The latest headlines....     Don’t borrow from the company unless you absolutely have to! August 2006   Condies climb every mountain to make poverty history July 2006   Advice before Action! June 2006   Are you the bank manager’s best friend? May 2006

Don’t borrow from the company unless you absolutely have to!
Edinburgh Evening News - August 2006

Imagine being able to borrow from a bank where the interest rates are zero and you pay the money back when you like.

Sounds like a dream doesn’t it? Unfortunately, this is how many company directors’ treat money they use or borrow from their own company. If not handled carefully the dream can turn into a nightmare!

It is fine for a director to lend money to the company but borrowing money from the company is actually in contravention of Section 330(2) of the Companies Act 1985. There are exceptions to this general prohibition in that loans under £5,000 made to a director and advances up to £20,000 where the purpose is to enable the director to meet any expenditure to perform his duties or to meet expenditure for company purposes, are permissible subject to prior approval at an annual general meeting of the company.

Section 342 of the Companies Act 1985 provides that if a director knowingly permits the company to make an illegal loan he is guilty of an offence and is liable on indictment to up to two years in prison and/or an unlimited fine!

In principle some directors think that taking loans are a good idea because if your business is cash rich why go to the bank and pay interest when you could borrow what is effectively your own money. However, in addition to the Companies Act requirements there are strict tax rules governing directors’ loans and the HM Revenue and Customs is taking an increasingly dim view of those who try to circumvent these regulations.

Timing of taking a loan is crucial. Loans must be repaid within nine months of the company’s financial year end to avoid the taxman charging the company 25% of the loan outstanding under Section 419 of the Taxes Acts. The amount levied under S.419 would eventually be repayable to the company after the loan had been repaid to the company by the director.. In addition to a possible charge under S.419 the company has an obligation to declare the beneficial loan interest (the notional interest payable) on a P11D as a benefit in kind and the director must then self assess this on their own personal tax return. Thus the Inland Revenue will look closely at any overdrawn directors’ loans as a lucrative source for possible underdeclared tax. The best policy is therefore to try and pay back the loan as quickly as possible.

In many small family companies the line between company and family funds can frequently become blurred. This is particularly dangerous in terms of directors’ loans. Any hint that loans are being used as a means to avoid PAYE on directors remuneration will incur the wrath of HM Revenue and Customs.

The golden rule is really to only borrow from the company if you really have to otherwise you may find yourself in hot water! The best course of action is to seek advice first from your professional adviser.

Condies climb every mountain to make poverty history

Five intrepid members of Condies have successfully scaled the three highest peaks in Scotland, England and Wales in aid of charity CARE International.

The event required the team to ascend and descend each of the mountains within 24-hours! The challenge was completed over the weekend of 10-11 June – some of the hottest days of the year – making the task even more gruelling.

A total of 31 teams from throughout the UK took on the three-peaks challenge starting at Ben Nevis progressing to Scafell Pike and finishing at Snowdon.

“Apart from the odd bruise and blistered feet we survived the challenge intact,” said Steve Gray, business development manager, Condies and team leader of the “expedition”. “I am pleased to say that we contributed nearly £5,000 in sponsorship for CARE International UK and an astounding £218,000 was raised overall by the event . Congratulations to the climbing team and also the back-up crew who not only drove us around the UK but kept us fed and watered.”

CARE International is an international relief and development agency working with poor communities in 70 countries worldwide, reaching over 45 million people every year. It has been running outdoor challenge events for 12 years.

For further information please visit www.careinternational.org.uk

Advice before Action!
Edinburgh Evening News - By Graham Pascall, Partner, Condies

Could you run your business without a firm of accountants? It may seem an odd thing for an accountancy firm to ask.

Many people rush headlong into starting a business without seeking the proper advice up front. For example, choosing the wrong company structure (limited company, sole trader or partnership) at the start can mean costly mistakes need to be unravelled later on.

If you have not run a business before, the subject of record keeping can be a bit of a mystery. Yet unless you get this right from day one it could lead to missing deadlines and falling foul of Her Majesty’s Revenue & Customs. Expert advice is needed on which records should be kept and how they are structured, especially if you are not familiar with computerised accounting systems. The same goes for payroll systems.

Do you have a business plan for your enterprise? A professional adviser can give you an objective appraisal of how realistic your numbers and projections are before taking it to the bank. It is vitally important that the first impressions a bank has of your business is a positive one. Having wildly optimistic sales forecasts will not endear you to the bank manager.

Sometimes a quick call to your professional adviser is all it takes to avoid a costly mistake. For example, your company is successfully trading and you have an idea for a business in a completely different line. You may be tempted to go off and form a separate company to operate the new enterprise. This could be a costly course of action as HMRC would consider both companies to be associated meaning that the corporate tax band would be split between the two companies. If the two companies were simply traded under one corporate entity this would not happen.

Another mistake start-ups typically make is trying to fund the company using credit cards. Besides the high interest charges spending can quickly get out of control and many companies find themselves saddled with a large debt. Negotiating a loan with the bank for proper funding of the business is a wiser move.

VAT is another thorny area for new businesses. For the first few returns it is sensible to get your adviser to check over them. A slight clerical error could lead to overpayment or worse still, underpayment of VAT.

Going back to my first question, could you do without accountancy firms? Yes you could in theory. However, doing everything yourself distracts from the core activity of running a profitable business and the chances are you are not an expert in finance, tax or VAT. The reluctance to seek advice from an accountant sometimes arises from a fear of additional costs which could be incurred. However, fixed fee arrangements are now very common and can remove this fear factor. The main thing to consider is whether action before advice is likely to cost you more in the long run. If you can leave your accountant to deal with the finance and tax aspects of your business you can get on with doing what you are good at…actually running the business!

Are you the bank manager’s best friend?
Edinburgh Evening News - 11/5/06

Condies, one of Scotland’s leading firms of chartered accountants and business advisers, begins a new series of articles offering practical, down-to-earth advice to SMEs on financial issues.

It used to be said that banks would only lend you an umbrella if it wasn’t raining. There is a grain of truth in this . If your company is doing well and has positive cash flow it is generally a good time to borrow money from the banks. However, if you are not in this fortunate position what should you do?

If you have a particular project in mind for funding then creating the right proposal for the bank is key. You may want to buy equipment, make an acquisition or launch a new product or service. Whatever the purpose you need to ensure you have done enough background research. Have you done detailed market research, are your financial projections accurate, what is your cash position, how much is needed up front, how long until it is repaid, is security available? Unless you can answer these questions your funding proposal is likely to fail.

Banks, by and large, tend to prefer lending against some form of security rather than on the basis of future cash flows but cash flow must never be overlooked as it is a vital component in any future debt servicing requirement.

They will require the directors to show that they will accept some of the risk by personal guarantees or pledging assets as security against the loan. If you expect your company to have rapid sales growth it may be worth considering cash flow finance or debtor factoring to reduce your reliance on borrowing.

If your company is a start-up or a young company it is worth considering the Small Firms Loan Guarantee. This Government-backed scheme is open to most businesses which have been trading for under five years (subject to certain conditions). It is designed to help small and medium enterprises who might not qualify for a loan due to lack of assets for security. The loan amount can be up to £250,000 repayable up to ten years. The DTI guarantee to cover 75% of the loan should the borrower default (under certain circumstances).

Should you approach your existing bank for funding or shop around? For a new project it is generally best to check out your existing bank first as they should at least know something about your company. It is essential to get your professional adviser to do a reality check on your projections. If your projections look too good they generally are! Also your professional adviser will know the format a proposal should take to convince the bank you have a viable proposition. If you are raising funds to acquire another company make sure your investigation into the target organisation has been as thorough as possible and spell out the benefits of the combined enterprise in detail. Again, your professional advisers should be able to help with the research and presentation of this information.

Lastly, if you do need an umbrella when it’s raining, good luck!

For further information please contact George Primrose or visit the Small Business Service website.