Adventures in the new normal

Options for opening a new business post-lockdown.

If I am being honest, I am getting a little tired of hearing about ‘the new normal’. It such an empty and nebulous phrase that I suspect what it actually means is ‘whatever it is that comes next’ rather than any specific meaning. What comes next, whatever that turns out to be, is going to be difficult to deal with and it will probably mean some major changes in the way we do business. For those already in business that will mean adapting and changing. For those considering jumping into the deep end with a new business an extra dose of the unknown is really not helpful. We are being asked questions like what the best business model after the pandemic will be? and ‘is it a good idea to open a business because of corona virus’? on a regular basis. If you are considering opening a new business venture in the post Corona Virus world you will certainly need to consider your options as the new normal, whatever that turns out to be, settles in. So, this seemed a good time to think about what they actually are.

I suppose before we begin looking at your choices for opening a new business in 2020, we should say that we are not a business advice service. As accountants it is our job to make suggestions about the financial implication of your business decisions but not to advise you in other business matters. We are happy to offer an opinion and of course a good business idea will need careful financial planning to make it work. We are luck in Northampton and the surrounding area that there are several, good business advice services for matters outside your of finances. OK, so now that the disclaimer over let’s look at what difference, if any, the Covid-19 pandemic could make to your decision process when you think about starting a new business.

Firstly, at the risk of doing a bit of a back to basics, let’s do a quick review of the main kinds of business structure in the UK. There is a surprisingly long list of different types of company in UK law but 3 of them are far and away the most common. Each has a unique effect on your financial model.

Sole trader.

This attractive if the business is just you and you don’t want to go through the complications of being limited. The money that comes in is yours to do with as you will but because the company is not a legal entity in itself it means that you, as the owner, are responsible for all debts, borrowing and so on. This can be risky if your business gets into financial trouble. Sole trader businesses can also be more difficult to sell if you want to move on.

Partnerships and Limited Liability Partnerships (LLP).

These are pretty much what they sound like and are quite common in some industries, particularly ‘professional’ areas such as legal and financial where LLPs are common because they are closer in operation to a Limited company. A non-limited partnership means the partners will be as liable for debts as sole traders so we do suggest you have a partnership agreement to ensure that responsibilities and financial matters are totally clear in advance.

Limited Company.

This is most common business that is a legal entity. That means that the business is responsible for any debts or borrowing not the directors of the company. However, and this in an important thing to remember, the directors will probably be asked to guarantee any borrowing and often contracts a new business requires.

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Which sort of business you choose will still depend on all the factors that you would have taken into account before the pandemic so will the Coronavirus pandemic actually make a difference to the choice? Well, we would suggest it would. Covid-19 is a lesson to be learned and anyone planning a business now really should be asking the question, what if this happens again? As a limited company, for example, you may be in a better position in terms of any financial responsibility should your business need to close due a to a second lockdown. However, there is likely to be a lot of thought given to how business is financed in the coming months so being limited may not be the advantage it was. Certainly, during the actual pandemic, many smaller limited company owners felt they were overlooked in rescue packages. It is also the case that many consultants and entertainment industry professionals effectively operate as an individual but must be a limited company at the request of their clients. However, changes to the tax regulations (IR35) may well change that.

Speaking of tax, that is another consideration. As a Limited Company, at the moment at least, there is a small tax advantage to taking a minimum wage and dividends from your company profits. This means you will be PAYE registered and employed by your business but have access to lower tax for your dividends. Non LLP partnerships and sole traders are likely to self-assess their tax burden as individuals. There is an advantage in this in that it is fairly simple for you and your accountant to work with and can be paid in stages in most cases.

Post Covid-19 I think we can all expect some changes to the way tax and employment will be structured in the UK. The IR35 rules (which, in a nutshell, assess when a contractor is employed or freelance) were postponed for private companies but when introduced in the public sector they caused a huge amount of confusion and some knee jerk reactions. At some point IR35 for the private sector will re-surface and we can expect disruption.

The cost of Covid-19 relief for existing business will also need to be paid for in some way. At the time of writing this the Chancellor of the Exchequer appears to have sent a clear message that taxation for self-employed and other areas will need be changed to cover the bill. If this is the case, then sole trader and partnership status may suddenly be less attractive. However, we need to remember that the small limited companies with one or two directors may be less able to weather any future changes to tax system. This, combined with the spectre of IR35, may result in fewer small limited companies and more contractors moving to either self-employed, fully employed or a mix of these.

The fall out of the pandemic on small business is yet to be seen, but it is coming. When it arrives it will likely result in a change to how we see the different business structures. Some say this is well overdue and that the current system is outdated, cumbersome and bloated with bureaucratic red tape. In some respects, I would agree. Change, if it is a part of a continuing drive to a fairer and better way of working, is probably long overdue. That said, change to simply drag funds back into the coffers of the treasury is a worrying thought.

Whatever happens next some basic principles will remain true. If you have a good idea for a business and you plan your finances well, you will be far more likely to succeed. However, to navigate the potentially choppy post covid-19 waters, you will need a good accountant by your side to advise on your best options and you are better to have them onboard as soon as possible.

Call us as soon as you are ready to discuss your business planning and we will be ready to help.

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