No papers = big problem.

Look at the UK Border Agency for example, they’ve been busy-enough during the summer. In just the few weeks between mid-June and mid-August there were reports of five separate cases of raids by the Border Agency on small businesses allegedly employing illegal workers: Cornwall [June], Leicestershire and Cumbria [July], Nottinghamshire and Shropshire [August]. In every case two or three migrant workers were reported as working illegally at each business – i.e. without the proper documentation to permit them to work in the UK. The stories all end in the same way: the employers in each case facing fines of £10,000 per worker for failing to carry out the necessary checks or maintaining the proper records of those checks. What is rarely mentioned in the news reports is that if the employers are eventually found to have knowingly employed ‘illegals’ then they face unlimited fines and/or prison sentences.
Now as it happens all of the cases reported above involved fast-food outlets or restaurants; the other interesting feature they have in common is that with the exception of the raid in Nottingham itself, all of the others have been in relatively small market towns rather than in major urban areas. In other words, being a small, remote business is no guarantee of ‘immunity’ or invisibility as far as these investigations are concerned. If summer is the logical time to look at seasonal workers in the catering trade, where will the focus shift when the summer is over?

Hand-job anyone?

Perhaps when the holiday season’s over the next target will be the hand car wash market. As Merril pointed out in her comment column last month, this area is already of interest to SOCA [the Serous Organised Crime Agency] – although rather than directly looking for illegal workers, it’s more probable that their interest would be related to potential money-laundering activities in what is almost by definition a ‘cash’ business. If SOCA are looking at this sector, it would be very surprising if HMRC and the Benefits Agency didn’t also have it on their radar somewhere, if only from the perspective of tax evasion and benefit fraud. One issue that doesn’t seem to get raised about these operations is that many of them appear to be based on abandoned petrol forecourts that at some time in the [recent?-] past were owned by the oil majors; just who actually owns these derelict sites now? Funnily enough the last report of a raid on one of these operations that we could find at the time of writing was from September 2009; that one involved three separate car wash locations in Lincolnshire. Roll on the end of summer.

Temptation, temptation..

OK you say, but those were ex-forecourts. Nothing to do with ‘legit’ operations. So let’s look at petrol retailing today: Good staff are always hard to find, sometimes it’s hard to find any staff at all; small towns don’t have the same labour-pool as large conurbations. A hard-pressed employer may be tempted to ‘overlook’ some of the paperwork that they’re supposed to check before taking anyone on because those shifts need filling next week. Some employers, struggling to attract staff against the pay and conditions offered by major High Street retailers for even the most menial posts, may be tempted to offer ‘cash in hand’ rates with no questions asked. Then we have the older, perhaps smaller, forecourts where the ancient rollover wash has simply packed up or fallen apart. Much as they’d like to put in a new one, the cost looks daunting – and that’s before the building and plumbing changes that may be necessary to comply with more modern environmental regulations. Along comes a ‘friend of a friend’ who ‘knows someone’ who’d be interested in ‘renting’ the old bay and putting in a few ‘kids’ to man a hand-wash; sounds attractive – a guaranteed income every week and maybe a few more customers drawn to the site by the prospect of a cheap wash while they shop. Of course there will be some genuine, honest, entrepreneurs out there just needing a start in their own business; and with little or no start-up capital involved a hand-wash service is as good a way as any. The dealer feels safe, after all he’s not employing the washers so who cares whether they’re legal, pay tax or claim benefits? Nothing in writing, no questions asked, no lies told.

Money may be the least of your problems.

So why are we talking about these things in a column devoted to ‘money’? The simple answer is that when times are hard it can be tempting to look for solutions that may edge into the shadowlands of illegality. Unfortunately when the spotlight turns onto them, the real criminals have a habit of disappearing into nowhere, leaving the ‘legit’ business holding the proverbial baby. We’ve already mentioned the ‘standard’ £10,000 fine per illegal employee [above] as well as the potentially unlimited fines for knowingly employing them. Where tax or benefit fraud are concerned, if the authorities can’t find the individual employees who’ve done a runner, they’ll turn to the employer whom they still have in place, and try to recover the due tax from them [along with penalties and interest]. If the thought of that isn’t enough of a deterrent then the potential consequences of getting caught-up in a money-laundering scam should terrify any normal business owner; just try this for a flavour of where that can lead:

The Proceeds of Crime Act 2002 (PoCA) Part 7 .. “Entering into or becoming involved in an arrangement which facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person: section 328 – Conviction…. can result in imprisonment for up to 14 years and/or an unlimited fine.”

Other penalties can include the seizure of any assets related to a business involved in money laundering; that could potentially include the premises where such a business was allowed to operate. Oh, and apart from any ‘criminal’ aspects, bear in mind the potential problems with your business insurance cover: any claims against you under your Employers or Public Liability insurance might prove rather ‘interesting’ if your insurance company discovers that the activities concerned weren’t quite as legal as you’d have them believe. As they used to say on ‘Crimewatch’ – sleep easily, don’t have nightmares – but to do that you need to make sure that your business is fully within the law.

Plastic – part 1.

The typical independent dealer doesn’t pick what payment cards they accept, nor the means of transmitting card information into the banking system; the most common approach being that card acceptance and processing is offered as part of the contractual supply ‘package’ with their oil company. In theory this should be a benfit to the retailer in that the oil company will usually have negotiated lower costs for these services than might otherwise be on offer, and indeed in some cases the oil company doesn’t pass any of the transaction cost back to the dealer [directly]. However, the most common complaint from the dealers is that the time taken for sales proceeds to hit their bank account is still too long. While sales on bank debit cards are usually in the account within three working days, those on the oil-company branded or other ‘fleet’ cards can still take anywhere between five and ten working days to be banked – and that’s without any particular queries or other disputed items. According to one dealer who’s been in this game for over thirty years, there’s been virtually no improvement to payment times on fuel cards since the dawn of the ‘electronic’ payment era back in the late 1980’s! The result is that at any given time a busy site can have between £30,000 and £70,000 sitting in the limbo of the EFT system, around half of it for three or four working days, the remainder for up to ten working days – and remember that the cost of all the fuel sold will have been DD’d by the oil company after just three working days.

Plastic – part 2.

One subject that irked a number of dealers was the reliability [or otherwise] of some of the EFT systems that they use, some of which had gained an unenviable reputation for ‘falling over’ several times a year. Quite apart from the chaos this always causes at the point of sale, the retailers were then faced with having to photocopy every single card receipt off their POS, covering a whole day [or sometimes longer -] of sales, before batching them up and submitting them to their card acquirer. In the words of one dealer “That’s when the fun begins” – meaning that these manual sales vouchers can take weeks to be accepted and cleared – so that the retailer has another few thousand pounds of his or her cash tied-up in the system for far longer than usual.

It’s on the shelves.

There’s an unwritten Law of Retailing that says ‘After any shop refit you’ll need to display at least 25% more stock’. In other words: once it was possible to keep a typical forecourt shop looking well stocked, even if your store-room was bare, and hence the total value of dry stock could be kept down. Today’s modern supermarket-style forecourt shops don’t have that option – miles of aisles several shelves high and dozens of chiller cabinets all on view to the punters and needing to be kept looking full. Add to that developments like the emergence of alcohol as a serious part of the modern shop offer, and it’s now fairly routine to see shop stock levels averaging between £50,000 and £75,000 at cost. But it’s not only the value that’s changed. One dealer reminisced about a time [no more than ten or fifteen years ago!] when a large part of his forecourt was stocked with items on ‘sale or return’ – tapes/CD’s, flowers, garden products, news, some of the early fast-food packages, even a fair number of accessory lines. In effect the suppliers of those lines wre offering extended credit terms whereby many of them would come in once a month and count what had gone since their last visit and then invoice the retailer. Today only ‘news’ remains as a sale or return line; virtually everything else is paid for on weekly DD terms from a wholesaler – or cash’n’carried. Have a look at your own store – how many items arrived on a 30-day credit basis?

It’s my account customers.

If it is, then sorry, but you’ve only got yourself to blame. If your customers really want the convenience of not having to pay for their fuel at every visit, the simple answer is pre-paid accounts: they give you a month’s worth of cash up-front, you let them draw fuel up to the maximum they’ve paid. Then you stop them having any more before they pay you another large wodge of cash up-front. And you charge them an administration fee for the luxury. Any other arrangement is asking for trouble.

It’s in the other bank account.

Once upon a time, on every high street there were dozens of branches of what used to be called ‘Building Societies’. Some of these used to positively want cash from small business customers [because they tended to pay out a lot of cash, over the counter, to their own customers] offering to count it free of charge, and as an added bonus they even paid you interest on the cash you deposited with them – unlike the ‘banks’ who charged you for counting and accepting cash into your own account. Hence common practice for forecourt retailers was to open an account at their local building society and deposit bags of cash there, before writing out a cheque from that account and paying it in to their bank account. Some still do. Unfortunately real ‘Building Societies’ have almost disappeared and most of those old names that do still exist are really just subsidiaries of the same banks who’s charges you’re trying to avoid. And nobody wants to count cash for free anymore. If you do manage to find a branch which will still allow you to bank cash for ‘free’ just remember that whatever you deposit with them will generally take at least three more working days to become available for paying bills out of your bank, even if you deposit the building society cheque straight into your bank account – and even if both are part of the same banking group!

Actually, it’s called “Working Capital”…

Of course what we’re looking at here is good old-fashioned ‘Working Capital’ – the money that’s almost permanently tied-up in ‘the plumbing’ of any functioning business. Looking at trends over many years, perhaps the bias has shifted somewhat against the small independent forecourt: unbelieveable as it may seem today even fuel used to come on credit terms longer than three days [seven days was once quite common, as were ‘monthly’ terms whereby the oil company would take payment for a whole month’s deliveries a few days into the following month..] and many shop suppliers worked on a 30 day credit period. Bear in mind though that in those days plastic payments were at least a little slower before EFT’s and many more sites extended credit to local account customers. Overall however, credit today is short and so the amount of working capital needed from each business owner is relatively higher: less ‘in the bank’ and more ‘in the business’.

• The growth forecast for 2011 is revised down to 2.3% from 2.6%.
• The economy is predicted to grow by 1.2% in 2010, 2.3% in 2011, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and 2015.
• Debt is to peak at 70% of the countries GDP in 2013/14.
• Unemployment is expected to peak at 8.1% this year and to fall in the coming years down to 6.1% by 2015.

Borrowing & Spending

• This year public sector net borrowing will be £149bn, which will eventually fall to £60bn in 2013/14.
• Current expenditure is set to rise – £637bn in 2010/11 to £711bn in 2015/16 mainly due to rising debt interest payments.

Banks

• A bank levy will be introduced from January 2011 and is expected to rise over £2bn a year.

Business

• The threshold from which employers start to pay national insurance will rise by the rate of inflation plus £21 per week from April 2011.
• Corporation tax will be cut next year to 27% and a further 1% annually until it reaches 24%.
• Tax rate for smaller companies will be cut to 20%.

Public Sector Pay

• People earning over £21,000 will expect a two-year pay freeze. However, those earning less will get a pay rise worth £250 in both years.
• Operational allowance will be doubled to £4,800 for armed services personnel in Afghanistan.

Tax

• VAT to increase to 20% from the 4th January 2011.
• In April, personal income tax allowance to be increased by £1000 which is worth £170 a year to basic rate taxpayers. 880,000 of the lowest paid will be expected to be taken out of the income tax altogether.
• Capital Gains Tax will rise from 18% to 28% from midnight for the higher rate taxpayers. The ‘entrepreneurs’ relief’ rate of 10% on the first £2m will be extended to the first £5m.
• 50p a month for landline tax will be scrapped.

Cigarettes, Alcohol and Fuel

• Labours duty on cider will be scrapped.

Pensions

• The basic state pension is set to rise in line with earnings, prices or 2.5% from April 2011 – whichever is greater.

Benefits

• Child benefit will be frozen for the next 3 years.
• Next year tax credits will be reduced for families earning over £40,000. Low-income families to get more Child Tax Credit – will rise by £150 per child above the rate of inflation next year.
• Housing benefit – A new maximum limit for different sized properties will be introduced – to save £1.8bn a year by the end of the Parliament.
• From April 2013, people who are unemployed will see their housing benefit cut by 10%, after 12 months of claiming Jobseekers allowance.
• The welfare shake-up will save £11bn by 2014/15.

For more information visit www.direct.gov.uk

It’s a World Cup: think Penalties!

One such area that no incoming Chancellor will rush to undo concerns various Penalties that HMRC have available against taxpayers who don’t quite follow the rules [as it were..]. A new, streamlined penalty regime came into effect from 1st April 2010; it didn’t really make headlines then, and although many individuals and businesses might think the changes were unnecessary or just another sign of the power of Government versus the individual taxpayer, they are unlikely to be suddenly cancelled by the new government.

Inaccuracy penalty

From 1 April 2009 there was a penalty for inaccurate tax documents and returns. This penalty is being extended to almost all taxes for return periods starting on or after 1 April 2009, for documents that are due to be filed on or after 1st April 2010. Apart from the ‘big ones’ [e.g. PAYE/VAT/Corporation Tax – for which these penalties already applied last year] the new rules cover virtually every other tax you can think of, such as Excise Duty, Tobacco Products Duty, etc.

Under the new system HMRC “will not penalise you if you take reasonable care to get your tax right”. Taking ‘reasonable care’ includes:

· keeping accurate records to make sure your tax returns are correct
· checking what the correct position is when you don’t understand something
· telling HM Revenue & Customs (HMRC) promptly about any error you discover in a tax return or document after you’ve sent it.

This clearly puts the onus onto every business operator to maintain an accurate accounting system, and to be open and honest when providing their accountant or tax advisor with information that will be used for preparing returns to HMRC.

Failure to notify penalty

From 1 April 2010 HMRC can apply a penalty if people don’t tell them about a tax obligation at the correct time. Again the penalties relate to almost every tax that you can think of, as well as quite a few that you’ve probably never heard of.

The failure to notify penalty will most commonly apply where you don’t tell them at the right time that:

· you are liable to tax because your new business has made a profit
· your business’s turnover has reached the VAT registration threshold
· you sell an asset and make a capital gain on which tax should be paid
· you start a type of business that is required to register with HMRC – for example for Excise
· your circumstances change in another way that affects your tax position [which is a classic ‘catch-all’ provision if ever we’ve seen one].

VAT and Excise wrongdoing penalties

From 1 April 2010 HMRC will apply wrongdoing penalties where a person:

· issues an invoice that includes VAT which they are not entitled to charge
· handles goods on which Excise Duty has not been paid or deferred
· uses a product in a way that means more Excise Duty should have been paid
· supplies a product at a lower rate of Excise Duty knowing that it will be used in a way that means a higher rate of Excise Duty should be paid
-the latter clause should be noted in particular by those fuel retailers selling products such as “Agricultural Diesel”! This penalty applies to anyone registered for VAT or Excise, anyone who should be registered to pay VAT or Excise duties and to other members of the general public.

Name & Shame

If those are the ‘penalties’ – what are the actual sanctions? What will HMRC do to you if you get caught? Simple: first the actual amount of tax that’s been underdecalared, plus an additional amount calculated as a percentage of that tax; exactly how hard they hit you comes down to how much you cooperate with them – and that includes just how good [or otherwise] your basic accounting records are. That’s been HMRC practice for a long time, what’s new is the ‘name & shame’ part: from April of this year if a taxpayer is found to have evaded over £25,000 in tax, HMRC can publish the names, business details and amount involved on their website, together with a press release to the media. Apart from any personal embarrasment, that’s not something that will do you a lot of favours if you’re trying to raise funds or get anyone interested in investing in your business in future.

Given that there’s going to be another Budget in the next few weeks, it’d take a brave or foolish soul to try and predict what will be in it; as we go to press there are persistent rumours of another hike in VAT rates, and possibly an extension to the scope of VAT to include things like newspapers and maybe even more categories of groceries. As a retailer, one can only hope that if any of these changes are being considered, they’ll be kept relatively simple and that we are all given sufficient notice [say six months..] to implement them smoothly, unlike the ‘overnight’ VAT changes back in December 2008.