MAINTAINING POSITIVE CASH FLOW IN YOUR BUSINESS

litigation

In today’s economy, difficulties with cash flow are quite frequent as customers take longer to pay their bills and banks tighten credit facilities. As a result, many business owners find themselves in a reactive cycle when it comes to matters of cash flow. Each month, managers strive to keep their cash flow profitable while costs such as payroll, material purchases and other overheads are deducted. Sometimes this goal is extremely difficult to achieve, causing stress levels to rise. Here are several tips for maintaining a positive cash flow in your business:

Managing Costs

In protecting your bottom line, you not only need to focus on increasing your income, you also need to reduce your expenses. The key to achieving a positive cash flow is to understand your costs and review these carefully on a monthly basis.

Create a sales forecast

Though it may prove difficult to begin with, running sales forecasting in your business will allow you to develop a good understanding of how sales will stack up month to month. Make sure to forecast by month, category and what revenue you anticipate based on your firm’s sales history.

Manage Debtors Actively

Make a detailed spreadsheet of “aging” debtors to identify the clients who owe money and the length of time they have been a debtor. Don’t hesitate to follow up on overdue accounts thereafter, beginning with the largest amounts due. Consider asking if there is anything you can do to help the client pay – for example, allow them to settle their bill in instalments.

Reward Early Payers

You can reward customers who pay early. Consider offering a discount of 5% or 10% to customers that pay in a short period of time, designated by you, or to a customer who pays cash. It can also be good practice to introduce new initiatives, such as asking customers to pay a percentage up front (or ideally, pay 100% of the bill up front).

Encourage Repeat Business

Encourage customers to come back to you again and again. Consider offering loyalty programs, special offers and so forth.

Retirement Relief

1156484_89891702

As readers will be aware the rate of capital gains tax increased to 33% in the December 2012 Budget, the third such increase in recent years. The increase in any tax rate places a greater responsibility on an Accountant and Tax advisor to ensure he or she “gets it right” when advising a client on the consequences of any transaction.

In the case of capital gains tax and its application to upcoming disposals of business assets this will refocus attention on the real value of the long standing “Retirement Relief” which has stood the test of time and has proven very effective in facilitating a passing of business assets in many Irish family businesses to succeeding generations over the years.

RETIREMENT RELIEF – THE MAIN CONDITIONS

Where an individual aged 55 or over sells all or part of their interest in a business and consideration is less than 750,000 a capital gains tax liability will not arise. Where the assets are sold to a child of the individual then a full exemption will generally apply even if the consideration exceeds 750,000 although in this case a clawback will apply (on the child) where the assets are sold by that child within a period of 6 years.

The assets must be chargeable business assets which include not only assets used directly in the business but also shares in a family company carrying on a business. In the case of shares the individual must generally hold at least 25% of the issued share capital of the company although smaller holdings of 10% or more will also qualify in the case where between them family members own at least 75% of the shares in a company.

It should also be noted that a disposal of shares in a non trading holding company may also qualify for relief where that company itself holds shares in a subsidiary trading company. Great care though must be taken to ensure that the assets and shares derive their value from trading and ongoing business activities as assets held as investments such as rental properties or shares deriving their value therefrom will not qualify for retirement relief.

This can frequently be a real issue in practice when advising a client and it is necessary to identify exactly how the overall consideration is to be apportioned between qualifying business activities and other non qualifying activities.

It should be noted that farming assets will also qualify and legislation also provides for the relief to apply to certain sales of leased farmland where a Farmer avails of the scheme for early retirement from farming and had previously farmed the land himself.

The assets must also be held for at least 10 years ending on the date of the disposal and must have been qualifying business assets throughout that time. It is therefore necessary to look back over that 10 year period and make sure that the asset was not applied to some non qualifying activity – an example being a business property let out to third parties for part of the time – The fact that part of a property may at some stage have been let out on a temporary basis may not in itself jeopardise the availability of Retirement relief and an experienced Accountant advising on such matters will pay careful attention to Revenue guidance and legislation in determining how to best advise in any given situation.

In the case of a company not only must the shares be held for at least 10 years but the individual selling the shares must have been a Director for that period of time also with at least 5 of those years as a full time working Director.

Where consideration exceeds 750,00 in the case of disposal to persons other than a child of the individual (extended to other family members regarded as a “ favourite nephew” in certain cases ) the gain is calculated under normal capital gains tax rules but marginal relief will apply to limit the tax to 50% of the difference between the consideration arising and the ceiling of 750,000.

It should be noted that it is proposed to reduce the 750,000 exemption threshold to 500,000 in 2014 while the unlimited exemption applicable on inter family transfers to children will it is anticipated be scaled back in certain circumstances also.

CONCLUSION

This a is a most valuable relief which with higher capital tax rates will attract greater interest in the coming years especially if business owners who have been postponing decisions on selling or passing on assets to their children during the recession now decide that the time is right to divest themselves of their business interests.

A thorough review of this important piece of Irish tax legislation will be essential reading for any Irish Accountant who thinks they may at any time be called upon to a

TAXATION AND PROFESSIONAL CONTRACTORS

Introduction

Until relatively recently, any professional person providing services of benefit to a large corporate, be it a Bank or multinational company, in Ireland would simply be hired as an employee and taxed through the PAYE system. Subject to occasional Revenue audits on the company, that would be the end of the matter and the employee, assuming he or she was not a Company Director and had no other income, was not even required in many cases to file an Income Tax Return.

contractors

Times have now changed however and employers for understandable business reasons are reluctant to take on employees on an indefinite basis with the resulting implications from a HR and employment law perspective and all that this may entail in terms of holiday pay, pension entitlements, statutory redundancy etc.

If the professional person is instead engaged under a “contract for services” as a self-employed person in their own right, the employment law and associated implications are overcome and the contractor is paid based on invoices produced with no deduction of tax at source. This is however by no means an ideal solution either, as recent experience has shown that in many cases, Revenue will still view the relationship between the parties as that between an employer and employee with a risk that on a tax audit they may require the “employer” to pay over the tax that should have been deducted at source on payment to the “employee”.

This is an unacceptable risk to any corporate and a further layer of security is required by insisting that the contractor incorporates their business into a limited company and use that entity as a vehicle by which their expertise and time may be invoiced to the ultimate client.

On receipt of the contracted amount – and of course associated VAT where applicable – the contractors company will pay a salary to the contractor via the PAYE system.

The issues that can arise . . .

In a scenario where for example €100,000 per annum is invoiced and received by the contractors company and an equal amount is then paid out in salary via the PAYE system with appropriate tax deductions at source, no issue arises – indeed in such a situation the Revenue Commissioners gain additional tax because the contractor in many cases will also be the owner of the company and will not be entitled to the annual PAYE credit of €1,650 per annum.

It has come to Revenue’s attention however that in cases such as this, the actual salary paid by the contractors company to the contractor is considerably less than the full amount of fee income that the company receives.

Instead the company finds itself in a position that before it can pay a salary it has first to defray various other expenses incurred such as:

Financing the cost of an office including matters such as an ISDN line, laptop and the cost of Directors mobile phone expenses incurred and wholly related to the conduct of the company’s business. Issues can arise when that office is at the registered legal address of the company and that also happens to be the home address of the Director.

Various motor expenses incurred by the company based on claims made by the Company Director for use of his or her own motor vehicle etc. on company business. Although the mileage rate claimed is usually well within published standard public sector rates, disputes can arise with Revenue as to what exactly constitutes genuine “business” mileage which can be reimbursed in this way and what constitutes non business mileage which cannot be reimbursed in this way. An example of non business mileage is travelling to and from work and a particular issue that arises is where exactly is the place of work of the employee in specific scenarios.

If we now change the facts outlined in the last example and assume that instead of the company paying out the full fee income of €100,000 as salary, it instead incurs €15,000 of motor expenses and €10,000 of other costs it can then only pay out €75,000 as salary. In that case the potential loss to Revenue is the €25,000 drop in salary at the combined marginal income tax rate of 52% giving a total drop in tax of close to €12,750.

Revenue interest in such cases

Given the situation as set out above, it can be seen why Revenue would have an interest in ensuring that only genuine business expenses are defrayed by such professional service companies and in particular that only legitimate reimbursement of motor expenses related to business mileage takes place.

Undoubtedly, practitioners would argue that the worst case outcome outlined above is unlikely to occur very often in practice but nonetheless this is an area where Revenue have repeatedly stated that there will be an increasing number of tax audits in the future. Given the current precarious state of the Exchequers finances, a look back tax audit over a period of four years would not be uncommon and for that reason a review of current practices in place with clients may be warranted.