With the Icelandic ash cloud having caused major disruption travel across Europe and Economists estimating that the loss of productivity will cost the economy around £10m a day as business people are unable to travel; how has your business been affected and were you prepared?
The recent disruption to individuals and businesses highlights the need for businesses to have robust contingency plans.
You have a sales person “stuck” on continental Europe. How much is that truly costing your business, not just in terms of additional expenses for hotel bills but in lost sales hours? If that person has a clear plan of what to do in certain situations they may be able to save some of those sales. Have they been provided with a laptop and Blackberry so that they can remain in communication with potential clients and the business whenever and wherever they are? Did they remember to pack all the chargers they might need if they were going to be away longer than anticipated? Do they have an extension cord with them so they can set up an effective, efficient “home” office in their hotel room? Did they check their mobile phone was compatible with the country they were travelling to? Did they check the hotel had internet access?
If your business had a list of things it requires anyone travelling either in the UK or abroad to take with them there is likely to be the minimum about of disruption possible.
In order for your business to lose as little money as possible you need to be prepared.
It is, of course, not just “acts of God” whilst away from the office that you need to consider. These things can occur in the office too.
Is your server located near any water pipes? Are you taking daily backups of data and storing them offsite in case of a fire?
You need to have contingency plans and a disaster recovery plan in place so that if any unforeseeable circumstances do happen then you lose as few man hours as possible.
The hard part is thinking of all the unforeseeable circumstances as, by definition, they are difficult to foresee! You then need to devise ways to mitigate the risk.
Well where to begin?
Begin by walking round your office with a pen and notebook and jotting down anything you see which may be a risk. If you can get 2-3 other members of staff to also do this it can help to get as many ideas as possible down. Do not discount anything at this stage. Just get as many ideas on paper as possible.
In order to work out which risks require mitigation you need to assess each in terms of the impact they would have to business whether that be financial or reputational.
A plan must then drawn up to mitigate those risks which will have a large impact on your business. All employees/contractors of the business need to be on board and buy into the plan in order for it to be effective. Everyone must know and understand their role.
Most large businesses spend between 2% and 4% of their annual IT budget on disaster recover planning in order to prevent larger losses in the event the business cannot trade due to a disaster.
If you want assistance assessing the risks to your business, formulating a travel checklist, and drawing up a disaster recovery plan then please contact us.
Thursday 22 April 2010
Sunday 28 March 2010
Insuring Your Business
When starting a new business, you will no doubt recognise the need for insurance. It can provide compensation and peace of mind should things go wrong but can also represent a significant cost.
In this factsheet we consider the different types of insurance you need to consider.
Compulsory insurance
Employers’ liability insurance is compulsory to cover your employees. By law you must have at least £5 million of cover although a minimum of £10 million is now provided by most policies. You must display the certificate of insurance in the workplace. If your business is not a limited company, and you are the only employee or you only employ close family members, you do not need compulsory employers’ liability insurance. Limited companies with only one employee, where that employee also owns 50% or more of the company’s shares, have also been exempt from compulsory employers’ liability insurance.
Motor vehicles liability insurance is also compulsory and must cover at least third party, fire and theft.
Optional insurance
Other categories of insurance are optional and a decision as to whether or not you need cover under any given heading will depend on the nature of your business and an assessment of the risks.
Public liability
Although strictly this is not compulsory you will almost certainly feel that you need cover under this heading. It covers claims for damages to third parties.
Property
You can think about limiting cover to specific risks such as fire and flood or providing more general cover. Consider the level of cover you would need for the premises (if you own the building), equipment and stock. If you rent your premises then you should check that the landlord has the appropriate cover.
Theft
If your business does not involve expensive items of equipment then you might to decide to pass on this one at least initially. If you do decide to provide cover for theft then an insurer will require a reasonable minimum level of security.
Professional indemnity
This is only likely to be necessary if you give advice which could make you liable. It protects against any loss suffered by your customers as a result of negligent advice. In some professions it is compulsory – examples being the law, accountancy and financial services. However it is common in other sectors such as computer consultancy and publishing.
Business interruption
This covers compensation for lost profits and extra costs if your business is disrupted due to say a fire. It is also referred to as ‘consequential loss’ insurance.
Key man
A small business is often dependent on key members of staff. What would happen if they became seriously ill or died? Do you need to consider insurance cover to pay out in such a situation?
Specialised insurance
A whole host of different policies cover a range of specialist situations – for example engineering insurance and computer policies.
Working from home
If you are planning to start your new business from home then don’t assume that your normal household insurance will be enough. It will not usually cover business risks. It is possible to obtain special ‘working from home’ policies.
Shopping around
It may be stating the obvious but it is important to shop around to get the best deal. You should obtain several quotes and always be wary of cheap deals. A personal recommendation may be the best way to decide.
Level of cover
Again it may be stating the obvious but too much cover and your cash flow will suffer, too little and the consequences can be catastrophic.
Consider the level of cover you need. With buildings and equipment make sure you are covered for the full replacement cost.
If there is to be an excess on any policy make sure that it is set at a sensible level.
How we can help
Please talk to us if you would like any further help on insuring your business.
In this factsheet we consider the different types of insurance you need to consider.
Compulsory insurance
Employers’ liability insurance is compulsory to cover your employees. By law you must have at least £5 million of cover although a minimum of £10 million is now provided by most policies. You must display the certificate of insurance in the workplace. If your business is not a limited company, and you are the only employee or you only employ close family members, you do not need compulsory employers’ liability insurance. Limited companies with only one employee, where that employee also owns 50% or more of the company’s shares, have also been exempt from compulsory employers’ liability insurance.
Motor vehicles liability insurance is also compulsory and must cover at least third party, fire and theft.
Optional insurance
Other categories of insurance are optional and a decision as to whether or not you need cover under any given heading will depend on the nature of your business and an assessment of the risks.
Public liability
Although strictly this is not compulsory you will almost certainly feel that you need cover under this heading. It covers claims for damages to third parties.
Property
You can think about limiting cover to specific risks such as fire and flood or providing more general cover. Consider the level of cover you would need for the premises (if you own the building), equipment and stock. If you rent your premises then you should check that the landlord has the appropriate cover.
Theft
If your business does not involve expensive items of equipment then you might to decide to pass on this one at least initially. If you do decide to provide cover for theft then an insurer will require a reasonable minimum level of security.
Professional indemnity
This is only likely to be necessary if you give advice which could make you liable. It protects against any loss suffered by your customers as a result of negligent advice. In some professions it is compulsory – examples being the law, accountancy and financial services. However it is common in other sectors such as computer consultancy and publishing.
Business interruption
This covers compensation for lost profits and extra costs if your business is disrupted due to say a fire. It is also referred to as ‘consequential loss’ insurance.
Key man
A small business is often dependent on key members of staff. What would happen if they became seriously ill or died? Do you need to consider insurance cover to pay out in such a situation?
Specialised insurance
A whole host of different policies cover a range of specialist situations – for example engineering insurance and computer policies.
Working from home
If you are planning to start your new business from home then don’t assume that your normal household insurance will be enough. It will not usually cover business risks. It is possible to obtain special ‘working from home’ policies.
Shopping around
It may be stating the obvious but it is important to shop around to get the best deal. You should obtain several quotes and always be wary of cheap deals. A personal recommendation may be the best way to decide.
Level of cover
Again it may be stating the obvious but too much cover and your cash flow will suffer, too little and the consequences can be catastrophic.
Consider the level of cover you need. With buildings and equipment make sure you are covered for the full replacement cost.
If there is to be an excess on any policy make sure that it is set at a sensible level.
How we can help
Please talk to us if you would like any further help on insuring your business.
Inheritance Tax (IHT)
Inheritance tax (IHT) is levied on a person’s estate when they die, and certain gifts made during an individual’s lifetime.
Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free: the result can be a substantial tax saving.
We give guidance below on some of the main opportunities for minimising the impact of the tax.
It is however important for you to seek specific professional advice appropriate to your personal circumstances.
Summary of IHT
Scope of the tax
When a person dies IHT becomes due on their estate. Some lifetime gifts are treated as chargeable transfers but most are ignored providing the donor survives for seven years after the gift.
The rate of tax on death is 40% and 20% on lifetime chargeable transfers. For 2009/10 the first £325,000 is chargeable at 0% and this is known as the nil rate band.
IHT on lifetime gifts
Lifetime gifts fall into one of three categories:
a transfer to a company or a trust is immediately chargeable
exempt gifts will be ignored both when they are made and also on the subsequent death of the donor
any other transfers will be potentially exempt transfers (PETs) and IHT is only due if the donor dies within seven years. It might therefore be more accurate to regard them as potentially chargeable transfers.
IHT on death
The main IHT charge is likely to arise on death. IHT is charged on the value of the estate. This includes any interests in trust property where the deceased had a right to income from, or use of, the property. Furthermore:
PETs made within seven years become chargeable
there may be an additional liability because of chargeable transfers made within the previous seven years.
Estate planning
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.
However careful consideration needs to be given to other factors. For example a gift that saves IHT may unnecessarily create a capital gains tax (CGT) liability. Furthermore the prospect of saving IHT should not be allowed to jeopardise the financial security of those involved.
Use of PETs
Wherever possible gifts should be made as PETs rather than as chargeable transfers. This is because the gift will be exempt from IHT if the donor survives for seven years.
Nil rate band and seven year cumulation
Chargeable transfers covered by the nil rate band can be made without incurring any IHT liability. Once seven years have elapsed a gift is no longer taken into account in determining IHT on subsequent transfers. Therefore every seven years a full nil rate band will be available to pass assets out of the estate.
Transferable nil rate band
It is now possible for spouses and civil partners to transfer the nil rate band unused on the first death to the surviving spouse for use on the death of the surviving spouse/partner. On that second death, their estate will be able to use their own nil rate band and in addition the same proportion of a second nil rate band that corresponds to the proportion unused on the first death. This allows the possibility of doubling the nil rate band available on the second death. This arrangement can apply where the second death happens after 9 October 2007 irrespective of the date of the first death.
Annual exemption
£3,000 per annum may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter.
Gifts between husband and wife
Gifts between husband and wife are generally exempt. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and PETs.
Small gifts
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
Normal expenditure out of income
Gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
Family maintenance
A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.
Wedding presents
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
Gifts to charities
Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
Business property relief (BPR)
When ‘business property’ is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief. In cases where full relief is available there is little incentive, from a tax point of view, to transfer such assets in lifetime. Additionally no CGT will be payable where the asset is included in the estate on death. However the reliefs may not be so generous in the future and therefore gifts now may be advisable.
Agricultural property relief (APR)
APR is similar to BPR and available on the transfer of agricultural property so long as various conditions are met.
Use of trusts
Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.
We can advise you on the type of trust which may be suitable for your circumstances.
Life assurance
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.
A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised, eg family company shares.
Wills
As the main IHT liability is likely to arise on death, a sensible and up to date Will is important.
How We Can Help
Whilst some generalisations can be made about IHT planning it is always necessary to tailor the strategy to fit your situation.
Any plan must take account of your circumstances and aspirations. The need to ensure your financial security (and your family’s) cannot be ignored. If you propose to make gifts the interaction of IHT with other taxes needs to be considered carefully.
However there can be scope for substantial savings which may be missed unless professional advice is sought as to the appropriate course of action. We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements.
Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free: the result can be a substantial tax saving.
We give guidance below on some of the main opportunities for minimising the impact of the tax.
It is however important for you to seek specific professional advice appropriate to your personal circumstances.
Summary of IHT
Scope of the tax
When a person dies IHT becomes due on their estate. Some lifetime gifts are treated as chargeable transfers but most are ignored providing the donor survives for seven years after the gift.
The rate of tax on death is 40% and 20% on lifetime chargeable transfers. For 2009/10 the first £325,000 is chargeable at 0% and this is known as the nil rate band.
IHT on lifetime gifts
Lifetime gifts fall into one of three categories:
a transfer to a company or a trust is immediately chargeable
exempt gifts will be ignored both when they are made and also on the subsequent death of the donor
any other transfers will be potentially exempt transfers (PETs) and IHT is only due if the donor dies within seven years. It might therefore be more accurate to regard them as potentially chargeable transfers.
IHT on death
The main IHT charge is likely to arise on death. IHT is charged on the value of the estate. This includes any interests in trust property where the deceased had a right to income from, or use of, the property. Furthermore:
PETs made within seven years become chargeable
there may be an additional liability because of chargeable transfers made within the previous seven years.
Estate planning
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.
However careful consideration needs to be given to other factors. For example a gift that saves IHT may unnecessarily create a capital gains tax (CGT) liability. Furthermore the prospect of saving IHT should not be allowed to jeopardise the financial security of those involved.
Use of PETs
Wherever possible gifts should be made as PETs rather than as chargeable transfers. This is because the gift will be exempt from IHT if the donor survives for seven years.
Nil rate band and seven year cumulation
Chargeable transfers covered by the nil rate band can be made without incurring any IHT liability. Once seven years have elapsed a gift is no longer taken into account in determining IHT on subsequent transfers. Therefore every seven years a full nil rate band will be available to pass assets out of the estate.
Transferable nil rate band
It is now possible for spouses and civil partners to transfer the nil rate band unused on the first death to the surviving spouse for use on the death of the surviving spouse/partner. On that second death, their estate will be able to use their own nil rate band and in addition the same proportion of a second nil rate band that corresponds to the proportion unused on the first death. This allows the possibility of doubling the nil rate band available on the second death. This arrangement can apply where the second death happens after 9 October 2007 irrespective of the date of the first death.
Annual exemption
£3,000 per annum may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter.
Gifts between husband and wife
Gifts between husband and wife are generally exempt. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and PETs.
Small gifts
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
Normal expenditure out of income
Gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
Family maintenance
A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.
Wedding presents
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
Gifts to charities
Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
Business property relief (BPR)
When ‘business property’ is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief. In cases where full relief is available there is little incentive, from a tax point of view, to transfer such assets in lifetime. Additionally no CGT will be payable where the asset is included in the estate on death. However the reliefs may not be so generous in the future and therefore gifts now may be advisable.
Agricultural property relief (APR)
APR is similar to BPR and available on the transfer of agricultural property so long as various conditions are met.
Use of trusts
Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.
We can advise you on the type of trust which may be suitable for your circumstances.
Life assurance
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.
A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised, eg family company shares.
Wills
As the main IHT liability is likely to arise on death, a sensible and up to date Will is important.
How We Can Help
Whilst some generalisations can be made about IHT planning it is always necessary to tailor the strategy to fit your situation.
Any plan must take account of your circumstances and aspirations. The need to ensure your financial security (and your family’s) cannot be ignored. If you propose to make gifts the interaction of IHT with other taxes needs to be considered carefully.
However there can be scope for substantial savings which may be missed unless professional advice is sought as to the appropriate course of action. We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements.
Saturday 27 March 2010
Fraud and How to Spot It
Major corporate frauds and collapses hit the headlines from time to time and many of these were high profile and the amounts involved quite spectacular.
With the current pressures we are now facing from the recession, difficulties in renewing finance, the challenge of achieving targets, even simply paying suppliers bills and it becomes easy to see that the risk of fraud for all sizes of businesses has increased significantly.
The issues associated with well publicised frauds may seem far removed from your business but the simple truth is that fraud can affect businesses of all sizes. Whether you employ a small team or a significant workforce, this factsheet considers how you can increase your awareness of the factors that indicate fraud. It also sets out the defences that you can implement to minimise the risk within your business.
It couldn’t happen here
It is easy to think that fraud is something that ‘couldn’t or wouldn’t happen here’. However while large businesses have the resources to implement what they hope are effective systems of internal control to prevent fraud, smaller and medium-sized businesses often have to rely on a small team of people who they trust. No doubt you can think of a handful of key employees who you couldn’t imagine being without! On so many occasions employers have said “do you know he/she (the fraudster) was my most trusted employee”.
A key difficulty faced by smaller businesses is the lack of options to segregate duties. Individuals have to fulfil a number of roles and this can lead to increased opportunity and scope to commit fraud, and for some, the temptation can be too great.
Areas where fraud can occur
While the precise nature of any fraud will be specific to the nature of the business and the opportunities afforded to a potential fraudster, there are a number of common areas where fraud can occur.
Employees abusing their position
Most fraud impacts on the profit and loss account, where either expenses are overstated or income understated. Frauds here could range from a few pounds of fiddled expenses, where no one checks supporting documentation or reviews whether the claim made is reasonable, to more significant frauds. These could involve the setting up of fictitious suppliers and the production of bogus invoices, or an employee who approves purchases working in collusion with a supplier.
Positions could also be abused where a business requests tenders. Here there is a risk of ‘kickbacks’ where the individuals involved in the tender process accept bribes or sweeteners from potential suppliers. This could result in inefficient contracts being signed perhaps for dubious quality goods.
The individual amounts involved in these types of fraud may not be large, so they go unnoticed for some time. However as time progresses the amounts involved can become significant. Many fraudsters gain in confidence and the figures involved escalate as they become ‘greedy’. Of course large scale frauds are more likely to be discovered and greed often plays a part in the identification and capture of fraudsters.
Nevertheless the time taken to detect fraud is vital. It may make all the difference to cashflow as fraud drains a business of resources that it needs to grow.
Suppliers taking advantage
Where a business has few or weak checking procedures and controls, a supplier may recognise this fact and take advantage. For example fewer items may actually be delivered than those included on the delivery note. Invoices may include higher quantities or prices than those delivered and agreed.
This highlights the importance of checking both delivery notes and invoices and following up any discrepancies promptly.
Other risk areas
Theft of confidential information such as client or customer lists or intellectual property such as an industrial process could cause a business untold problems if these are stolen by disgruntled employees. There have even been examples of these being copied onto an Ipod!
Information could also be vulnerable to attack from outside. Advances in technological developments mean that all businesses connected to the internet need to consider the risks associated with this. The same advances in technology sometimes lead us to believe that the computer is always right, so fewer manual checks are completed generally within the organisation as a result.
Certain types of organisation are at greater risk of fraud, for example those that are cash based can be more vulnerable due to the difficulties in implementing effective controls over cash. Similarly businesses that deal in attractive consumer goods are at increased risk.
Examples
J F Bogus & Sons
You might think that this could never happen to you but if your trusted bookkeeper presents you with an invoice and a cheque to sign, just how hard do you look at the invoice? The amount might be relatively small and is of course supported by an invoice. You have to sign the cheque in a hurry as you won’t be in tomorrow and it’s 5.15pm. Your bookkeeper will fill the payee line in before the cheque is sent out.
Ultimately, your year end figures just don’t look quite right and subsequent investigations identify missing invoices and eventually, that the bookkeeper has been making these cheques payable to himself.
Sporting life!
Stock controls were put to the test in the sportswear and equipment business that showed up too many discrepancies between computerised stock and that actually counted at the year end. The differences could not be explained and eventually surveillance was used to monitor the warehouse.
Revealing footage showed the cleaners adding various bats, balls and kit to the bin bags full of rubbish removed each evening!
Businesses that are growing rapidly may also be more susceptible to fraud. When both company resources and directors personally are stretched to capacity, it is even more difficult to maintain an overview. Indicators of fraud may go unnoticed.
Does anyone know where Sid is?
Imagine the surprise a director of a local manufacturing company had when he handed out the payslips to his workforce and two were left over! His financial controller, who had never missed handing these out previously, had been taken ill and could not come into work. Subsequent investigations revealed that for some time, this much trusted staff member had created fictitious employees and had been paying the wages into his own bank account.
Ten step guide to preventing and detecting fraud
Given the wide range of fraud that could be committed, what steps can you take to minimise the risk of fraud being perpetrated within your organisation? Consider our top ten tips for detecting and preventing fraud.
1 Begin by recruiting the right people to work in your organisation. Make sure that you check out references properly and ensure that any temporary staff are also vetted, particularly if they are to work in key areas.
2 Ensure that you have a clear policy that fraud will not be tolerated within the organisation and ensure that this is communicated to all staff.
3 Consider which areas of your organisation could be at risk, then plan and implement appropriate defences. Target the areas where most of your revenue comes from and where most of your costs lie. Develop some simple systems of internal control to defend these areas. Effective controls include:
segregating duties
supervision and review
arithmetical checks
accounting comparisons
authorisation and approval
physical controls and counts
4 Wherever possible don’t have only one person who is responsible for controlling an entire area of the business.
This in particular includes the accounting function but will also include other key areas. For example ordering goods, stock control and despatch in a business where stocks include attractive consumer goods.
5 Always retain a degree of control over the key accounting functions of your business. Don’t pre-sign blank cheques other than in exceptional circumstances and ensure that the corresponding invoices are presented with the cheques.
6 Be on the lookout for unusual requests from staff involved in the accounting function.
7 Watch out for employees who are overly protective of their role - they may have something to hide. Similarly watch out for disaffected employees, who might be bearing a grudge or those whose circumstances change for the worse or inexplicably for the better!
8 Watch out for notable changes in cashflow when an employee is away from the office, on holiday for example. Similarly be aware of employees who never take their holiday. These could both be indicators of fraud, something we see when we look back retrospectively.
9 Prepare budgets and monthly management accounts and compare these against your actual results so that you are aware of variances. Taking prompt investigative action where variances arise could make all the difference by closing the window of opportunity afforded to fraudsters.
10 Where a fraudster is caught, make sure that appropriate action is taken and learn from the experience.
Winning the battle against fraud
While the most devious of fraudsters might go unnoticed for some time, many fraudsters are ordinary individuals who see an opportunity. The frauds that they commit are quite simple in nature.
The implementation of some simple checks within a business can make it much more difficult for a fraudster to take advantage. The results could be startling - preventing a fraud of £100 each week equates to around £5,000 leaving a business over a year. Operating at a 20% margin would mean generating £25,000 of turnover to compensate for this.
How we can help
If you would like to discuss any of the issues raised in this factsheet please do contact us.
With the current pressures we are now facing from the recession, difficulties in renewing finance, the challenge of achieving targets, even simply paying suppliers bills and it becomes easy to see that the risk of fraud for all sizes of businesses has increased significantly.
The issues associated with well publicised frauds may seem far removed from your business but the simple truth is that fraud can affect businesses of all sizes. Whether you employ a small team or a significant workforce, this factsheet considers how you can increase your awareness of the factors that indicate fraud. It also sets out the defences that you can implement to minimise the risk within your business.
It couldn’t happen here
It is easy to think that fraud is something that ‘couldn’t or wouldn’t happen here’. However while large businesses have the resources to implement what they hope are effective systems of internal control to prevent fraud, smaller and medium-sized businesses often have to rely on a small team of people who they trust. No doubt you can think of a handful of key employees who you couldn’t imagine being without! On so many occasions employers have said “do you know he/she (the fraudster) was my most trusted employee”.
A key difficulty faced by smaller businesses is the lack of options to segregate duties. Individuals have to fulfil a number of roles and this can lead to increased opportunity and scope to commit fraud, and for some, the temptation can be too great.
Areas where fraud can occur
While the precise nature of any fraud will be specific to the nature of the business and the opportunities afforded to a potential fraudster, there are a number of common areas where fraud can occur.
Employees abusing their position
Most fraud impacts on the profit and loss account, where either expenses are overstated or income understated. Frauds here could range from a few pounds of fiddled expenses, where no one checks supporting documentation or reviews whether the claim made is reasonable, to more significant frauds. These could involve the setting up of fictitious suppliers and the production of bogus invoices, or an employee who approves purchases working in collusion with a supplier.
Positions could also be abused where a business requests tenders. Here there is a risk of ‘kickbacks’ where the individuals involved in the tender process accept bribes or sweeteners from potential suppliers. This could result in inefficient contracts being signed perhaps for dubious quality goods.
The individual amounts involved in these types of fraud may not be large, so they go unnoticed for some time. However as time progresses the amounts involved can become significant. Many fraudsters gain in confidence and the figures involved escalate as they become ‘greedy’. Of course large scale frauds are more likely to be discovered and greed often plays a part in the identification and capture of fraudsters.
Nevertheless the time taken to detect fraud is vital. It may make all the difference to cashflow as fraud drains a business of resources that it needs to grow.
Suppliers taking advantage
Where a business has few or weak checking procedures and controls, a supplier may recognise this fact and take advantage. For example fewer items may actually be delivered than those included on the delivery note. Invoices may include higher quantities or prices than those delivered and agreed.
This highlights the importance of checking both delivery notes and invoices and following up any discrepancies promptly.
Other risk areas
Theft of confidential information such as client or customer lists or intellectual property such as an industrial process could cause a business untold problems if these are stolen by disgruntled employees. There have even been examples of these being copied onto an Ipod!
Information could also be vulnerable to attack from outside. Advances in technological developments mean that all businesses connected to the internet need to consider the risks associated with this. The same advances in technology sometimes lead us to believe that the computer is always right, so fewer manual checks are completed generally within the organisation as a result.
Certain types of organisation are at greater risk of fraud, for example those that are cash based can be more vulnerable due to the difficulties in implementing effective controls over cash. Similarly businesses that deal in attractive consumer goods are at increased risk.
Examples
J F Bogus & Sons
You might think that this could never happen to you but if your trusted bookkeeper presents you with an invoice and a cheque to sign, just how hard do you look at the invoice? The amount might be relatively small and is of course supported by an invoice. You have to sign the cheque in a hurry as you won’t be in tomorrow and it’s 5.15pm. Your bookkeeper will fill the payee line in before the cheque is sent out.
Ultimately, your year end figures just don’t look quite right and subsequent investigations identify missing invoices and eventually, that the bookkeeper has been making these cheques payable to himself.
Sporting life!
Stock controls were put to the test in the sportswear and equipment business that showed up too many discrepancies between computerised stock and that actually counted at the year end. The differences could not be explained and eventually surveillance was used to monitor the warehouse.
Revealing footage showed the cleaners adding various bats, balls and kit to the bin bags full of rubbish removed each evening!
Businesses that are growing rapidly may also be more susceptible to fraud. When both company resources and directors personally are stretched to capacity, it is even more difficult to maintain an overview. Indicators of fraud may go unnoticed.
Does anyone know where Sid is?
Imagine the surprise a director of a local manufacturing company had when he handed out the payslips to his workforce and two were left over! His financial controller, who had never missed handing these out previously, had been taken ill and could not come into work. Subsequent investigations revealed that for some time, this much trusted staff member had created fictitious employees and had been paying the wages into his own bank account.
Ten step guide to preventing and detecting fraud
Given the wide range of fraud that could be committed, what steps can you take to minimise the risk of fraud being perpetrated within your organisation? Consider our top ten tips for detecting and preventing fraud.
1 Begin by recruiting the right people to work in your organisation. Make sure that you check out references properly and ensure that any temporary staff are also vetted, particularly if they are to work in key areas.
2 Ensure that you have a clear policy that fraud will not be tolerated within the organisation and ensure that this is communicated to all staff.
3 Consider which areas of your organisation could be at risk, then plan and implement appropriate defences. Target the areas where most of your revenue comes from and where most of your costs lie. Develop some simple systems of internal control to defend these areas. Effective controls include:
segregating duties
supervision and review
arithmetical checks
accounting comparisons
authorisation and approval
physical controls and counts
4 Wherever possible don’t have only one person who is responsible for controlling an entire area of the business.
This in particular includes the accounting function but will also include other key areas. For example ordering goods, stock control and despatch in a business where stocks include attractive consumer goods.
5 Always retain a degree of control over the key accounting functions of your business. Don’t pre-sign blank cheques other than in exceptional circumstances and ensure that the corresponding invoices are presented with the cheques.
6 Be on the lookout for unusual requests from staff involved in the accounting function.
7 Watch out for employees who are overly protective of their role - they may have something to hide. Similarly watch out for disaffected employees, who might be bearing a grudge or those whose circumstances change for the worse or inexplicably for the better!
8 Watch out for notable changes in cashflow when an employee is away from the office, on holiday for example. Similarly be aware of employees who never take their holiday. These could both be indicators of fraud, something we see when we look back retrospectively.
9 Prepare budgets and monthly management accounts and compare these against your actual results so that you are aware of variances. Taking prompt investigative action where variances arise could make all the difference by closing the window of opportunity afforded to fraudsters.
10 Where a fraudster is caught, make sure that appropriate action is taken and learn from the experience.
Winning the battle against fraud
While the most devious of fraudsters might go unnoticed for some time, many fraudsters are ordinary individuals who see an opportunity. The frauds that they commit are quite simple in nature.
The implementation of some simple checks within a business can make it much more difficult for a fraudster to take advantage. The results could be startling - preventing a fraud of £100 each week equates to around £5,000 leaving a business over a year. Operating at a 20% margin would mean generating £25,000 of turnover to compensate for this.
How we can help
If you would like to discuss any of the issues raised in this factsheet please do contact us.
Enterprise Investment Scheme
The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors in qualifying shares in these companies.
There are really two separate schemes within EIS:
a scheme giving income tax relief on the investment and a CGT exemption on gains made when the shares are disposed of and/or
a scheme aimed at providing a CGT deferral.
An individual can take advantage of either or both of these schemes.
The reliefs available
Income tax relief
Investors may be given income tax relief at 20% on their investments of up to £500,000 a year.
The income tax relief is withdrawn if the shares are disposed of within three years.
CGT exemption
Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn.
The CGT exemption may be restricted if an investor does not get full income tax relief on the subscription for EIS shares.
Losses on the disposal of EIS shares are allowable. The amount of the capital loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of.
A capital loss arising on the disposal of EIS shares can be set against income.
CGT deferral
Gains arising on disposals of any assets can be deferred against subscriptions for shares in any EIS company.
Shares do not have to have income tax relief attributable to them in order to qualify for deferral relief.
The gain will become chargeable in the tax year when the subscription shares are disposed of.
There is no upper limit on the amount of deferral relief available to an individual although there is a limit on investment in a single company or group of companies.
Qualifying companies
Companies must meet certain conditions for any of the reliefs to be available for the investor.
The company must be unquoted when the shares are issued and there must be no arrangement in existence at that time for it to cease to be unquoted.
All the shares comprised in the issue must be issued to raise money for the purpose of a qualifying business activity.
The money raised by the share issue must be wholly employed within a specified period by the company.
The company or group must have fewer than 50 full time employees.
The amount of capital raised in any 12 month period is limited to £2 million.
It was announced in the Pre-Budget Report 2009 that certain changes to the qualifying conditions for scheme are being made to ensure it continues to meet European State Aid requirements.
In summary the proposed changes are:
to qualify a company must not be in difficulty
to qualify a company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK
In addition a new ‘small enterprise’ definition is to be incorporated into legislation to ensure that the scheme remains targeted on the small enterprises for which it is intended and do not benefit larger enterprises.
Qualifying business activities
A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:
dealing in land, in commodities or futures or in shares, securities or other financial instruments
financial activities
dealing in goods other than in an ordinary trade of retail or wholesale distribution
leasing or letting assets on hire
receiving royalties or licence fees, other than, in certain cases, such payments arising from film production, or from research and development
providing legal or accountancy services
property development
farming or market gardening
holding, managing, or occupying woodlands
operating or managing hotels, guest houses or hostels
operating or managing nursing homes or residential care homes
ship building
coal and steel production.
Time period in which the money is invested
In most cases at least 80% of the money must be used within 12 months after the date on which the shares were issued and the remaining balance within the following 12 month period. Where the qualifying business activity has not started:
the company must begin to carry on the trade within two years after the date of issue of the shares
the above deadline is extended to 12 months and 24 months after the date on which trading commences.
From 22 April 2009 the time limit for the employment of money invested is relaxed to two years from the issue of the shares or if later two years from the commencement of the qualifying activity.
How to qualify for income tax relief
Eligibility for income tax relief is restricted to companies with which you are not 'connected' at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.
You can be connected with a company in two broad ways:
by virtue of the size of your stake in the company or
by virtue of a working relationship between you and the company.
In both cases the position of your ‘associates’ is also taken into account.
Size of stake
You will be connected with the company at any time when you control directly or indirectly possess, or are entitled to acquire, more than 30% of the ordinary share capital of the company.
Working relationship
You will be connected with the company if you have been an employee or a paid director of the company.
There is an exception to this rule if you become a paid director of the company after you were issued with the shares.
You must never previously have been connected with the company and must not become connected with it in any other way. Also, you must never have been involved in carrying on the whole or any part of the trade or business carried on by the company.
How to qualify for CGT deferral relief
You can defer a chargeable gain which accrues to you on the disposal by you of any asset. In addition, you can defer revived gains arising to you in respect of earlier EIS, Venture Capital Trust (VCT) or CGT reinvestment relief investments.
There are some restrictions on investments against which gains can be deferred. These are designed, broadly, to prevent relief being obtained in circumstances where there is a disposal and acquisition of shares in the same company.
Receiving value from a company
The EIS is subject to a number of rules which are designed to ensure that investors are not able to obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.
Examples of the circumstances in which you would be treated as receiving value from the company are where the company:
buys any of its shares or securities which belong to you
makes a payment to you for giving up the right to payment of a debt (other than an ordinary trade debt)
repays a debt owed to you that was incurred before you subscribed for the shares
provides you with certain benefits or facilities
waives any liability of yours or an associate’s to the company
undertakes to discharge, any such liability to a third party
lends you money which has not been repaid before the shares are issued.
Receipts of ‘insignificant’ value will not cause the withdrawal of relief.
How we can help
It is not possible to cover all the detailed rules of the scheme in a factsheet of this kind. If you are interested in using the EIS please contact us if you need further information about the scheme.
We can advise you as to whether your company has a qualifying trade.
We can also help to guide you through the implementation of a scheme which is suitable for your circumstances.
There are really two separate schemes within EIS:
a scheme giving income tax relief on the investment and a CGT exemption on gains made when the shares are disposed of and/or
a scheme aimed at providing a CGT deferral.
An individual can take advantage of either or both of these schemes.
The reliefs available
Income tax relief
Investors may be given income tax relief at 20% on their investments of up to £500,000 a year.
The income tax relief is withdrawn if the shares are disposed of within three years.
CGT exemption
Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn.
The CGT exemption may be restricted if an investor does not get full income tax relief on the subscription for EIS shares.
Losses on the disposal of EIS shares are allowable. The amount of the capital loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of.
A capital loss arising on the disposal of EIS shares can be set against income.
CGT deferral
Gains arising on disposals of any assets can be deferred against subscriptions for shares in any EIS company.
Shares do not have to have income tax relief attributable to them in order to qualify for deferral relief.
The gain will become chargeable in the tax year when the subscription shares are disposed of.
There is no upper limit on the amount of deferral relief available to an individual although there is a limit on investment in a single company or group of companies.
Qualifying companies
Companies must meet certain conditions for any of the reliefs to be available for the investor.
The company must be unquoted when the shares are issued and there must be no arrangement in existence at that time for it to cease to be unquoted.
All the shares comprised in the issue must be issued to raise money for the purpose of a qualifying business activity.
The money raised by the share issue must be wholly employed within a specified period by the company.
The company or group must have fewer than 50 full time employees.
The amount of capital raised in any 12 month period is limited to £2 million.
It was announced in the Pre-Budget Report 2009 that certain changes to the qualifying conditions for scheme are being made to ensure it continues to meet European State Aid requirements.
In summary the proposed changes are:
to qualify a company must not be in difficulty
to qualify a company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK
In addition a new ‘small enterprise’ definition is to be incorporated into legislation to ensure that the scheme remains targeted on the small enterprises for which it is intended and do not benefit larger enterprises.
Qualifying business activities
A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:
dealing in land, in commodities or futures or in shares, securities or other financial instruments
financial activities
dealing in goods other than in an ordinary trade of retail or wholesale distribution
leasing or letting assets on hire
receiving royalties or licence fees, other than, in certain cases, such payments arising from film production, or from research and development
providing legal or accountancy services
property development
farming or market gardening
holding, managing, or occupying woodlands
operating or managing hotels, guest houses or hostels
operating or managing nursing homes or residential care homes
ship building
coal and steel production.
Time period in which the money is invested
In most cases at least 80% of the money must be used within 12 months after the date on which the shares were issued and the remaining balance within the following 12 month period. Where the qualifying business activity has not started:
the company must begin to carry on the trade within two years after the date of issue of the shares
the above deadline is extended to 12 months and 24 months after the date on which trading commences.
From 22 April 2009 the time limit for the employment of money invested is relaxed to two years from the issue of the shares or if later two years from the commencement of the qualifying activity.
How to qualify for income tax relief
Eligibility for income tax relief is restricted to companies with which you are not 'connected' at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.
You can be connected with a company in two broad ways:
by virtue of the size of your stake in the company or
by virtue of a working relationship between you and the company.
In both cases the position of your ‘associates’ is also taken into account.
Size of stake
You will be connected with the company at any time when you control directly or indirectly possess, or are entitled to acquire, more than 30% of the ordinary share capital of the company.
Working relationship
You will be connected with the company if you have been an employee or a paid director of the company.
There is an exception to this rule if you become a paid director of the company after you were issued with the shares.
You must never previously have been connected with the company and must not become connected with it in any other way. Also, you must never have been involved in carrying on the whole or any part of the trade or business carried on by the company.
How to qualify for CGT deferral relief
You can defer a chargeable gain which accrues to you on the disposal by you of any asset. In addition, you can defer revived gains arising to you in respect of earlier EIS, Venture Capital Trust (VCT) or CGT reinvestment relief investments.
There are some restrictions on investments against which gains can be deferred. These are designed, broadly, to prevent relief being obtained in circumstances where there is a disposal and acquisition of shares in the same company.
Receiving value from a company
The EIS is subject to a number of rules which are designed to ensure that investors are not able to obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.
Examples of the circumstances in which you would be treated as receiving value from the company are where the company:
buys any of its shares or securities which belong to you
makes a payment to you for giving up the right to payment of a debt (other than an ordinary trade debt)
repays a debt owed to you that was incurred before you subscribed for the shares
provides you with certain benefits or facilities
waives any liability of yours or an associate’s to the company
undertakes to discharge, any such liability to a third party
lends you money which has not been repaid before the shares are issued.
Receipts of ‘insignificant’ value will not cause the withdrawal of relief.
How we can help
It is not possible to cover all the detailed rules of the scheme in a factsheet of this kind. If you are interested in using the EIS please contact us if you need further information about the scheme.
We can advise you as to whether your company has a qualifying trade.
We can also help to guide you through the implementation of a scheme which is suitable for your circumstances.
Directors’ Responsibilities
The position of director brings both rewards and responsibilities upon an individual.
Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement.
However the office of director should not be accepted lightly. It carries with it a number of duties and responsibilities. We summarise these complex provisions below.
Recently, the introduction of the Companies Act 2006 has brought about a number of changes for directors which you must be aware of.
Companies
You can undertake business in the UK as either:
an unincorporated entity, ie a sole trader or a partnership or
an incorporated body.
An incorporated business is normally referred to as a company. Although there are limited liability partnerships and unlimited companies the vast majority of companies are limited by shares. This means the liability of shareholders is limited to the value of their share capital (including any unpaid).
A limited company can be a private or public company. A public company must include 'public' or 'plc' in its name and can offer shares to the public.
The responsibilities and penalties for non compliance of duties are more onerous if you are a director of a public company.
Directors
When you are appointed a director of a company you become an officer with extensive legal responsibilities. The Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The new law, contained in the Companies Act 2006, extends this by highlighting the connection between what constitutes the good of your company and a consideration of its wider corporate social responsibilities.
The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.
The aim of the codification of directors’ duties in the Companies Act 2006 is to make the law more consistent and accessible. It should be noted that the other existing duties will continue to apply alongside these new statutory duties.
The Act outlines seven new statutory directors' duties, as detailed below.
Duty to act within their powers
As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.
Duty to promote the success of the company
You must act in such a way that you feel would be most likely to promote the success of the company (ie. its long-term increase in value), for the benefit of its members as a whole. However, you must also consider a number of other factors, including:
The likely long-term consequences of any decision
The interests of company employees
Fostering the company’s business relationships with suppliers, customers and others
The impact of operations on the community and environment
Maintaining a reputation for high standards of business conduct
The need to act fairly as between members of the company.
Duty to exercise independent judgment
You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.
Duty to exercise reasonable care, skill and diligence
This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.
Duty to avoid conflicts of interest
This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.
This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.
This clarifies the previous conflict of interest provisions, and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.
Duty not to accept benefits from third parties
Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.
This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Duty to declare interest in a proposed transaction or arrangement
There was an existing requirement for directors to disclose an interest in a proposed transaction. The new duty under the Companies Act 2006 extends this further and requires that any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.
The requirement to make a disclosure also applies where directors ‘ought reasonably to be aware’ of any such conflicting interest.
However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or ‘ought reasonably to be aware’) of the interest.
Enforcement and Penalties
Although the common law duties have been extended and incorporated into Company Law, the Act states that they will be enforced in the same way as the common law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.
Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:
The company itself (ie the Board or the members in general meeting) deciding to commence proceedings; or
A liquidator when the company is in liquidation.
Where the company is controlled by the directors these actions are unlikely.
However the Act has also introduced new legislation whereby an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.
How We Can Help
You will now be aware that the position of director must not be accepted lightly.
The law is designed to penalise those who act irresponsibly or incompetently.
A director who acts honestly and conscientiously should have nothing to fear.
We can provide the professional advice you need to ensure you are in the latter category.
Please come and talk to us if you would like more information.
Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement.
However the office of director should not be accepted lightly. It carries with it a number of duties and responsibilities. We summarise these complex provisions below.
Recently, the introduction of the Companies Act 2006 has brought about a number of changes for directors which you must be aware of.
Companies
You can undertake business in the UK as either:
an unincorporated entity, ie a sole trader or a partnership or
an incorporated body.
An incorporated business is normally referred to as a company. Although there are limited liability partnerships and unlimited companies the vast majority of companies are limited by shares. This means the liability of shareholders is limited to the value of their share capital (including any unpaid).
A limited company can be a private or public company. A public company must include 'public' or 'plc' in its name and can offer shares to the public.
The responsibilities and penalties for non compliance of duties are more onerous if you are a director of a public company.
Directors
When you are appointed a director of a company you become an officer with extensive legal responsibilities. The Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The new law, contained in the Companies Act 2006, extends this by highlighting the connection between what constitutes the good of your company and a consideration of its wider corporate social responsibilities.
The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.
The aim of the codification of directors’ duties in the Companies Act 2006 is to make the law more consistent and accessible. It should be noted that the other existing duties will continue to apply alongside these new statutory duties.
The Act outlines seven new statutory directors' duties, as detailed below.
Duty to act within their powers
As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.
Duty to promote the success of the company
You must act in such a way that you feel would be most likely to promote the success of the company (ie. its long-term increase in value), for the benefit of its members as a whole. However, you must also consider a number of other factors, including:
The likely long-term consequences of any decision
The interests of company employees
Fostering the company’s business relationships with suppliers, customers and others
The impact of operations on the community and environment
Maintaining a reputation for high standards of business conduct
The need to act fairly as between members of the company.
Duty to exercise independent judgment
You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.
Duty to exercise reasonable care, skill and diligence
This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.
Duty to avoid conflicts of interest
This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.
This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.
This clarifies the previous conflict of interest provisions, and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.
Duty not to accept benefits from third parties
Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.
This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Duty to declare interest in a proposed transaction or arrangement
There was an existing requirement for directors to disclose an interest in a proposed transaction. The new duty under the Companies Act 2006 extends this further and requires that any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.
The requirement to make a disclosure also applies where directors ‘ought reasonably to be aware’ of any such conflicting interest.
However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or ‘ought reasonably to be aware’) of the interest.
Enforcement and Penalties
Although the common law duties have been extended and incorporated into Company Law, the Act states that they will be enforced in the same way as the common law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.
Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:
The company itself (ie the Board or the members in general meeting) deciding to commence proceedings; or
A liquidator when the company is in liquidation.
Where the company is controlled by the directors these actions are unlikely.
However the Act has also introduced new legislation whereby an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.
How We Can Help
You will now be aware that the position of director must not be accepted lightly.
The law is designed to penalise those who act irresponsibly or incompetently.
A director who acts honestly and conscientiously should have nothing to fear.
We can provide the professional advice you need to ensure you are in the latter category.
Please come and talk to us if you would like more information.
Could I Really Make a Go of It?
Many people wonder deep down if they could really make a go of running their own business. It is not for everyone but the following is a list of attributes that successful business owners have. You do not need all of these characteristics but ‘go-getters’ have the majority of the qualities.
Qualities needed for success
To help you decide whether or not you are cut out for the enterprise culture, do you see in yourself any of the following? Are you:
Positive - decisive and enthusiastic to succeed?
Proactive - do you go out to get things or do you let them come to you?
Determined - have you clearly-defined personal and business goals?
Hardworking - do you mind being tied to the business seven days a week?
Leadership - are you able to get the best from your colleagues and discipline them when necessary?
Opportunist - will you see openings in your market and develop products for it?
Self-critical - are you able to review your own performance and welcome advice from others?
Flexible - could you change your products or methods quickly when necessary?
Erratic spending power
You must appreciate that in becoming self-employed you will lose the comfort of having a regular income. There will be times when you will have very positive cash flow but also times when money is short. Therefore during times of shortage you must be prepared to do without some luxuries for both yourself, your family and your business.
Making sure the family is with you
Starting a business is not easy and your family must both be on your side and also lend you support. Initially, especially in the early days, you could often find yourself away from your family for long, unsocial hours. Their understanding can be invaluable.
It can help to get your family involved in aspects of the business. There may be many jobs that can be easily delegated to them. It may also help on the financial side that they understand why there may be a tight control of the family finances.
Identifying your skills
You may be considering self-employment to exploit your talents. Running a business needs many skills. You should identify those things you are good at and those with which you will need help. You may wish to employ people with the necessary skills or, alternatively, consider contracting out certain tasks.
Researching your market
You must research as much as possible about the marketplace, your potential customers and competitors. It is vital to have knowledge of these areas when considering whether you have a potentially successful business proposition. You may wish to use published material or ask people who are likely to buy from you, either directly or by market survey.
You will need to find out about:
Your target market - its size and whether it is expanding or contracting.
Your customers - who are they? Where are they? What do they want? How much will they pay?
Your competitors - what are their products, prices and market share?
How we can help
You will need to consider all the above very seriously, involve your family and make a trial business plan.
We can help you to plan and answer any questions you may have.
Qualities needed for success
To help you decide whether or not you are cut out for the enterprise culture, do you see in yourself any of the following? Are you:
Positive - decisive and enthusiastic to succeed?
Proactive - do you go out to get things or do you let them come to you?
Determined - have you clearly-defined personal and business goals?
Hardworking - do you mind being tied to the business seven days a week?
Leadership - are you able to get the best from your colleagues and discipline them when necessary?
Opportunist - will you see openings in your market and develop products for it?
Self-critical - are you able to review your own performance and welcome advice from others?
Flexible - could you change your products or methods quickly when necessary?
Erratic spending power
You must appreciate that in becoming self-employed you will lose the comfort of having a regular income. There will be times when you will have very positive cash flow but also times when money is short. Therefore during times of shortage you must be prepared to do without some luxuries for both yourself, your family and your business.
Making sure the family is with you
Starting a business is not easy and your family must both be on your side and also lend you support. Initially, especially in the early days, you could often find yourself away from your family for long, unsocial hours. Their understanding can be invaluable.
It can help to get your family involved in aspects of the business. There may be many jobs that can be easily delegated to them. It may also help on the financial side that they understand why there may be a tight control of the family finances.
Identifying your skills
You may be considering self-employment to exploit your talents. Running a business needs many skills. You should identify those things you are good at and those with which you will need help. You may wish to employ people with the necessary skills or, alternatively, consider contracting out certain tasks.
Researching your market
You must research as much as possible about the marketplace, your potential customers and competitors. It is vital to have knowledge of these areas when considering whether you have a potentially successful business proposition. You may wish to use published material or ask people who are likely to buy from you, either directly or by market survey.
You will need to find out about:
Your target market - its size and whether it is expanding or contracting.
Your customers - who are they? Where are they? What do they want? How much will they pay?
Your competitors - what are their products, prices and market share?
How we can help
You will need to consider all the above very seriously, involve your family and make a trial business plan.
We can help you to plan and answer any questions you may have.
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