Author Archives: James Hallett - Senior Manager

About James Hallett - Senior Manager

Telephone: +44 (0) 20 7874 8872

James has significant experience across the media sector be that with TV production companies, advertising agencies, gaming groups or publishing houses. Supporting clients throughout their development from initial start-up through to international expansion.

As a result, James has a deep understanding of the key challenges facing the creative sector whether that is retaining key staff within an agency or the problems faced in royalty collection and administration.

“I enjoy working closely with clients to develop practical and commercial solutions tailored to their individual needs. Beyond issues such as annual accounts, audit and tax, that includes helping with other business needs such as valuations and tax planning.”

With Sterling declining 7% against the dollar and Euro since the end of May, those trading across borders from the UK are facing a renewed pressure on margins. Equally, these swings can reduce cash-flow certainty when it comes to paying suppliers. As we saw in the lead up to previous Brexit deadline the currency market will become more volatile, reacting to comments by the main players on all sides. Therefore, we will look at how companies can practically manage currency exposure to have greater cashflow certainty and earn the margins expected when initially scoping a contract.

The Natural Hedge

The natural hedge would involve looking ahead at all your likely payments and receipts in the next few months identifying which are being made by overseas suppliers and customers. If you can identify several payments and receipts in the same currency, then it could be worth setting up a foreign currency bank account. Thereby avoiding costs involved in converting currency and providing greater certainty on cashflow. However, this may not be fully effective in eliminating currency exposure, as there could be timing differences in receipts and payments, leading to a need to convert some currency to cover any shortfalls.

Forward Contract

This is a tailor-made contract to convert an agreed quantity of currency at an agreed price at a future date. This provides certainty on the cashflow commitment of the transaction and the margin impact to the business. While, you have certainty protecting from any downside movement in exchange rates, it also means should the spot rate move in the businesses favour it will miss out on the upside. Therefore, the value to the business of entering a forward contract, will depend on the amount currency required and the impact of adverse movements on margin. Buying certainty will come at a cost and therefore it can be worth looking at forex broker rather than the company’s bank in order to obtain the best rates.

There are other hedging strategies such as future contracts, however the underlying transaction would need to be of significant scale for these to be considered a practical strategy to manage the business’ exchange rate exposure.

As we enter a period of uncertainty, reviewing the business’ exposure to currency volatility will help assess the impact of adverse swings in exchange rates on cashflow and margin. Once that it is understood, it is possible to identify what would be the appropriate steps to mitigate the risk. Whether, that through adopting a formal hedging strategy such as forward contracts or a looser one such as the one looked above in ‘ the natural hedge’.

Read more at Currency Hedging; A creative imperative

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The hard-fact for business remains, as the law currently stands, the UK leaves the EU on 29 March; Deal or No Deal. As the 29 March is less than 50 days away now, it is necessary to consider what this would mean in practical terms should no deal become reality by default.
The government has started issuing some guidance on things to consider, should the no deal become reality.

As a first step, we explore areas businesses need to think about in order to prepare themselves from a regulatory compliance perspective:

Import/Export Ready

1. If you import and export goods to EU, under a no deal scenario you will need UK EORI number. This can be obtained here. We recommend registering for one now, even if it is not used.
2. Customs declarations will be required. The government has said it will publish further information closer to the time. However, here are the tariffs in place currently.  To assist in cash-flow modelling should these rates become applicable.
3. Review the terms and conditions of your contracts to reflect the business will be importing or exporting goods.

VAT Ready

1. When importing goods to the UK, the government intends to allow for the Import VAT due to be reported on a business’ VAT return. Rather than paying it at the border.
2. If exporting goods direct to EU consumers and businesses, then import VAT and customs duties will become due when goods arrive in the EU.
3. For those that sell digital services, the Mini One Stop Shop (MOSS) portal, as things currently stand will no longer be available. To continue using MOSS it will be necessary to register in an EU Member state for the VAT MOSS non-union scheme. Registration needs to be completed by 10 April 2019 to report sales between 29 and 31 March 2019

Financial Reporting Ready

1. If a UK business has a branch operating in the EU, under a no deal scenario it will become a third country business. Remaining EU Member States may no longer deem compliance with the Companies Act 2006 as sufficient.
2. The guidance states exemptions in Companies Act 2006 will no longer be available to companies with parents and subsidiaries in the EU. Highlighted is the current exemption from preparing dormant accounts where an EU parent company prepared group accounts.

In addition to these compliance requirements under a no deal scenario, we strongly recommend cash flows are reviewed. As on top of costs arising from the imposition of tariffs and VAT, it is possible that the working capital cycle will extend due to hold ups in transportation.

Overall there are fewer than 50 days to go until Brexit, therefore it is necessary to start planning for a no deal eventuality. This is likely to be a very uncertain time for your business, especially while getting to grips with the new trading arrangements. However, action now can at least lay foundations for operating under a no deal scenario.

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The UK

The UK has long been an ideal destination for businesses from entrepreneurs to multinationals who are attracted here for the geographical location, favourable time-zone, infrastructure and connectivity.

The government is investing in the future with the world’s first test bed for 5G technologies. As well as investing in more traditional infrastructure projects such as HS2 (the new highspeed railway link) and expansion of Heathrow airport. This interconnected forward-thinking eco-system allows people to start their businesses, scale them, exit or turn them into multimillion pound successes from the UK.

Population

The UK is the fifth largest economy in the world. Like many countries it suffered significantly in the aftermath of the 2008 global banking crisis. However, GDP has long since surpassed
pre-crisis levels and in recent years has been one of the fastest growing economies in the G7. UK unemployment stands at 4.4% which is amongst the lowest in the developed world and
is testament to UK’s highly skilled workforce and flexible labour market.

Property

It is normal for enterprises to rent their property. In London there are plenty of shared workspaces making it easy to set up a base from which to expand.

The government is seeking to expand supply and is demanding local authorities approve planning applications for new housing.

The EU referendum

In June 2016 the UK voted to leave the EU. The UK government and European Commission are currently negotiating the transitional arrangements and the future relationship.

London

London is the UK’s commercial hub.
Regardless of what the new trading relationships have in store, big business and entrepreneurs alike are making London their base.
Google, Facebook, Bloomberg and Deutchesbank have all invested in new Headquarters in London since the EU referendum. But its not just the big boys who find opportunities here. Family businesses account for a quarter of the UK’s Gross Domestic Product, employing 12 million people.
One of London’s recent success stories has been the creation of tech city which has acted as an incubator for entrepreneurial businesses looking take advantage of new opportunities within
the digital economy.

Global hub

With five airports and the rail link to the European mainland London is highly accessible for the business traveller and connected to most corners of the globe.

Doing business in the UK

Attractive tax incentives

Key tax breaks that any potential inbound investor should be aware of include:

  • The UK Corporation Tax Rate is one of lowest in the G20
  • Low Social Security Rate for employers
  • Attractive Capital Allowances and Annual Investment Allowance on the purchase of plant and machinery
  • The UK Patent Box regime with an even lower corporation tax rate possible
  • Incentives for innovation in the form of R&D Tax Credits for any business that can demonstrate they solved a technical challenge and where it is not possible to acquire an off-shelf alternative. We have helped businesses in a range of different sectors obtain this relief from construction to financial services

Goodman Jones

Goodman Jones is a business advisory firm, passionate about providing an outstanding service tailored to each client, and is a member firm of the Institute of Chartered Accountants in England & Wales.

We are based in a single office in central London and are now in the top 60 practices in the UK.
In addition to our own expertise in London, we can call on GMN International, our worldwide association of legally independent accounting firms.

As well as being proud to be the UK representative firm of GMN International, we are also members of the UK Advisory Network which was set up by Department for International Trade
(DIT) to provide an accessible route to high quality and trusted professional support, for foreign investors setting up in the UK.

The Network consists of business services providers across a range of disciplines which provide advice on all aspects of establishing your business in the UK. Members complete a robust application process to join the Network.

How we can help:

Structuring

We help the organisation explore which structure is most suited to their requirements – typically, but not limited to, either a UK limited company, a UK partnership or a UK-registered branch of the parent company.

Tax planning & advice

We guide investors through UK tax and anti-avoidance legislation and provide support for both the organisation and the individualsincluding:

Corporation tax compliance:

  • We can help you get your tax strategy right from the outset.
  • We can also act as your tax agent in the UK and liaise with HMRC on your behalf.

Transfer pricing:

  • We can look at the consideration of the proposed business model and risk allocation between parent and subsidiary to identify the nature of the return the UK operation should be seen to achieve.
  • We can Identify the transactions/intercompany interactions which could be covered by transfer pricing rules
  • We can benchmark to confirm the appropriateness of the intercompany prices charged
  • We can support you to ensure appropriate intercompany agreements are in place

VAT & customs duty

We explain the principles behind VAT, and advise on the need for, and arrange if necessary, VAT registration.

Accounting

We can provide your on-going UK accounting and advise on modifications required to their General Ledgers for UK purposes.

IFRS accounting

International Financial Reporting Standards (IFRS) applies whether you are required to report publicly or whether you are an SME though there are different standards for each with much fewer disclosure requirements for SMEs. We can ensure that your accounts comply.

UK audit

We are registered auditors and have considerable experience acting as auditor for the UK subsidiaries of international groups.

Financial due diligence

Where groups have invested in the UK through the acquisition of a UK based enterprise, we have provided support through the acquisition process and appropriate financial due diligence.

Fund raising and banking

We can help advise on UK funding (whether grants, equity or bank finance) and the practical issues such as setting up bank accounts.

Employees

We can advise on all aspects of bringing employees, directors and partners to the UK including:

  • Advising on the issues regarding employment whether they are ex-pats relocating or new employment of locals.
  • Helping employers evaluate the position regarding salary equalisation across countries
  • Providing HR advice and support including creating staff handbooks and providing interview support.
  • Providing your payroll operation including payroll equalisation and support with P11D compliance.
  • Advising on auto-enrolment and pensions issues.

Property

  • We are experts in property and tax issues arising in the UK. We are also well connected within the sector and able to make introductions for those looking for premises, be they for occupation by the business or accommodation for ex-patriate employees.

How we’ve helped:

  • Provided domiciliation services for a French financial services business and provided IFRS Financial Statements
  • Provided an independent valuation of a British business that was being acquired by a Belgian company in compliance with International Accounting Standards.
  • Helping an Austrian subsidiary re employee taxation issues.
  • We helped a US company with the conversion of its standard US employment contract to a UK-compliant equivalent. The US business had not been aware that its standard contract
    could expose it to penalty under UK employment legislation.
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Setting the right price for transactions between group companies is one that many boards ask themselves in order that each group company’s profit and loss fairly reflects the underlying nature of transactions. For many items an external market can act as a reference point, making this task relatively straightforward. However, this becomes more difficult when dealing with more complex transactions such as:
• Recharging management team time
• Recharging rent
• Charging for the use of intangible assets such as customer lists or licences
• Provision of finance amongst group companies
For these transactions it is not just the directors of companies that get vexed by the question of what is the right price?

International Groups in HMRC’s sights

Where groups trade internationally, the disparities in global corporation tax rates provides for groups to take advantage of more favourable tax rates. Therefore, unsurprisingly tax authorities take a keen interest in the amounts charged for intra-group transactions. In the period between 2011/12 – 2016/17 HMRC secured an additional £5.9 billion of tax receipts by challenging the transfer pricing arrangements of multinational trading groups.
Therefore, what can international groups do to get the price right? And avoid both the time and expense of a tax enquiry.

Exemptions for SMEs not straightforward

Firstly, the good news is in the UK, HMRC provides an exemption to most small and medium size enterprises (SMEs). To qualify as medium the business will have no more than 250 employees, annual turnover less than €50 Million and a balance sheet of less than €43 million.
However, this UK exemption may not apply in the following circumstances:
• Transactions with overseas subsidiaries where the UK does not have a double tax treaty including the appropriate non-discrimination article
• Where HMRC has issued a transfer pricing notice to an SME which is party to a transaction relevant to a patent box claim
• Where an SME elects that the exemption from the transfer pricing notice should not apply
• Where HMRC issued a transfer pricing notice to a medium sized enterprise
Furthermore, while the UK has an SME exemption, not all territories have one and their thresholds may stipulate different criteria. Therefore, where a group trades globally it is worth considering this issue even if at first glance it seems the SME exemption is available.

OECD Guidelines

The first port of call for determining the right price are the OECD [Organisation for Economic Co-operation and Development] guidelines. These are globally accepted as the bible for providing methodology on calculating an appropriate price and the documentation which needs to be in place. Allowing for review of the pricing policy following its implementation and ongoing monitoring. At their core is the principle that transactions are at arm’s length.

Advanced Pricing Agreements (APAs)

After determining an arm’s length pricing policy, to provide additional comfort that the price is right, a group may wish to obtain an advance pricing agreement (APA) from tax authorities. Thereby agreeing the principles for calculating the price with the tax authority. The degree of certainty obtained can vary from non-binding opinions through to a form of advanced clearance on the transfer pricing policy. HMRC does not offer a simplified process for SMEs for an APA. However, other territories such as France and the USA do provide a streamlined APA process for SMEs. While, APAs do add an initial administrative burden, the clarity they provide on whether the price is right, avoids any nasty tax surprises further down line.

Overall setting the right price for transactions between group companies is not straightforward and is an issue which tax authorities globally are increasingly taking a keen interest in. Even where groups may be able to take advantage of the UK SME exemption, when trading internationally, groups need to be vigilant that these exemptions apply in other territories. Where groups do need to consider an appropriate transfer price, the best starting point are the OECD guidelines, which at their heart are based on the arm’s length principle. Finally, having determined an appropriate transfer pricing policy, to mitigate against any nasty tax surprises down the road it is worth considering obtaining an advance pricing agreement from the relevant tax authorities.

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We often get asked by clients for opinions on a range of incentive schemes all with the overarching aim to motivate staff to deliver great work and enhance the performance of the business; whether that be share options, bonus schemes or benefits such as ride to work.

However, perhaps one piece of the jigsaw that gets overlooked is emotional well-being and how this is balanced with delivering great work under intense pressure. After all mental health is the leading cause of sickness, with 70 million days lost each year in the UK. Therefore, it is an important part of the jigsaw when thinking about boosting productivity and performance.

Wellness Action Plans

The good news is that relatively small steps that do not necessarily involve a huge amount of investment or time can make a difference. On the strategic level, Mind recommend Wellness Action Plans which encourage employees to consider stress triggers in their roles and what can be done to reduce them. This can easily be included as part employee development plans in their annual appraisal process. Equally giving employees greater input in to how they do their job and the opportunity to contribute to the overall direction of travel of the organisation will help improve employee engagement, reduce days lost to sickness and enhance the overall productivity of the company.
On a more day to day basis, increasing shared experiences between staff designed to improve openness and understanding within teams should help decrease anxiety and enhance performance. Practical ideas to facilitate this include:

  • Taking the temperature at the start of meetings, allowing individuals to introduce themselves and how they are feeling.
  • Having a mentor scheme allowing staff to bounce ideas off each other.
  • Monthly team lunches celebrating successes and reinforcing the drive towards the common team goal.

Overall the business case is a no brainer: given mental health is the leading cause of sickness any business that takes the opportunity to consider how it can improve emotional well-being amongst its staff should reap the rewards, not only increasing productivity but also through greater employee engagement.

Hopefully the practical ideas above demonstrate the relatively small simple steps that could make a big difference. So in mental health awareness week 2017 is it not time to start the conversation within your organisation?

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Disruption concept image with business icons and copyspace.

Key points

• Goodwill on acquisitions will reduce your profits and net asset value  perhaps affecting bank covenants
• Long term, interest-free inter-company loans will have to be discounted at a commercial interest rate
• Exchange rate risk and interest rate risk hedging will have to be accounted for
• Any lease incentives or premiums on office leases will now have to be accounted for over the full life of the lease, so affecting your profit every year
• Unused holiday leave at the year-end will have to be accounted for which could reduce your profit
• Your reported profits will change and this could affect the corporation tax due
• Greater amounts of disclosure and changes in terminology used in the financial statements

 

What should you do?

• Analyse the impact as soon as possible
• Plan future reporting based on new rules
• Communicate changes with key stakeholders

Your quick guide to FRS 102

FRS 102 is the new suite of accounting requirements closely aligned to International Financial Reporting Standards. Their introduction is generating a lot of concern and interest as their adoption will affect many companies’ reported financial statements. Here we consider the major areas affected as far as media sector businesses are concerned.

When do you need to apply new UK GAAP?

The first sets of accounts being prepared under FRS102 are most commonly those for the year ending 31 December 2015 and after. In addition to assessing the changes for that year you will also need to calculate those same changes for 2014 and 2013 to provide updated FRS 102 compliant comparative information. This can end up being a big exercise for some companies.

The first sets of accounts being prepared under FRS102 are most commonly those for the year ending 31 December 2015 and after. In addition to assessing the changes for that year you will also need to calculate those same changes for 2014 and 2013 to provide updated FRS 102 compliant comparative information. This can end up being a big exercise for some companies.
Planning is the key to a successful outcome.

Will the accounts look different?

This is one of the most significant financial reporting changes in the UK for many years. Although many aspects of FRS 102 accounts will be recognisable, there are many changes too.

FRS102

One of FRS102’s aims is to improve comparability of financial statements with those prepared under IFRS. Profit and Loss, Balance Sheet and Cash-flow Statement become Statement of Comprehensive Income, Statement of Financial Position and Statement of Cash flows, as they are under IFRS. However companies can keep their current terminology combined with other disclosures. In addition to these statements, there will be a Statement of Changes in Equity, which will detail movements in balances such as share capital, share premium, revaluation reserve and retained earnings. There will be greater disclosure within accounting policies, such as Significant Judgements and Estimates. It is anticipated that most businesses will have one or two significant accounting estimates which will need to be disclosed.

Goodwill

Many businesses in the sector grow through acquisitions, either of other companies’ shares or businesses. Under UK GAAP, where goodwill has arisen on acquisitions, many groups, especially those funded through equity and debt arrangements (typically MBO’s) would have an interest in maintaining the acquired value. The directors would perform annual impairment reviews using the most appropriate method and often concluding that goodwill had an indefinite useful economic life. This would result in no amortisation charge arising on goodwill. FRS102 requires goodwill to be amortised over it useful economic life. Therefore, directors will need to consider what a reliable estimate of goodwill’s economic life is. In exceptional circumstances where a reliable estimate cannot be reached goodwill is amortised over 10 years. FRS 102 could therefore result in a significant additional charge to the profit and loss account and a reduction in net assets. This may impact factors such as bank covenants, as well as landlord’ consideration of affordability on rental agreements based on reported profits. If this can be foreseen it will need to be communicated so the change is fully understood.

Intercompany loans

In the sector, groups of companies often provide interest-free, long term loans to other group companies. Currently no financial cost or income would be shown under UK GAAP however FRS 102 requires an imputed interest charge to be calculated and accounted for. This uses an amortised cost methodology, discounting to the present value future cash flows using a market based interest rate. The lender will disclose interest receivable and the borrower interest payable. This is a significant change and again can impact reported results on an entity-level.

Foreign Currency and Interest rate hedging

Many media companies enter into foreign currency hedging arrangements to manage their exposure to losses for example where  production activity is undertaken in Sterling but paid for in foreign currency by an overseas based client. Under UK GAAP such hedges would only be accounted for on completion of the arrangement, however under FRS 102 these will need to be adjusted to the fair value of the forward contract at the financial year end. This requires an estimate of the outcome of the hedge to be calculated at the financial year end and not just at the completion of the hedge. This affects interest rate hedges too, for example on bank debt, which is of particular relevance to debt backed MBO’s. These calculations can be complex and are best undertaken with the support of the financial institution making the arrangement.

Operating Leases

Media businesses often occupy rented accommodation through an operating lease, often with the benefit of a rent-free period. Under FRS102 this incentive is spread over the entire length of the lease. Under UK GAAP this period was to the first rent review date often after 5 years. What used to be a credit to the profit and loss account over 5 years may now be spread over 20 years thus reducing reported profit for each of those years under FRS 102.  For leases granted before transition it is possible to continue accounting for them as before.

Employee Benefits

Historically companies in the media sector have not accounted for holiday pay accruals. Under FRS102, it is necessary to accrue a cost for any unused holiday at the year end. Again this is likely to lead to a charge to the profit and loss account, particularly where the holiday year and financial year ends don’t coincide.

Tax Impact

Generally corporation tax on business profits follows accounting treatment. On transition to FRS 102 there could be significant changes to reported profit which will also impact the corporation tax charge. This could also affect prior year’s submitted returns. The tax impact could be beneficial such as a deduction for holiday pay accruals; however tax could also become due under FRS 102 when none was previously charged.

Conclusion

Planning is essential in ensuring a smooth transition to reporting under FRS 102. We have been working with our media clients for some time in identifying those areas where we consider the most significant changes will arise. 2016 will be the year of highest activity on FRS 102.

Likely pitfalls:

• Risk of bank covenant breaches
• Risk of faulty accounts being drafted
• Increased questioning from shareholders

Action: Please call +44 (0) 20 7388 2444 or email us and we will be pleased to talk you through the changes.

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Today we remember Guy Fawkes’ attempt to blow up the Palace of Westminster. Since then our legislators have been beavering away passing laws and regulations on all manner of subjects. Recently pension reform has been grabbing their attention, with the well publicised reforms to personal pensions and the ability for phased drawdown (Recently blogged by Richard Verge). Although of far wider significance is the introduction of auto-enrolment pensions, which employers will have to offer the majority of their employees. After all if individuals are to have flexible pension options; they need to have a pension pot in the first place.

Auto-enrolment has been phased in since 2012, starting with the largest employers, rolling out to all businesses. This is now becoming a hot topic for many small and medium enterprises, whose staging dates are coming up. To begin with employers will need to contribute a minimum of 1%, with the employee also providing a 1% contribution. The contribution from the employer is then set to rise to 3% from 2018 onwards. So it is going to significantly impact those businesses whose staff costs, make up a high proportion of their cost base. Therefore, it is essential these changes are factored into their business plans.

However, this cost can be turned into a positive. As I recently blogged, staff turnover is a major challenge at the moment. Auto-enrolment could be used as an opportunity to differentiate from the competition, with contributions in excess of the statutory minimum or incorporated into a flexible benefits package for employees. The other bit of good news is the employers’ contribution can be used as a deduction against corporation tax.

Not only are there financial implications, you also need to consider a range of other factors in implementing auto-enrolment: Is your payroll software up to the challenge of coping with auto-enrolment? Who do you want your pension scheme provider to be? What and when do I have to communicate auto-enrolment changes to my staff? All of this will take time to look into and according to the pension regulator; failure to comply can lead to fines of up to £10,000 a day. So to make sure your business is ready, remember remember auto-enrolment, find out your staging date and start planning now.

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Staff turnover is extremely disruptive for any business. When a team member leaves the momentum built up, shudders to a halt. Time and resources have to be spent finding and integrating their replacement into the team, re-building relationships amongst the team and clients. This all distracts from the core purpose; producing excellent work for clients. As Campaign recently highlighted   research from the IPA Adaptathon estimated, the cost of replacing senior management is between 200-400 percent of their salary and for middle managers at 150 percent.

So what tools are in the box to get talent committed for the long term? Well one tool is putting in place an Enterprise Management Incentives (EMI) share scheme. The concept is simple by giving employees share options, which are typically exercised in 3-5 years or in the event of sale, this should lead to greater loyalty. As this encourages your star performers to give their best and be committed to the business, in the knowledge they will share in its future success. As an added bonus this is an extremely tax efficient method of remuneration for both the business and the employee.

Although, the current owners have to accept this will result in a dilution of their current shareholding, so they need to be sure EMI options are awarded to individuals who bring added value to the business. Equally, this incentive only reduces churn if it incentivises the star performers. So you need to make sure this something your key players really want before undertaking the cost of implementing. Otherwise, you are worse off than in the first place.

While an EMI scheme works for your star performers, it is probably not suitable for everyone within the team. It goes without saying that to keep talent on board they will want to be involved in exciting projects and be rewarded with market rate salaries. Although, there are always little tweaks to individual remuneration packages that could be made, which help differentiate from the rest and are relatively inexpensive to implement. So it might be worth looking at a menu of options with employees – for instance a cycle scheme, private medical insurance, the opportunity to acquire additional holiday and flexible bonus schemes. As with the EMI scheme though they will only help reduce churn if employees value the items on the menu too.

At the end of the day the reducing talent churn, allows businesses to focus on what they good at: servicing the needs of clients. Having an EMI scheme for star players or a flexible remuneration package can help achieve this goal. Although, they will only work if they are what your talent wants. Additionally, on their own EMI schemes and flexible remuneration packages are not magic bullets and are only part of the equation in generating long term commitment from employees. Other factors such as the team environment, training opportunities and participating on exciting projects are all part of the jigsaw in reducing talent churn.

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Crowd funding has given a shot in the arm to business, especially in these times of limited access to more traditional forms of finance. It’s been a year since Kickstarter  the world’s largest crowd funding platform for creative projects launched in the UK and during that period £120 million has been raised, so it’s important that project teams plan for tax implications that could arise on funds raised in this way. In a worst case scenario tax could be charged on funds raised which have already been used in the project, causing serious issues for the wider project business.

Crowd funding is a collective effort to raise funds on the internet through multiple small pledges. NESTA believe by the end of 2015, up to £15 billion a year could be raised on crowd funding platforms globally. Even established businesses are turning to crowd funding. Aardman raised £75,000 in just 8 days to fund a Morph production.

On Kickstarter the project team pitch their idea to the crowd with a financial target. Individuals make pledges but nothing is taken unless the full target is met. If the project falls short of target no money is received, a neat way of reducing project failure risk for the investor. The current failure rate on Kickstarter is about 43% however for the project team this may not be a wasted effort, as it gives them the opportunity to test out ideas, raise awareness and connect with other individuals who could help take that project forward. If the target is achieved then funds are released and this is where careful financial planning is vital.

With Kickstarter the project seeks funding in return for insight into the project and commonly rewards to incentivise pledges, the larger the pledge the more desirable the reward. Kickstarter is not a platform for taking equity or making loans. Typical rewards include pre-launch access to a game, exclusive web content and even production credits. Rewards may also be more tangible such as tickets to events or small gifts like t-shirts. If we consider the accounting and tax implications of these rewards monies have been received which could be credited to income and trigger tax liabilities. If this is not considered and the funds applied in full to the project without reserving for such liabilities should they arise then the project could be facing a serious issue. Depending on each projects circumstances VAT may be due on monies received as goods and services may have been supplied. Business tax on profit may also arise. Such issues if unexpected may even affect the ability of the project to complete its stated objectives.

Crowd funding provides great opportunities for creative projects to raise money. To make sure there is no sting in the tail, be sure to consider the practical implications of accounting for the project and seek professional advice as part of structuring the project. After all who doesn’t want to see more Morph?

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