more than one share is issued, the company’s control will be determined.

    Two shares for two shareholders, for example, means the company is controlled equally, with each party owning 50% of the company. The divide would be 40/60 if the two shareholders each owned two and three shares. This would obviously make a majority shareholder of person number two.

    Is There a Minimum and/Or Maximum When It Comes to Share Capital?

    As we mentioned, a minimum of one share must be issued by every limited company. Although there is no maximum share capital, all shareholders must pay the value of their shares to the company. For example, if a shareholder owns 50 £1-per-share shares, they must pay the company £50.

    PLCs may also issue two shares at the time of incorporation, but they must also issue a share capital of at least £50,000, 25% of which at least will need to be fully paid and recorded before they begin trading.

    Shareholders and Subscribers: What’s the Difference?

    A subscriber has agreed to buy shares in a privately held company under the terms of a subscription agreement. At the time of incorporation, their name would appear on the Memorandum and Articles of Association.

    A shareholder is a person who owns stock in a public or private corporation.

    A minimum of one shareholder is required by Companies House for both private limited companies and public limited companies, but if it involves subscribers is totally up to the company.

    When Setting Up a PLC, Should I Pay for My Shares in Full?

    The company has the option of issuing paid or unpaid shares. Ordinary shares issued by a limited company are usually fully paid. This means that the shareholder has paid the entire agreed-upon amount and therefore has no further payment commitments to the company.

    A company can however issue unpaid or partially paid shares and decide whether or not to pay for them. This could be accomplished, for example, through settlements made on specific dates.

    If a company were to go into liquidation, any shareholders would be required to pay the full amount owed for their shares.

    Can I Give Some of My Shares to My Children?

    Yes, unless the Articles of Association of your company forbid it. Many family-owned businesses ensure the future of their firm by transferring ownership to their children.

    Children under the age of 18 are considered minors in the United Kingdom, and they lack the legal capacity to enter into contracts except for necessaries, or goods and services that are necessary or valuable to them, such as food, clothing, and education. Because shares would not be considered necessities, a child could not be forced to make good on a contract to buy stock, but would be allowed to ratify the contract after reaching the age of 18.

    How Do You Add New Shares to a Company?

    A company’s share capital can be increased by issuing new shares. Allotments should be made through the proper channels. The company’s directors allot shares on its behalf, and this is governed by the company’s Articles of Association or a firm resolution.

    The Companies Act of 2006 makes an exception to this rule. Unless the Articles of Association specifically prohibit it, a private company incorporated under the Companies Act 2006 with only one class of shares does not require prior authorisation. In that case, a firm would have to adopt a standard resolution.

    Within one month of the allotment of new shares, a SH01 form must be completed and filed with Companies House. This can be done on paper or electronically.

    The form has two main sections: the allotment and the capital statement, both of which must be completed. This will notify Companies House of the number and type of shares that have been issued. The names of the new shareholders do not need to be reported to Companies House until the next Confirmation Statement is submitted.

    How to Do You Change Shareholders? Can You Transfer Shares?

    A share transfer form is all that is required if you want or need to transfer company shares or change a shareholder. If the shares are fully paid, a J30 form will be used. Because Companies House does not need to be notified until the Confirmation Statement is due, these forms will be kept with the new shareholders in the interim.

    Who owns shares in your company, in what amounts and how much they pay for them (and when) are all things that can have a significant impact on your firm’s future as it grows. That’s why it’s usually best to have a financial professional involved when dealing with them. A mistake today could be hugely costly in the future.

    Have more questions about company shares, share capital or other related issues? Get in touch here, we’ll be happy to answer them.

  • An Employer’s Guide to Unlawful Deduction of Wages

    An Employer’s Guide to Unlawful Deduction of Wages

    Unlawful deductions of wages claims could be filed against you if an employee claims you illegally deducted money from their paycheck. What are your legal options if this happens, and how can you avoid future conflicts with your employees? That’s what we are going to take a closer look at here.

    What Constitutes an Unlawful Deduction of Wages?

    Only one of two reasons can be used to deduct money from one of your employee’s paycheck:

    If the deduction/s are required by law – for example, tax and/or National Insurance deductions are required by law.

    Alternatively, if the employee has consented to the deduction/s being made.

    So, if you’re wondering if you, as an employer, can deduct money from your employees’ paycheck, the answer is yes, but only if the deductions meet these two legal requirements.

    Any other deduction, by extension, will be illegal.

    THE LAW: Sections 13-27 of the Employment Rights Act 1996 govern unlawful wage deductions.

    What are Wages?

    The obvious answer to that question is the money an employee gets every week/fortnight/month after plenty of hard work. The law has its own definition though, and that’s what is important here.

    The legal definition of wages in the UK is:

    ‘any sums payable to the worker in connection with his employment’ – Section 27 of the Employment Rights Act 1996

    Wages, then, cover a wide range of payments to which people are entitled to as an employee or worker. This obviously includes regular pay, but it also includes bonuses and commissions (even post-employment commission).

    It is also important to note that it covers other statutory payments to which employees/workers are entitled. Examples include:

    • Statutory sick pay
    • Statutory holiday pay
    • Statutory maternity pay

    Wages also include compensation for time off work for which they are entitled. For example, employees have the right to be paid for time off taken to attend antenatal appointments.

    What is Not Covered by the Legal Definition of Wages?

    Certain types of compensation are not considered wages. Here are some examples:

    Expenses

    Expenses aren’t paid in connection with most jobs, so they’re not considered wages. If you as an employer refuse to pay for unpaid expenses, an employee may be able to file a breach of contract claim with the employment tribunal (if their employment has ended) or County Court. To avoid these situations all policies on expense reimbursement should be clear, and understood by all parties.

    Redundancy Payments

    While such payments are not considered “wages,” an employee can file a claim under Section 164 of the Employment Rights Act 1996 if you fail to pay their redundancy payment.

     

    Payment in lieu of notice (PILON)

    These payments are not wages because they are not contractually due for “the provision of service” while a person are employed. However, a claim for unpaid PILON can be filed as a breach of contract or wrongful dismissal claim, so tread carefully.

    Do Bonuses Count as Wages?

    It all depends!

    If an employee has not been paid a contractual bonus, they may be able to file a claim for an unlawful deduction from wages. It is less clear with discretionary bonuses, and it is dependent on the circumstances and terms of the bonus scheme. You should probably seek legal advice in such cases, as these types of claims can be complicated.

    What About Tips?

    If your business operates in the service industry, you are most likely have staff who earn tips, gratuities, or a percentage of tronc.

    An employee can file a claim for unlawful deduction from wages if you, as an employer, seems to be keeping such payments from them.

    Their tips, gratuities, and tronc share are all part of their pay, and an employer cannot use them to meet their National Minimum Wage obligations since the law changed in 2009.

    Pay Cut Issues

    Need to make pay cuts to see your business through a rough patch? It’s not as easy to do that as you may think.

    If you want to make a pay cut for a member of your staff, you must first obtain their permission. You’ll need to write it down for them as well as your own records.

    Employees have the option of rejecting your proposal and working under duress. They may also resign if they believe you have violated their contract. It is also within the employee’s rights to compose a grievance letter about illegal wage deductions.

    If the employee does not agree to the pay cut terms, you can terminate their current contract and begin a new one with them. This could result in a claim for unfair dismissal, which could lead to a hearing in front of an employment tribunal. In this case, you’d be able to claim a just dismissal because it was for the greater good of your company.

    Overpayment Issues

    Payroll errors can occur, resulting in overpaying employees. What are your rights if this happens, and can you get your money back?

    Time limit for recouping salary overpayments

    To avoid a conflict with an employee that could lead to legal action, it’s critical to take the right approach. First and foremost, double-check that you have truly overpaid an employee. Payroll or a staff member may have reported the overpayment, but double-check to make sure.

    You may be able to reclaim money if they were overpaid. The sooner you act to correct this, the better—you’ll need to notify your employee right away. A contractual claim, on the other hand, must be filed within six years of the overpayment.

    If you file a claim after the six-year period has passed, a judge will have to extend the limitation period, which he or she may do if the judge thinks it is fair. In many cases, if it has been six years, your company may have to accept the error and move on. Pursuing overpayments at that point could be much more expensive than the amount owed.

    Talking to Employees About Overpayment

    When employees are overpaid by their employers, they may believe they are entitled to keep the money. And by the time the error is noticed, it’s likely the money has already been spent. When the truth is revealed, they may become defensive about returning it. They could even look into whether they can keep the money if an employer overplays them, as well as their legal options if they refuse to refund such a proven overpayment.

    Don’t deduct the amount from their future wages automatically to avoid upsetting your employee and/or jeopardizing your own legal position. You have the option of reclaiming a genuine overpayment, but you must do so in a way that is fair to your employee. They haven’t done anything wrong, after all. In speaking to them:

    • Discuss the reason for the overpayment
    • State clearly the amount that was paid in error and provide proof for them.
    • Describe how the money will be repaid.

    Wage deductions can be made in one lump sum or in several installments. If there is a significant overpayment, the latter may be preferable to avoid disputes. This recovery period should be communicated to your staff member in writing.

    Overpayment is not uncommon in smaller businesses, just one of the reasons why it may be best, even as a small firm, to outsource your payroll to an independent accounting firm like Pearl Lemon Accounting.

    What happens if an employee is overpaid?

    If an employee is overpaid, the employer is within their right to reclaim the funds that have been overpaid to you. 

    Can an employer deduct pay without consent?

    No, they cannot. The only time an employer can deduct your pay is if you have been mistakenly overpaid, if it was mentioned in your contract, or if the deduction was agreed to before it occurred.

    If you would like more information, feel free to book a call with our experts!

    FAQs

    How do I claim an unlawful deduction of wages?

    If your employer owes you money, the best way to move forwards is to file a claim with the county court or the Employment Tribunal.

    For more information, book a call with our experts today!

    Can my employer make Unauthorised deductions from my wages?

    No. Your employer is not allowed to make unauthorised deductions from your wages.

    What is an unlawful deduction of wages in the UK?

    In the UK, an unlawful deduction of wages is when the employee has received an incorrect amount of funds. This can be due to not receiving the entire amount owed to them or even underpayment. 

    If you would like more information, feel free to book a call with our experts!

    Do you have to pay your employer back if they overpay you?

    Not exactly. However, if they choose to, they can request repayment for the amount overpaid to you.

  • Tip Pooling, Troncs and a Fairer Workplace for Everyone

    Tip Pooling, Troncs and a Fairer Workplace for Everyone

    Tipping dates from the 18th century, when customers in pubs would attach coins to notes handed to the barkeeper. The purpose of this monetary incentive was “to ensure promptness,” hence the term “TIP.”

    Tipping, like the industries in which it is found, has changed dramatically since then. In fact, few would have predicted the same generosity when enlisting the complimentary services of a hotel concierge or saying “thank you” to a home removal company when those coins were first attached to notes in pubs.

    Tipping has unfortunately been subjected to a great deal of criticism and regulation. Employees have not received their fair share in some cases, and businesses have  inadvertently implemented tip policies that are neither a reward nor an incentive.

    There is, however, tip pooling, which can be a fantastic solution for employees who receive tips on a regular basis. And when such a system is legally implemented under a tronc it can solve and prevent lots of financial and legal hassles too.

    What is Tip Pooling?

    When a portion of – or all – of the tips collected during a shift are put into one ‘pot,’ it is known as tip pool distribution. After that, the contents of the pot are redistributed among all employees.

    The advantage of a tip pool is that no one is left out; all employees are fairly compensated for their efforts based on the overall level of gratuity provided by customers. It can often reduce competition, especially among servers, and result in better customer service overall (or so we are told by industry experts.)

    Tip Pooling and the Law

    When it comes to tipping laws in the United States and the United Kingdom, things get a little more complicated. 165,000 businesses in the latter, for example, pay tips to their employees, demonstrating how what was once a friendly ‘off-the-record’ transaction between customer and server has evolved into a common, monitored form of remuneration.

    In the United Kingdom, tip pooling is referred to as a ‘tronc,‘ which is thought to be derived from the French phrase ‘tronc des pauvres,’ or ‘poor box.’

    A tronc is a pay arrangement used by restaurants to evenly distribute trips, service charges, and gratuities among their employees. They can be used for tip pooling and tip sharing (or a combination of the two).

    Payments made through a tronc scheme may be exempt from National Insurance contributions in some cases (NICs). This is the case if the payment is made in the following manner:

    not directly or indirectly allocated to the employee; or

    not paid directly or indirectly to the employee and doesn’t include or represent wages already paid.

    To run a tronc in your company, you should appoint a troncmaster (more on that later) to be in charge of tip distribution. By doing it this way, you’ll be able to meet the two requirements listed above while also ensuring that the payments can be made without NIC deductions.

    Aside from the odd name, HMRC recognizes a tronc as good business practice, and it is highly recommended if you want to follow the law (and who doesn’t?), as well as ensuring that employees are fairly compensated through tips. A good tronc can be key to attracting and hanging onto the best talent, another big plus for your business.

    Why is Tip Pooling Fairer?

    Consider a busy coffee shop with multiple employees who have varying levels of responsibility.

    John is in charge of taking drink orders, which are then forwarded to Jennifer to brew. Lydia and Paul, on the other hand, deliver the order to the table and check in to make sure everything is in order before passing the bill to John, who processes it through the POS.

    What happens if a customer tips Lydia? What happens to the rest of the chain? By putting that tip into a pool and evenly distributing it among all team members, everyone is fairly compensated.

    Isn’t it difficult to argue with logic?

    Tip pooling is also recognized by the UK government, and as such is subject to a set of rules (which we’ll go over later), ensuring that neither the employer nor the employee can take advantage of the system.

    Is Tip Pooling and Tip Sharing the Same Thing?

    You might be thinking to yourself at this point, “Well, this just sounds like tip sharing, which we already do.” They aren’t, however, the same.

    Tip pooling is not the same as tip sharing, as it turns out. When tips are distributed among employees at a set rate for each person, it is referred to as tipping out  in the United States (how long before that term makes its way over here?).

    These rates are usually defined by the employer as a percentage of the total tip pot, broken down by tips, sales, or category receipts.

    Tip sharing and tip pooling aren’t seen as adversarial; they can coexist peacefully in the same business.

    In Tip Pooling, How Should Tips be Distributed?

    So, you’d like to start a tip pooling program at your company, but how do you distribute the funds fairly?

    Thankfully, there are a variety of tip distribution methods to choose from, the benefits of which will vary depending on your operation and how your team is set up to work.

    Worked hours This is a method of evenly distributing all tips across the entire staff based on the number of hours worked. So, if you have £1,000 in tips and your team worked 1,000 hours, they will each receive £1 for each hour worked.

    Percentage based on the number of hours worked. You can distribute the pool according to a percentage associated with each role. For example, if the tip pool is £1,000 and the waiting staff receives 5% of the total tips, the waiting role will receive £50 in tips. Each employee in that bracket is then paid a percentage of the funds based on the number of hours they worked.

    Percentage, regardless of the number of hours. This is the same as the previous method, but it divides the tip pool evenly among the team members based on a predetermined percentage based on their role, regardless of how long each person worked. Regardless of the time of day. This eliminates all percentages and evenly distributes the tip pool among all players, regardless of other factors.

    The percentage method is the most popular method above, regardless of the number of hours. The best method for your business, however, is determined entirely by the makeup of your operation, your own attitudes toward tipping, and how your team is most likely to be motivated.

    The Advantages and Disadvantages of Tip Pooling

    Not convinced that tip pooling is a good idea? It isn’t appropriate for every business, which is why we’ll summarize the main benefits and drawbacks of this method of tip distribution

    Advantages of Tip Pooling

    Here are some reasons why you might want to use tip pooling:

    • It promotes teamwork because, by pooling tips, each employee will realize that their unique role in the overall process is valuable to customers, but that they can’t do their part without the help of others;
    • It eliminates table conflict, in which two or more servers argue over who deserves a tip based on the amount of time they spent dealing with a specific table; and it reduces income inequality by evenly distributing all tips among the front of house team, effectively eliminating disparities in earnings.

    The Disadvantages of Tip Pooling

    If you’re concerned about the following, your fears about tip pooling may be realized:

    • Resentment among the best-performing wait staff: why should they receive the same amount of tips as others when they are clearly doing more?
    • A drop in service quality – could a tip pool relieve the pressure to serve to your best ability if you’re a member of the waiting staff who knows the quality of your service is determined by the total tips you receive?
    • Low performers are rewarded – is it really fair that Sarah, who has consistently performed poorly during a given month, receives the same level of tips as Dave, who has smashed it?

    Tip pooling is a great way to fairly compensate employees, but it comes with its own set of issues. Each business will have its own too. Overall however, many find it’s the best way to go.

    How to Keep Your Employees’ Tips NI and VAT-free Via a Tronc

    Employers must comply with the Income Tax (Pay As You Earn) Regulations 2003. This means you must notify HMRC if you have a tronc that was created on or after April 6, 2004. Furthermore, you must supply the name of the troncmaster and keep it up to date at all times.

    When you’re establishing a tronc, you should keep the following in mind.

    • Confirm that there is a system in place for sharing tips, and figure out what it is.
    • Determine how the tronc will be paid (for example employees paying in cash tips or an employer paying in credit card tips)
    • Who and how does the tronc money get held (is there a tronc bank account, and if so, who manages it?)
    • What is the basis for tronc distributions, and who decides what that basis is?
    • Which employees are members of the tronc?
    • Whether the troncmaster accepts and comprehends his or her role (including the obligation to operate PAYE)

    Choosing a Troncmaster

    Establishing a tronc means choosing a troncmaster. This is something that HMRC insists upon, but has specific rules about. A troncmaster has to be independent of management. They can be an employee, but that often leads to big trouble, both in terms of distrust by other tipped staff and if they leave.

    There is a growing demand for troncmasters who are not employees of the company and thus cannot be influenced by their boss. Businesses value someone who is up-to-date on tronc rules and acts fairly and ethically – without bias, favoritism, or personal friendships or motivations.

    This is where Pearl Lemon Accountants can be a big help. Not only can we guide you through setting up your tronc, but also we can act as troncmaster, ensuring that everything remains fair, consistent and is compliant with HMRC regulations. We take care of the tips, you take care of the customers. Contact us today to learn more!

    FAQs

    How common is tip pooling?

    Tip pooling is not as common as one might believe in restaurants. Only 45% of restaurants today participate in tip pooling, which applies to restaurants of all kinds. 

    What is a valid tip pooling arrangement?

    Proper tip pool arrangements are regulations that surround the tip pooling concept. For example, with tip pooling, the employee is obliged to receive the minimum wage for their region. 

    This means that between their tips and salary, they should be reaching the minimum wage limit; if this does not occur, the employer is obligated to make up the difference.

    If you would like more specific information, feel free to book a call with our experts!

    Can a manager participate in a tip pool?

    No, they cannot. Supervisors and managers are not allowed to participate in tip pools, and they are not allowed to claim any portion of an employee’s tips as their own.

  • How the Employment Allowance Can Help Your Business Grow?

    How the Employment Allowance Can Help Your Business Grow?

    How the Employment Allowance Can Help Your Business Grow 

    The Employment Allowance – referred to, inaccurately, by some as the employer’s allowance – reduces the amount of National Insurance that businesses must pay by up to £4,000 per year, a possible real boon for a small business. Is it possible for your small business to benefit from this incentive? Let’s take a look.

    The Basics of Employment Allowance

    The scheme was put in place to help spur economic growth and encourage UK small businesses to hire more workers. All businesses with a total NI bill of £100,000 or less in the previous tax year are eligible to participate in it.

    A company can use the scheme to write off the first £4,000 of its annual Employers’ NIC bill (from April 2020).

    The Allowance is ‘claimed’ each month as the liability arises through your company’s payroll process. As a result, no Employers’ NICs are due until your company’s £4,000 allowance has been exhausted.

    So, is your firm eligible for this helpful break?

    • Companies are eligible for the Allowance if they pay Class 1 Employers’ National Insurance Contributions. This is, however, true for all limited companies.
    • Because they pay Class 2 and Class 4 Contributions, self-employed people are ineligible to claim against any profits they take personally. They can, however, make a claim if they employ people and pay Class 1 NICs.
    • If your company serves the public sector, you won’t be able to claim.
    • The Allowance is not available to sole proprietorships with no additional employees. The EA’s entire purpose is to encourage businesses to hire more people, so this only makes sense. As a result, if you’re a one-man-band with no employees, you won’t be able to claim the EA. This eliminates many professional contractor firms.
    • If your business employs one or more people, at least one of them, in addition to the director, must be paid more than the secondary NIC threshold of £8,840 per year.

    Setting Salary Levels with Employment Allowance in Mind

    Importantly, you will only benefit from this Government measure if you pay yourself (and your employees) enough to incur and claim Employers’ NICs.

    Furthermore, as salary levels rise, so do income tax and employee NIC liabilities, so there are several factors to consider when determining the ideal salary level.

    From April 6, 2021, the personal allowance (the amount you can earn before paying any income tax) is £12,570, and if your salary is £9,568 or less during the 2021/22 tax year this is known as the ‘Primary Threshold,’ you will not pay any Employees’ NICs.

    Employers’ National Insurance is paid at a rate of 13.8 percent on salaries above the ‘Secondary Threshold’ of £8,840 per year.

    How the Employment Allowance works in practice – £12,570 salary

    Is it worth paying an employee a  £12,570 salary during the 2021/22 tax year, as opposed to £8,840, if your company is eligible for the EA? Here are some numbers to help you decide.

    • The EA will offset the £514.74 Employers’ NI bill if the company pays its employee(s) a £12,570 salary.
    • In our example, no income tax is due on either salary because the Personal Allowance for 2021/22 is £12,570.
    • The company saves £708.70 in Corporation Tax by paying a salary of £3,730 more than the £8,840 salary level.
    • However, the employee has an additional Employees’ National Insurance bill of £360.24 to pay.
    • So, assuming your company is eligible to claim the EA, paying a £12,570 salary in 2022/22 will save you £348.46 compared to paying an £8,840 salary.
    • From 2020/21 onwards, the EA must be claimed each year in order to receive it, and it can no longer be carried over from year to year as it could previously.

    Confused? We’re not surprised. There’s more to the ‘simple’ employment allowance than people realise. Yet get it right, and it could benefit you, your employees and your firm’s chances of attracting top talent.

    Needed help with your accounting? Pearl Lemon Accountants work with businesses of all sizes and in all kinds of niches. Contact us today to discuss how we can help you.

    FAQs

    Is my business eligible for employment allowance?

    Your business needs to meet certain criteria to be eligible for employment allowance. An employment allowance can be claimed by a charity or business with less than £100,000 in National Insurance liabilities before the current tax year. 

    If you would like more information, feel free to book a call with our experts!

    How far back can you claim employment allowance?

    You can claim employment allowance as far back as 4 years.

    What is employee allowance?

    An employee allowance is a form of payment made to employees. It can be made to compensate employees for certain working conditions or even to cover expenses.

    If you would like more information, feel free to book a call with our experts!

    When can you not claim employment allowance?

    You cannot claim employment allowance if more than half of your business’s work is done in the public sector. An example of this would be NHS services or even local councils. 

  • Everything You Need to Know about Micro-entity Accounts

    Everything You Need to Know about Micro-entity Accounts

    A micro-entity (also known as a micro company) is a very small, privately held limited company. If you’re the director of a micro-entity, submitting micro-entity accounts to Companies House can save you time when it comes to preparing and filing your accounts. Micro-entity accounts are a simplified format that contains all the information that all statutory accounts must include. They are, however, not always the best option, as we are going to explain in further detail here.

    What are Micro-Entity Accounts?

    Despite the fact that all businesses must file a Company Tax Return with HMRC, small firms have options when it comes to their statutory accounts. You can submit them in a simplified format known as a “micro-entity account” if you want to save time and money.

    A limited company is classified as a micro-entity under the Companies Act 2006 if it meets two of the three conditions during the financial year in question. There can’t be more than one of the following in a company:

    • More than £632,000 in annual revenue
    • A total of more than £316,000 on the balance sheet
    • More than an average of more than ten employees in the calendar year.

    Micro businesses are exempt from some financial reporting requirements when preparing their year-end Companies Act accounts, thanks to the Small Companies (Micro Entities’ Accounts) Regulations 2013. Some businesses are not eligible for the micro-entities exemptions, such as:

    • Non-profit organizations
    • Public limited companies
    • Limited-liability partnerships (LLPs)
    • Investment projects (which look after a collective pool of investor assets)
    • Financial intuitions (such as banks)
    • Subsidiaries of larger parent companies that are included in the financial statements of the group

    This new micro-entity regime was created, HMRC claims, to ensure that the UK’s smallest businesses were not subjected to the same time-consuming requirements as larger businesses. Which in many ways makes sense.

    Should My Company File Micro-Entity Accounts?

    Filing micro-entity accounts has both advantages and disadvantages. On the one hand, filing a micro-entity will save you time and stress because you won’t have to include documents like a director’s report.

    If your limited company is just you and a couple of employees, you probably don’t have any shareholders who need to be kept informed about your progress. Your year-end accounts may simply be a compliance stumbling block that you’d like to clear as soon as possible. In this case, micro-entity accounts were created with you in mind.

    You can also choose to file ‘filleted’ accounts with Companies House, which limits the amount of information about your company’s performance that is publicly available. This can keep information about your financial situation private or prevent competitors from learning about it.

    Micro-entity accounts, on the other hand, may hold you back if you’re actively seeking new shareholder buy-in or funding to help your company grow. You may have a harder time securing additional investment or loans to expand your business if you don’t have a detailed financial picture of your operations to offer to interested parties.

    In fact, most of them won’t even look at your proposals without them. They might be called angel investors sometimes, but that does not mean they are not interested in making money, and as much of it as possible. A company without the ability to supply a detailed snapshot of their finances is often just not taken seriously by these folks.

     What’s the Best Way to Prepare Micro-Entity Accounts?

    If you want to prepare micro-entity accounts, you’ll need the following items:

    An abbreviated profit and loss statement (starting from gross profit rather than turnover)

    A simplified balance sheet (minus main heading such as debtors, creditors etc.)

    A report from an auditor (unless you choose to claim the Small Companies audit exemption)

    You won’t need to file a director’s report, unlike abridged accounts that small businesses can file. Many micro-entities are also exempt from auditing, so you won’t have to submit an audit report.

    You can also choose to fillet your accounts for public record to limit the amount of information available to the public. You’ll only need to file a balance sheet with footnotes in this case. Make sure to include a statement stating that the profit and loss account has not been filed and that your annual accounts have been delivered in accordance with the Small Companies’ regime.

    Even if you do file micro-entity accounts, it’s critical that you give your company’s members and shareholders as much information as possible in a private setting. They’ve invested time and/or money in your company, and they deserve to know how it’s doing.

    How Do You File Micro-Entity Accounts?

    Micro businesses can file their micro-entity accounts in a variety of ways, including through the Companies House WebFiling service. You can also use the Company Accounts and Tax Online (CATO) service to file your accounts with HMRC and Companies House at the same time. To do so, you’ll need your Government Gateway credentials as well as a Companies House company authentication code. You can also file your accounts on paper and post them in if it’s easier, but make sure you leave plenty of time.

    Should I Have an Accountant Handle My Micro-Entity Accounts?

    Filing micro-entity accounts can be difficult because you must adhere to the FRS 105 Financial Reporting Standard. Even if you’re used to preparing a profit and loss account and balance sheet, the abridged versions may leave you scratching your head. It’s best to use an accountant to file micro company accounts in order to ensure compliance and save time and hassle.

    An experienced accountant can also help you decide if micro-entity accounts are even right for you. As touched on earlier, they may not be the right option if you have big growth plans. Speaking of which, an experienced accountant is one of the best people to advise you on the financial moves to make to achieve that growth, making the investment in professional accounting services potentially priceless.

    Need help with micro-entity accounting? Contact Pearl Lemon Accountants today to discuss just how we can help you.

  • Basic Guide to Benefits in Kind: What You Need to Know Now

    Basic Guide to Benefits in Kind: What You Need to Know Now

     It’s possible that you’re receiving a benefit-in-kind if you receive any other benefits as part of your job in addition to your salary (BIK), or, if you are an employer you are offering them to your employees.  

    You may – often rightly- think of them as a workplace perk, or you may hear them referred to as “fringe benefits”. But you should be aware that while they may appear to be quite a nice bonus, even a reason to choose one position over another, they may not always be free. Not at least as far as HMRC is concerned.

    That means that it’s important that employers who offer benefits in kind, and the employees that receive them, understand the tax obligations attached to them. Nothing kills the pleasure of a perk faster than a notice from HMRC demanding unpaid tax when you may not have realised it was owed in the first place.

    What Counts as Benefits in Kind?

    Access to a company car that an employee is also allowed to use for personal purposes – such as driving their children to school and going shopping – private medical insurance, or even free canteen meals are all examples of BIKs. In other words, anything given to an employee that isn’t “wholly, exclusively, and necessary” for them to perform their job duties is considered a BIK.

    Why Offer Benefits in Kind?

    Although they are perhaps not as generous as they were back in the 1970s and 1980s, benefits in kind are usually used by employers as a tool to attract, and then retain, the top talent they need to help their businesses grow and thrive.

    Salary matching is a common practice in lots of business niches, so it is often the benefits in kind on offer that help a top employee prospect decide between two different positions. They might also be the reason they decide to stay, so, even though they technically represent an additional expense on the part of the employer, their ROI is often rather high in terms of staff retention and reduced turnover.

    Which Benefits in Kind Can Be Offered Tax Free?

    For the simple reason that they are tax-free, tax-free BIKs are one of the most common benefits you’ll come across in today’s work environments.  As a result of these benefits, neither the employee nor the employer are required to pay any additional taxes, and as no-one likes to pay a penny more in tax than they really need to, this makes these BIKs even more popular.

    While it’s not an exhaustive list – you can find one of those provided by HMRC here – here is a look some of the most popular options:

    • Employer contributions to a workplace or personal pension plan that has been approved as such by the government.
    • Subsidized canteen meals as long as they are available to all employees.
    • Leisure facilities such as a gym, pool table, or other forms of entertainment are available on-site, again, as long as they are offered to all employees.
    • Other on-site services, such as childcare, mental health services or other incidentals like personal fitness training.
    • Staff parties as long as all employees are invited and the cost per person does not exceed £150 per year.
    • As part of the Cycle to Work program, bicycles and cycling equipment (helmets, knee pads etc)
    • Gifts for non-work-related occasions such as birthdays, weddings, or retirement (but the total value of these gifts should not exceed £250 in a single year)
    • Trivial benefits worth less than £50 that are not cash or cash vouchers. Free coffee and tea provided in a break room is a common example of such a perk.
    • The use of the office car park, provided all employees are offered a space (you can still maintain better parking for executives though)
    • Uniforms or safety equipment that is required to complete the job.

    What Benefits in Kind are Taxable?

    So which BIKs does the government expect tax paid on? All the following benefits in kind, while often very desirable, are also taxable:

    • A company car that an employee can also make use of for personal purposes. The total value of this benefit will be calculated using the car’s list price, its carbon dioxide emissions, the type of fuel it uses (with the exception of pure electric vehicles), and the car’s registration date.
    • Fuel for a company car which an employer provides and which employees are free to use for personal purposes.
    • Accommodation that is provided for free or at a reduced rate AND where employees are not required to live in order to perform their job duties.
    • Non-specific regular clothing, also known as clothing allowance, referring to clothing that isn’t required for an employee to do their job, such as protective goggles. This is frequently defined as clothing that could also be worn outside of work.
    • Private medical insurance
    • Employees’ children’s school fees
    • Interest-free or low-cost loans provided by a company or business to an employee for amounts greater than £10,000
    • Holidays or holiday vouchers

    How is the Tax Calculated on Benefits in Kind?

    Depending on what benefit is being offered/received and how it has been administered, there are different and complex rules about what kind of tax must be paid and by whom. In general, BIKs are subject to income tax, employer’s national insurance, and employee’s national insurance.

    You will be charged income tax if you receive a BIK as an employee. To figure out how much, multiply the taxable value of the benefit by your personal income tax rate band (20% for basic rate, 40% for higher rate, and 45 percent for additional rate), which HMRC defines as the cash equivalent. This means that if your gym membership costs your employer £600 per year and you are a basic rate taxpayer, you will have to pay 20% of £600 in income tax on this benefit.

    Employers who offer BIKs to their employees must also pay tax in the form of employer’s NI, which is currently 13.8 percent. This is applied to the benefit’s taxable value once more. The cost of providing BIKs, on the other hand, is a tax-deductible expense that can be deducted from profits for corporation tax purposes. Employers may choose to offer BIKs as a less expensive alternative to paying employees a higher salary.

    Although an employee may be required to pay income tax on the BIK, they will not be required to pay NI on it in most cases, resulting in a tax savings. To avoid attracting employee NI, it is critical to administer BIKs in such a way that the employee does not receive cash or an equivalent, such as vouchers, as this will be considered earnings and subject to both income tax and employee NI.

    How is Benefits in Kind Tax Reported and When is it Due?

    It is the employer’s responsibility to declare the BIKs that have been received by employees. They must do so by completing and submitting the P11D form to HMRC by the 6th of July following the tax year in which the benefits were received. If an employee received BIKs between April 6, 2019 and April 5, 2020, the P11D form deadline would be July 6, 2020. The form provides a list of all possible benefits from which the employer can choose the ones that are relevant to the employee and state the value of the benefit provided. A copy of this form should be given to the employee as well.

    Employers must also fill out the P11D(b) form, which is available on the HMRC Government Gateway. Employers can pay their National Insurance contributions on the BIKs if they submit the P11D(b) form along with the P11D.

    The BIK is subject to income tax for employees. There is no need for you to do anything because the payment will be deducted automatically from your paycheck. When you receive a copy of the P11D from your employer, you should double-check that the benefits and value have been reported correctly. If there are any discrepancies, you must notify your payroll department as soon as possible.

    Benefits in kind, while great for lots of reasons, can cause some serious tax headaches if not managed properly, both for the employers that pay them and the employees that receive them. To avoid these professional help is always the best way to go if you are in any way unsure about what you are doing. Pearl Lemon Accountants can offer such help. Contact us today to learn more.

    FAQS

    What is a benefit in kind?

    A benefit in kind (BIK), also known as “fringe benefits”, are considered additional pay or allowances (a non-cash benefit) that have monetary worth but are excluded from the wages in a paycheck.  

    What  are some examples of benefits in kind?

    Examples of benefits in kind include the use of a company vehicle, housing allowances, childcare expenses, health insurance, life insurance, relocation expenses, etc.

    Are benefits in kind classed as income?

    Yes and no. Some BIKs are considered non-taxable. However, other BIKs are included in tax returns and are treated as taxable income. A few BIKs that are not considered taxable include disability insurance, adoption and educational assistance, health insurance, etc. Want more detailed information? Let’s chat!

    Which are the most common in-kind benefits?

    The most common BIKs are:

    • private health insurance, 
    • pension contributions, 
    • childcare expenses, 
    • education subsidies, 

    relocation expenses, and many more.

  • Personal Service Company: What It Is and Why You Might Want to Form One

    Personal Service Company: What It Is and Why You Might Want to Form One

    When then-Chancellor Gordon Brown used the phrase “personal service company” to introduce the well-known legislation IR35 in 1999, it caught everyone’s attention in the world of business (and especially accounting)

    There is no clear definition of a personal service company (PSC), though it is commonly used to refer to the limited company director who owns the majority, if not all, of the shares when discussing contracting. But here we are going to take a closer look at what a PSC is, why the exist and whether it’s right for you.

    Why Work Under the Personal Service Company Umbrella?

    Many recruitment agencies and private clients across all kinds of business niches will not hire self-employed individuals unless they own their own limited company, so personal service companies are most commonly used for contract jobs.

    This is for a number of reasons, the most important of which is risk. When a client hires someone for contract work, they don’t want to sign a contract with them and, as a result, they don’t want to be in an employment relationship with them.

    This isn’t meant as a criticism of the individual or their skills; they simply don’t want the added responsibilities of a full-time employee, such as holiday and sick pay. As a result, they use recruitment agencies, not only because they can quickly hire in skills, but also because they have another layer of “protection” between them and the contractors.

    There are numerous benefits to contracting through a limited company, some of which are listed below:

    Working via a limited company means that you may be able to increase your take-home pay. Limited liability companies (LLCs) or personal service corporations (PSCs) are widely regarded as the most tax-efficient way of doing business for individuals or small groups of contractors.

    The process of forming a limited company is likely to be much faster and easier than you think, and can often be completed in a single working day. Pearl Lemon Accountants offers limited company formation as part of our accounting services and often when you tell us in the morning you need it done we can have it done by the end of business.

    Because they have their own registered company name, limited companies are thought to appear more professional. Having the word “limited” in your company name will give you a more respectable air, which may give you an advantage when it comes to landing new contracting jobs.

    Contractors who work for a limited company can claim a broader range of business expenses. You can claim a cost as a business expense if you can define it as solely and exclusively for business purposes. And with the right accountant to guide you, that can apply that to a lot.

    Personal Service Companies and IR35

    As previously stated, the term “personal service” was coined as a result of the implementation of IR35. IR35 was enacted in April 2000 to combat the practice of misrepresenting one’s employment status.

    In a nutshell, IR35 prevented full-time employees from working as a limited company contractor on Fridays and returning to their desks on Mondays, reaping the tax benefits of running their own limited company without the risk.

    If you consider your limited company to be a personal service company, you must be fully aware of IR35 and ensure that all contracts you enter into are reviewed for IR35 status. If your contract falls within IR35, you’ll have to pay more tax. However, there are still many benefits available for your company’s operating costs; but, beginning April 1, 2017, the government implemented changes affecting contractors working in the public sector that eliminated the 5% tax relief that used to be offered to personal services companies.

    How Will Hiring a Personal Service Company Accountant Help?

    Many contractors who work through limited companies or personal service companies hire an accountant who specializes in the contractor market to assist them with their tax and financial matters. A personal service company accountant will handle your business and personal tax needs, as well as provide ongoing tax advice and assist you in contracting in the most tax-efficient manner possible.

    And we mean more than just helping you stay on the right side of HMRC. Working with Pearl Lemon Accountants will also give you access to expert financial planning advice to help grow your personal service company income, and who doesn’t aspire to that? Get in touch with us today to chat about just how we can help you.

    FAQs

    What is a Personal Service Company (PSC)?

    A Personal Service Company (PSC) is an organisation that provides personal services by a single contractor, usually the primary shareholder of the business. A PSC is customarily known to be a limited company, meaning that the proprietor or the company director works through the organisation rather than directly with clients.

    What qualifies as a personal service company?

    A company can qualify as a personal service company if they provide services in certain industries. For example, they can work in industries like accounting, consulting, performing arts, engineering, law, etc.

    If you would like more detailed information, feel free to book a call with our experts!

    Are personal service companies illegal?

    No, they are not. As long as the personal service contract includes the actions that will be performed i.e 

    What is the difference between a personal service company and an umbrella company?

    Well, a PSC is an organisation that provides personal services. In contrast, an umbrella company is a business that acts as an intermediary between two parties (usually a client and a contractor). 

    Looking for more information? Book a call with our experts today!

    Who should set up a Personal Service Company?

    Anyone who doesn’t mind doing at least 20% of the overall personal services offered by the organisation by themselves. 

    Self-employed professionals own most PSCs, so if you’re looking to start your own business and provide personal accounting, engineering, or even law services, this might be a good option.

    If you would like more detailed information, feel free to book a call with our experts!

    Is a limited company a personal service company?

    Yes, it is. PSCs are actually the most common type of limited companies that focus on providing personal services, usually from only one individual – the owner or primary shareholder.

  • Credit Control – How to Get it Right Every Time

    Credit Control – How to Get it Right Every Time

    One of the most important aspects of running a successful business is effective credit control. Your business’s cash flow can be severely impacted if money does not come in on time, and the resulting problems can quickly spiral out of control.

    Effective credit control is an important process that begins with getting to know your customers before selling to them and ends only when you’ve been paid. Here we are going to take a step-by-step look at credit control best practices to help you ensure you get paid on time, every time.

    Before the Sale Credit Control Best Practices

    Credit checks on potential customers are a must, as are strict credit control procedures that your sales and credit control teams understand and adhere to.

    The Importance of Setting a Credit Control Policy

    Your accounts receivables team should implement a coordinated and professional credit control procedure by clearly laying out a day-by-day strategy from the time the order is placed until the invoice is paid. From there make sure that the appropriate levels of training are provided so that all stages are properly completed, communicated, and adhered to. No special favours to certain people, no ‘we’ll let it slide this time’, or everything will fall apart.

    Get to Know Your Customer’s Payment Profile

    Before committing to credit terms, it’s becoming increasingly important to get to know your customer. The first step is to collect all the necessary business data by having new customers complete an application form.

    Using this information, you can ask a credit expert to check the credit risk posed to your company using one of the many credit rating services available on the market. Banks do this before they issue business or consumer credit, and you should too.

    Check Your Customer’s Terms

    It’s critical to check for any onerous terms imposed by your customer that may override your company’s own Terms & Conditions of Sale. Before delivery, if at all possible, send out an order acknowledgement to reaffirm your terms.

    To demonstrate your seriousness, use this opportunity to explain your credit control procedure in the event of late payment, such as charging interest, taking legal action, or referring the debt to a specialist commercial debt collection agency.

    Keep a Stop List

    It can often help to put persistently late-paying customers or those with a poor credit rating on a “stop list” or a “watch list” to ensure due diligence when selling to these companies in the future.

    Businesses on the stop list should be notified and should not be supplied with any additional goods or services until at least all outstanding invoices have been paid, while those on the watch list should no longer be offered credit terms without an up-front payment or deposit.

    Credit Control After the Sale

    This is the most crucial stage of successful credit control, from timely invoicing to maintaining regular contact with your customers.

    Send All Invoices in a Timely Manner

    It may seem pretty obvious, but sending invoices to customers as soon as an order is fulfilled is critical, as any delays in invoicing will generally result in delays in receiving payment. The process can be sped up even further by faxing or emailing the invoice rather than mailing it.

    It’s also crucial that the invoice is addressed to the correct person and that the information it contains is correct. Make sure to include purchase order numbers or vendor references whenever possible, as such things are great for both parties to reference later.

    State Your Terms and Conditions Clearly and Firmly

    Your invoices must be clear and easy to understand, with your credit terms, the actual payment date, and the acceptable payment methods and details prominently displayed. Make sure you don’t make the mistake of choosing fancy looking invoices over easy to read and accurate ones.  

    Work on Positive Customer Relationships

    Having a pleasant and positive relationship with your customers has a number of benefits. It will not only encourage them to buy more goods and services from your company, but it will also increase your chances of getting paid on time; the more they like you, the less likely they are to keep you waiting.

    It’s always a good idea to call ahead of time to ensure that your invoice is in the system, to avoid any disputes, and to make sure that your payment is at the top of the payment queue.

    Dealing with Difficult Beyond Terms Issues

    Chasing customers for past-due payments can be difficult and uncomfortable, but you must act quickly and decisively to achieve the best results.

    Review Your Sales Ledger Often

    Knowing when an invoice exceeds its credit terms is a crucial aspect of credit control. Your accounts department or credit controllers should review your sales ledger on a regular basis to ensure that your customers’ payment activity is always tracked.

    Begin the Chase Early

    When an invoice exceeds its credit terms, the pressure is on to collect the debt in full, as the likelihood of collecting the debt in full decreases as the debt matures. As a result, it’s critical to speak with the person in charge of your invoice right away to find out why you haven’t been paid and when you should expect to be.

    Don’t Be Afraid to Get Tough

    Asking customers for money they owe you, despite the fact that it is rightfully yours, can be a daunting task – especially for those larger than you. It’s important to remember that by not paying on time, they’ve harmed your company’s cash flow and exploited the trust you put in them by offering credit terms. You have a right to go hard.

    Call in the Professionals

    When you’ve done everything you can to recover the debt, it’s critical to make the most of every resource available to you.

    Specialist commercial debt collection agencies excel at recovering particularly outstanding debts, devoting the time and attention that you may no longer be able to afford to each individual debtor.

    Ongoing Credit Control Best Practices

    From benchmarking to insuring against bad debts, there are always things you can do behind the scenes to ensure your credit control process is as efficient as possible.

    Keep an Eye on Collections Performance

    Always examine your company’s credit control performance, determining whether the process can be made more efficient, whether the team is too big or too small, and how your credit terms compare to those of your competitors. The comparison of your average debtor days to the industry average is crucial to this process. You can keep your company on the front foot by reacting to the latest trends.

    Insure Against Late Payments

    Credit insurance safeguards a company’s cash flow from the effects of late payments and bad debts by protecting it from non-payment due to insolvency or prolonged default, and policies can be tailored to meet your specific needs.

    Stay in Your Bank’s Good Books

    Because late payments can cause serious cash flow problems for your company, it would be great to be able to turn to your bank for short-term funding to bridge the cash flow gap. To stay in their good books, it’s crucial to keep in touch on a regular basis, attend all scheduled meetings, and let them know right away if you’re having any short-term cash flow issues.

    Remember to Thank Your Good Paying Customers

    Remember to send a thank you to all of your on-time paying customers! It not only shows you appreciate their punctuality, but it also improves customer relations and may lead to additional sales.

    Consider Getting Credit Control Help

    Given its importance to the success of your business – particularly for those with a large debtor book – credit control should be an everyday business task. As a result, hiring a full-time credit controller who spends all of their time keeping the business’s sales ledger up to date, building rapport with your customers’ accounts departments, and performing basic credit control tasks could be a serious plus.

    Pearl Lemon Accountants can help with your credit control issues. Get in touch today and let’s chat about how we can help you.

    FAQs

    What is credit control?

    Credit control is a business strategy that allows credit to be given to customers (usually those with a good credit standing) to purchase products and services.

    How do you do credit control?

    The are a few steps you can take to do credit control.

    1. Make sure procedures, and payment terms are agreed to from the beginning.
    2. Be sure to check up on aged debtors regularly.
    3. Confirm that your customers have received the necessary invoice, and be sure to remind them of the upcoming due date.
    4. Late payments should be pursued every 7 days until the payment has been received. You can also automate this to make it easier to pursue multiple late payments at once.

    If you would like more detailed information, feel free to book a call with our experts!

    What are the types of credit control?

    There are three kinds of credit control, each with its own risk. Restrictive, moderate, and liberal are the three most common types of credit control.

    Why is credit control necessary?

    Credit control is necessary for every business as it decreases the chances of racking up bad debt and the accumulation of unpaid invoices.

    What are the benefits of credit control?

    Credit control has a few benefits, including increasing your organisation’s cash flow and reducing negative debt, among other things.

    What are the limitations of credit control?

    For starters, having poor credit control can compromise the overall cash flow of the organisation, thus making it tough to pay anything you owe, such as employee salaries, suppliers, etc.

    If you would like more detailed information, feel free to book a call with our experts!