The manner in which businesses and organizations operate, whether they are for profit, in the charity and not-for-profit sector, or even a public service, is governed by regulations.
All of these regulations have a major impact on cash flow, the amount of start-up capital required and the profit margins that can be obtained. For example, electing to pay value added tax on a cash accounting basis can lower cash needs and speed up cash flow, attractive attributes for any venture. However, selling on credit, for which a licence is required, can increase funding needs and add to administrative costs. But if selling on credit is the norm in the business sector you plan to enter, or is a key ingredient of your competitive strategy, that burden has to be faced and prepared for.
These regulations can be loosely clustered under two headings: customer facing, those that deal with the rules concerning relationships with consumers; and taxation, those that deal with the various dues to the state that organizations have to either pay directly or to collect for onward transmission. Omitting the implications of these regulatory matters in your business plan will seriously weaken it and may even, when subsequently the financial implications are included, render a proposition unviable.
Other specific regulatory matters such as legal form, intellectual property, property consents and employment matters are covered in the relevant sections of this workbook.
From the claims being made by some businesses and the shoddy treatment handed out to customers you might be forgiven for believing that caveat emptor (let the buyer beware) was the rule of the marketing road. Far from it. In fact, organizations are heavily regulated in almost every sphere of their operations. What follows are the main customer-facing regulations that you will need to take account of in running any venture.
CASE STUDY Google fights the law
Google China, founded in 2005, was headed by former Microsoft executive, Kai-Fu Lee until September 4 2009. His appointment was just the first of a number of serious controversies that beset Google, with Microsoft initially suing both parties for breach of contract only to reach a confidential settlement within months. The Chinese government operated, and still does, a level of censorship on all communication media, alien to Western culture. To enter the Chinese market Google had to operate a form of self-imposed censorship known as the ‘Golden Shield Project’. The effect of this was that whenever people in China searched for keywords on a list of blocked words maintained by the government, google.cn displayed the following at the bottom of the page (translated):
‘In accordance with local laws, regulations and policies, part of the search result is not shown.’
Though this form of restriction appeared contrary to Google’s culture, its management argued that it could be more useful to the cause of free speech by participating in China’s IT industry even under such terms, rather than being excluded. In a company statement Google declared: ‘While removing search results is inconsistent with Google’s mission, providing no information (or a heavily degraded user experience that amounts to no information) is more inconsistent with our mission.’ In short, Google chose what it saw as the lesser of two evils. Nevertheless, in deciding to launch the censored service, Google was attacked on all fronts by free-speech campaigners and accused of ‘sickening collaboration’ in a Congressional hearing.
By the start of 2010 Google had only a third of the search-engine market in China, a market dominated by local giant Baidu. Though its sales revenues continued to rise, it was finding business hard going. On 12 January 2010, Google and more than a score of other US companies recognized that they had been under cyber attack from an organization or organizations based in mainland China. During an investigation into these attacks evidence came to light to demonstrate that the Gmail accounts of key human rights activists connected with China were being routinely accessed by third parties. Also, attempts over the preceding year were made in China to further limit free speech on the web, including the persistent blocking of Facebook, Twitter, YouTube, Google Docs and Blogger.
On 12 January 2010 Google declared it was no longer willing to censor content on its Chinese site after discovering that hackers had obtained proprietary information and e-mail data of some human-rights activists. On March 22, Google decided to stop censoring Chinese internet searches and shifted its search operations from the mainland to an unfiltered Hong Kong site, in effect reversing its original decision to comply with local conditions. While this act was criticized as ‘totally wrong’ by China, to date Google’s wider business operations, including its R&D work in China and its sales presence, have been unaffected and allowed to continue; on 12 March 2017 the South China Morning Post carried a story suggesting that Google was in talks with Beijing over its plans to return to the mainland Chinese market.
Some businesses, such as those working with food or alcohol, employment agencies, mini-cabs and hairdressers, need a licence or permit before they can set up in business at all. Your local authority planning department can advise you what rules will apply to your business. You can also use a GOV.UK website (www.gov.uk/browse/business/licences) to find out which permits, licences and registrations will apply and where to get more information.
Any advertising or promotion you undertake concerning your business and its products and services, including descriptions on packaging, leaflets and instructions and those given verbally, has to comply with the relevant regulations. You can’t just make any claims you believe to be appropriate for your business. Such claims must be decent, honest, truthful and take into account your wider responsibilities to consumers and anyone else likely to be affected. If you say anything that is misleading or fails to meet any of these tests, you could leave yourself open to being sued.
The five bodies concerned with setting the standards and enforcing the rules are:
Customers buying products are entitled to expect that the goods are ‘fit for purpose’ in that they can do what they claim to. Also, if the customer has informed you of a particular need the products must be suitable for that purpose. The goods also have to be of ‘satisfactory quality’, ie durable and without defects that would affect performance or prevent their enjoyment. For services you must carry the work out with reasonable skill and care, and provide it within a reasonable amount of time. The word ‘reasonable’ is not defined, and is applied in relation to each type of service. So for example, repairing a shoe might reasonably be expected to take a week, while three months would be unreasonable.
If goods or services don’t meet these conditions customers can claim a refund. If they have altered an item or waited an excessive amount of time before complaining, or have indicated in any other way that they have ‘accepted’ the goods, they may not be entitled to a refund, but may still be able to claim some money back for a period of up to six years.
Selling by mail order, via the internet, television, radio, telephone, fax or catalogue, requires that you comply with some additional rules over and above those concerning the sale of goods and services described above. In summary, you have to provide written information, an order confirmation, and the chance to cancel the contract. During the cooling-off period customers have the unconditional right to cancel within seven working days, provided they have informed you in writing by letter, fax or e-mail.
There are, however, a wide range of exemptions to the right to cancel, including accommodation, transport, food, newspapers, audio or video recordings and goods made to a customer’s specification. GOV.UK (www.gov.uk/online-and-distance-selling-for-businesses) publishes a guide for business on distance selling on its website.
If you hold personal information on a computer on any living person, a customer or employee for example, then there is a good chance you need to register under the Data Protection Act. The rules state that the information held must have been obtained fairly, be accurate, held only for as long as necessary and held only for a lawful purpose.
You can check whether you are likely to need to register on the GOV.UK website (www.gov.uk/data-protection/the-data-protection-act).
If you plan to let your customers buy on credit, or hire out or lease products to private individuals or to businesses, then you will in all probability have to apply for a licence to provide credit. If you think you may need a licence read the regulations on the website of the Financial Conduct Authority (www.fca.org.uk/firms/firm-types/consumer-credit). Businesses must be authorized by the FCA, or have interim permission, to offer consumer credit.
Any organization handling money is responsible for paying a number of taxes and other dues to the government of the day, both on its own behalf and for any employees it may have, as well as being an unpaid tax collector required to account for end-consumers’ expenditure.
There are penalties for misdemeanours and late payments, and more serious penalties for anything that could be construed as tax evasion – a crime, as opposed to tax avoidance, the prudent arrangement of your affairs so as to minimize taxes due. You are required to keep your accounting records for six years, so at any point should tax authorities become suspicious they can dig into the past even after they have agreed your figures. In the case of suspected fraud there is no limit to how far back the digging can go.
VAT, a tax common throughout Europe though charged at different rates, is a tax on consumer spending, collected by businesses. Basically it is a game of pass the parcel, with businesses that are registered for VAT (see below) charging each other VAT and deducting VAT charged. At the end of each accounting period the amount of VAT you have paid out is deducted from the amount you have charged and the balance is paid over to HM Revenue & Customs (HMRC).
In the United Kingdom the standard rate is 20 per cent, while some types of business charge lower rates and some are exempt altogether. The way VAT is handled on goods and services sold to and bought from other European countries is subject to another set of rules and procedures. HM Revenue of Customs provides full details on VAT.
Normally VAT is paid each quarter but small businesses can take advantage of a number of schemes to simplify procedures or aid their cash flow. The annual accounting scheme lets you pay monthly or quarterly estimated figures, submitting a single annual return at the end of the year with any balancing payment. The cash accounting scheme allows you to delay paying over any VAT until you have actually collected it from your customers. The flat-rate scheme allows you to calculate your VAT as a flat percentage of your total sales, rather than having to record the VAT charged on individual purchases and sales.
You will pay tax on any profit made in your business. The rate at which you will pay depends on the legal structure chosen. If you are a sole trader or in a partnership you will pay tax at your personal marginal rate, either 20 per cent or 40 per cent; limited companies will pay at a rate of 20 per cent on profits. These tax rates are subject to change each year or so.
The financial year for tax purpose is usually 6 April to 5 April, although some businesses use different dates such as the calendar year end if it is more appropriate for their type of business. You need to get your tax return back to HMRC by 30 September if you want it to calculate the tax due, or by 31 January if you are happy for you or your accountant to do the sums. The tax itself is paid in two stages at the end of July and January. Companies have to calculate their own tax due and pay it nine months after their year-end. You will be fined and charged interest on any late tax payments.
A company’s financial affairs are in the public domain. As well as keeping HMRC informed, companies have to file their accounts with Companies House (www.gov.uk/government/organisations/companies-house). Accounts should be filed within 10 months of the company’s financial year-end. Small businesses (turnover below £5.6 million) can file abbreviated accounts which include only very limited balance sheet and profit and loss account information, and these do not need to be audited. You can be fined up to £1,500 for filing accounts late. You can find out how to file your companies accounts and complete a tax return online.
Tax is due on the profit of your business, which might not be the same amount as the figure arrived at in your profit and loss account. For example, you will include depreciation, entertainment and perhaps other expenses in your profit and loss account. Although it is important for you to know how much and on what they were incurred, these are not allowable expenses for tax purposes. Your accountant will be able to give you a good steer in this area. Bytestart.co.uk, the small business portal, has a useful overview of business expenses which goes someway to clarifying what are ‘allowable’ and ‘non-allowable’ expenses. This guide provides an overview of business expenses, with links to further resources which provide more in-depth information.
Employers are responsible for deducting income tax from employees’ wages and making the relevant payment to HMRC. If you trade as a limited company, then as a director any salary you receive will be subject to PAYE. You will need to work out the tax due. HMRC has guidance on PAYE on its website together with all the necessary forms at www.hmrc.gov.uk/payerti/forms-updates/forms-publications.htm. There are also a range of PAYE tools for employers to carry out all the tedious calculations for you at www.hmrc.gov.uk/payerti/forms-updates/more-tools.htm.
Almost everyone who works has to pay a separate tax – national insurance (NI) – collected by HMRC, which in theory at least, goes towards the state pension and other benefits. NI is paid at different rates, and self-employed people pay Class 4 contributions calculated each year on the self-assessment tax form.
The amount of NI paid depends on a mass of different factors: married women, volunteer development workers, share fishermen, self-employed and small earnings are all factors that attract NI rates of between 1 per cent and 13.8 per cent. The UK government website, for example, provides all the information required to calculate and pay the appropriate National Insurance.
HMRC has online guides for employers and business and corporations linked directly from its home page (www.hmrc.gov.uk). Tax Café (www.taxcafe.co.uk>Business Tax) has a series of guides priced at around £25 each on such subjects as Using a company to save tax and Salary vs dividends as well as tax saving tactics.