I’ve blogged previously about why you should have an accountant.  However, when trying to cut costs (and who isn’t, these days?), often business owners look to cutting accountant fees.  They either fnd a cheaper accountant, or they do without one altogether.

Unless you require an audit, there is absolutely no obligation for a business to appoint an accountant.  None whatsoever.  It is only a matter of being prepared to spend time researching how to do it (and then doing it, obviously):

• Making sure every transaction is in the right place
• Dealing with tricky, unusual or ambiguous transactions
• Using the required format (particularly important for limited companies/limited liability partnerships)
• Having the correct notes & wording (again, mainly for limited companies/limited liability partnerships)
• Decide what is tax-deductible and what is not
• Getting the tax computations correct and in the right format.

The information required to prepare a set of accounts and a tax return is all within the public domain.  Sole traders should look mainly at the HMRC website.  Limited Companies should also refer to the Companies House.

With the advent of iXBRL (a new labour-saving - for HMRC, that is - way of “tagging” accounts and tax returns so that computers can “read” the data), you must file or submit your accounts & tax online.

The software to do all this is also available free from HMRC.  Just set up a login and wait for the PIN to arrive in the post (this can take a little time, so plan ahead).  (Limited companies can “joint-file” to HMRC and to Companies House using this software.  Alternatively, Companies House have their own free software that you can use to file accounts directly with them)

The only questions to consider are:

• Have you got time for all of this?
• Do you even want to do accounts?
• Will it be correct? (there are penalties for getting it wrong and/or late – and ignorance is no defence or excuse)
• Will you have paid more tax by doing it yourself?
• Could you be doing something more productive and profitable with your time that would have earnt you more money than the accountant fees would be?

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Recourse Factoring calls for “Separate Presentation” in the balance sheet of a company’s statutory accounts.

The liability to the Factor is shown as a short-term creditor, because in effect it is a loan from the Factor.

The Sales ledger debtors are shown under “current assets” in the usual way.

The Factoring fees and discount fees go through the Profit & Loss account (similar to how bank charges are treated).

The accounting policy for debt factoring will need to be disclosed in the notes.

This topic crops up from time to time, most recently on Accounting Web.

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Advantages of Factoring

It is a quick boost to cash flow (assuming that the Factor’s conditions can be met)

Some customers take Factors more seriously and pay quicker (also, the reverse is true)

Non-recourse Factoring can protect against bad debts.

Factors will credit check your customers which will help reduce bad-debts.

Some Factors will withhold the VAT amount and transfer to you at the end of the VAT quarter, which saves you having to worry about putting it aside.

Disadvantages of Factoring

Queries with sales invoices can be slower / more bureaucratic to deal with.

It may reduce the scope for other borrowing, since you would already have effectively borrowed against the financial asset of your sales ledger debt.

Factors will not fund or may restrict funding against poor quality customers.

Leaving a Factoring arrangement means that you will have to repay off any money that you have withdrawn against your sales invoices (even if your customer has not paid)

You have no direct control over your credit control and some customers will prefer to deal with you directly.

Factoring is not cheap.  The usual financial costs  are the Factoring Fees and the Discount Fees.

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Every time a sales invoice is raised, a copy must be sent to the Factor as well as to the customer.  (Some Factors will also raise the sales invoices, which would cut out this step).

The sales invoice is marked as being factored, and the customer is required to pay the Factor direct.

The business can withdraw or “draw down” up to 85% of the sales invoice.  (Some Factors will withhold the VAT element until the end of the VAT quarter, eliminated the problem of not having enough funds to pay the VAT to HMRC)

The Factor will maintain the sales ledger (posting sales invoices and payments to each customer account) and also carry out credit control (chasing customers for payment)

When the customer pays, the balance of that sales invoice may be also be withdrawn.

At the end of each month, the Factor sends out statements for the sales ledger, the overall account position/availability of funds – including Factoring charges and discount fees.

The availability of funds or “Client Availability” or sometimes confusingly called the “Client Balance” is  the amount of money that can be withdrawn or “drawn down” from the Factor)

If a sales invoice is not paid within a certain timeframe (typically within 3 months), in the case of a recourse agreement, that sales invoice becomes “disapproved” and the Factor will take the money back, normally by reducing the availability of funds.

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Factoring or Debt Factoring typically used by business to help cash flow.  Factoring involves a business selling it’s sales invoices to a Factoring company, at a discount.  The business is then able to “draw down” cash against the sales invoices and the Factor (as Factoring companies are known) collects the money from the business’s customers, acting as their sales ledger and credit control team.

A Factor will typically allow a client to withdraw or “draw down” an advance of about 85% of their approved sales invoices.

The factoring fee is taken by the Factors when the sales invoice is received.  There is also a monthly discount fee (that works a bit like overdraft interest) charged on the balance of funds that have been drawn.

There are two sorts of Factoring:

Non-Recourse Factoring and Recourse Factoring.

Recourse Factoring or Recourse Agreements mean that the Factor does not take on the risk of the bad debts.  So, if the customer does not pay their invoice, the Factor can reclaim the money.  This means that after a certain number of days (specified in the Factoring company), the debt is “disapproved” and the money must be repaid to the Factor.

With Non-Recourse Factoring or Non-Recourse Agreements, the Factor takes on the bad debt risk (although, beware – Factors do not accept genuine disputes, in this instance).

(Incidentally, Invoice Discounting – is similar to Factoring, but the company will not maintain a sales ledger or do credit control)

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Some pitfalls in calculating “use of home” costs:

• not ensuring that the calculation results in a reasonable figure.
• not using a reasonable basis of apportionment
• not being able to substantiate claims greater than £3/week with bills/receipts.
• not having a licence agreement in place (directors/limited companies)

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The situation of use of home is slightly different for directors than for sole traders.  In this instance, it may be more straightforward and advantageous for the company to pay rent to the director for the use of their home.

(Make sure that there is a licence agreement in place to cover the rental agreement.)

The rental charge will go through the company’s accounts and it’s corporation tax return.  The director will need to report the rental income in their personal self-assessment return, together with the associated costs (ie, mortgage interest, utilities, and so on)

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From Monday 1 December 2008, the VAT rate will drop to 15% and remain at this level until 31 December 2009, when it will revert back to 17.5%

The new VAT fraction is 3/23.

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Also, called the “carrying value”, the net book value is the value of an asset in the accounts at any given point, calculated by: original value less accumulated depreciation OR previous year’s value less current year’s depreciation.  (Ignoring, for the time being, revaluations and so on)

In yesterday’s examples, the net book values would be as follows:

Straight Line Method
At the end of year 1: £10,000 – £1,000 = £9,000
At the end of year 2: £10,000 – £1,000 – £1,000 = £8,000 OR 9,000 – £1,000 = £8,000
At the end of year 3: £10,000 – £1,000 – £1,000 – £1,0000 = £7,000 OR 8,000 – £1,000 = £7,000
etc…

Reducing Balance Method
At the end of year 1: £10,000 – £2,500 = £7,500
At the end of year 2: £10,000 – £2,500 – £1,875 = £5,625 OR £7,500 – £1,875 = £5,625
At the end of year 3: £10,000 – £2,500 – £1,875 – £1,406.25 = £4,218.75 OR £5,625 – £1,406.25 = £4,218.75

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There are several ways of calculating depreciation.  Two of the most popular are:

Straight line method
If an asset is bought for £10,000 and it’s useful life is estimated at 10 years (with no residual value at the end of the ten years), then the annual depreciation charge is £10,000 ÷ 10 = £1,000 per year.

Reducing balance method
If an asset is bought for £10,000 and it is estimated that it reduces in value by 25% each year, the annual depreciation charge at the end of year 1 would be £10,000 x 25% = £2,500.
At the end of year 2, it would be (£10,000 – £2,500) x 25% = £1,875
At the end of year 3, it would be (£10,000 – £2,500 – £1,875) x 25% = £1,406.25

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