SIC Code

Quick SIC Code stuff

SIC CodeHere’s a fun site to help you find the right SIC code… SIC code Wiki

And here’s a blog post explaining why you should check it out… because Standard Industry Classifications matter..

Is your SIC code making your company credit rating sick?

You get to pick the SIC code that best describes your company’s activities… in fact you can pick 4… the Credit Agencies use the first one to pigeon-hole you & compare you against other companies with the same code… so make sure the first one of the four works for you?

Problems with Personal Guarantees…

Guarantee I don’t like ’em… never have done… and I think they stand in the way of decent companies accessing the external capital they need to grow.

There’s an example of the problems they cause in another post I did : The Problems with Banks… their attitude to security

So why does just about every lender insist on PGs?

I wish I knew…

I suspect it’s because they can.

They’ll claim it’s to take account of the risk involved in lending to an owner managed business… by ‘lifting the corporate veil’… because ‘if the owners aren’t prepared to stand behind their company why should we lend to it’…

BUT

… the interest rate on any borrowing is supposed to reflect the risk of lending…  so the risk premium is baked in… the riskier the company, the higher the rate…

So why don’t lenders let the rate really take the strain and offer borrowers a choice ? … say 4% over base with a PG… 6% over base without… (a ~ 50% premium for the extra risk)

I know which one the growth companies I work with would choose…

Which begs another question…

Where are the genuine innovators in the Fintech space?

Lots of clever people with a lot of smart money busy building sites & offerings… but I don’t see too much innovation… let alone disruption…

Incremental innovation aplenty… but if they want quality companies with growth prospects to take on the external capital that’ll make growth less painful & more fun then the Fintech guys will have to take a punt on being more disruptive… by being more responsive to the needs of their target market…

Say… offering money with have two buttons on the site… choice is a wonderful thing… one PG low-Rate… one no-PG high-Rate… and watch which one gets pressed…

But at the very least all these PG loving lenders should let you know you can get insurance against the chance your PGs will be called in…

PGI Cover from Purbeck covering up to 80% of your PG is available

One of the better-kept secrets…

Again I don’t why…

 

 

 

 

 

SIC Code

Is your SIC code making your company credit rating sick?

Company credit ratings are affected by lots of things… but one of the major ‘unknown’ factors is a company’s SIC code… and in my experience most company’s don’t know what their’s is.

SIC stands for Standard Industrial Classification… it’s used to classify your business by type of economic activity…

Some can be very very specific… e.g. if you’re into ‘scaffold erection’ there’s a special SIC code just for that… some can be very general e.g. ‘other business support services’

And what code you have really matters…  Because agencies use it to compare your performance with others in same SIC code as part of their rating process.

If you’ve got the wrong one, or don’t look good in the one you’ve got, it can really hurt your credit ratings.

So who decides what SIC code you should have?

Believe it or not…You pick your company’s code and it gets filed at Companies House (you can list up to 4 codes, but the agencies will use the first one as the primary code).

I find that most companies leave this to their accountants, but I encourage owners to take an interest in their SIC code… and change it if necessary…

Because wrong SIC code = wrong rating?

The list of SIC codes can be viewed at Companies House SIC list

It may be useful to identify several companies like yours (or even your direct competitors) and see what SIC codes they’re using.

You can see any company’s Annual Return and therefore their SIC code for free at Companies House

 

 

patent box

Patently obvious… open the box & take the money

The Patent Box means the tax rate on profits made from patents is to drop to just 10%…

This is a cracking way to encourage firms to patent their Intellectual Property (IP), and exploit it from here in the UK.

Any profits derived from exploiting a patent you own will be taxed in future at 10%… and not the current 20%

Patents can cost as little as a few grand to file… so should easily pay for themselves… because you get up to 20 years of paying tax at the reduced rate

So why not take a look at your IP… and take a look at Patenting some of it  ?
 I’ll admit that in the past I’ve been luke-warm on patents… the effort & costs just didn’t seem worth it for smaller Owner Managed Businesses given the limited commercial benefits.

The patent gives you protection… and that could boost your business’ value… and make new external funders a little more comfortable investing/dealing with you…but…

Read more

The problem with banks… ?

It’s bankers’ outdated obsession with security that’s stopping SMEs borrowing…

A typical owner managed business looking to their business banker for funding will end up being asked for Personal Guarantees to secure any loan… and that’s got to stop

The desperate will always sign whatever the bankers want… but the rest are increasingly turning away from bank finance… and who can blame them…

Last month I was with a solid, established company who have a real growth opportunity. The middle aged owners have run the company profitably & completely debt free for over a decade, and for all that time they’ve been with the same bank… yet they didn’t get the modest business loan they wanted… why?

Because after supplying all the historic accounting information (which their bank had already been given), filling in all the forms, doing a we-all-know-its-useless-but-ya-gotta-do-it forecast, and emailing, phoning, meeting their lovely manager… the bank insisted on full Personal Guarantees for the whole loan…

These people have homes, with mortgages paid off, teenage kids etc … why the hell would they take the business risk so deeply into their personal lives that they could end up homeless at their age & after all their efforts?

Strikes me all the risk was on their side…what real risk were the bank taking when offering a loan that’s more than fully secured?

My gripe is… interest rates charged on loans are supposed to reflect risk… the higher the risk, the higher the rate… so let the rate take more of the strain… and drop the obsession with security

…or let’s be really radical and offer a company 2 rates… a lower one with Personal Guarantees… a higher one without any…

Security : how it works
This obsession with security & personalising a business’ risk is a real problem for the economy as whole (and for a Government that wants you to borrow)

It means banks effectively ignore any drivers of growth within the business (customer base, order book, employee skills, market position), and concentrate far too much on tangible assets to support any lending.

They make that even worse by applying ‘risk weighted asset’ models … which normally means ignoring most of your assets, like Stock or W-i-P.

It also means ignoring Debtors (which is why they try to push you to invoice discounting or factoring… they can’t lend against your Debtors… but they ‘know-a-man-who-can’)

So you’re typically left with tangible Fixed assets… which usually means Property.

For most Owner Managed Businesses this all means they haven’t got enough assets in the business to support the bankers’ obsession for security… so it gets Personal with Guarantees required.

Your manager : how he works
Your bank manager has almost no impact on the situation… they just package up the deal proposal to pass on to a remote credit committee…

That ‘committee’ makes a decision & sets terms based on a few of things, but they will :

1.check your company credit ratings : if you’ve met me you’ll know how important I think ratings are nowadays… banks take these ratings and employ a few twists of their own…

eg typically ‘Head Office’ will rank your sector (often in a traffic light scheme)… and the rankings are always changing…

… so a builder might find it easy to borrow today because construction is ‘green’, but next month it might be ‘red’ as the bank tries to reduce exposure to the sector or have a more balanced loan book… and now the builder won’t get the loan

2.check your bank manager’s record : after years of successfully not losing the bank’s money and only putting to the credit committee deals that they’ll accept, a manager will be given an internal score or % that improves as time passes…

I know an 80%er… and a 95%er…  the 95% banker is as close to ‘can-do-the-deal-guaranteed’  as you’ll get… but just you try getting him to take on a deal that he’s happy to put his name & score to and that he’ll push up to the Credit Committee…

(as an aside this is why sometimes the process can take so long… your manager may be stalling because he knows your current credit rating & sector rating means you’ll get knocked back.. and he doesn’t want to see that happen (it hurts you & his own internal score)… so he may spin things out to see if you or your sector rating improve… and of course they hate to say an outright ‘no’ because then you’ll go elsewhere !)

So what’s to be done?

I work with some cracking bankers… and they do genuinely want to lend and support the SME sector… and the fact that you guys aren’t borrowing is genuinely puzzling them…

So.. assuming that encouraging SMEs to take on more debt is a good thing… how about we :

1. get rid of bankers’ anachronistic reliance on Personal Guarantees
2. reduce their obsession with security & their reliance on ‘risk weighted asset’ models (which struggle to work for younger, service based businesses)
4. let the interest rate alone reflect more of the risk of the loan

And if the interest rate then gets too high… and the Government still wants to interfere with the market to get SMEs borrowing & growing again… they can subsidise the rate & get it down to a better level…

But it’s not interest rates that are the problem… or access to finance in the first place (only 9% claim it’s a barrier according to the SME Monitor, down from 15% 2 years ago)…

It’s the banks, and the terms they demand.

R&D Tax Credits… they want YOU to claim them

… and you don’t need a white coat… or an R&D department

Research & Development tax credits are the Government’s way of encouraging companies to develop new products and services…

Any company that spends money trying to improve a product or service or even a process through a technological advance where there’s doubt about the project’s success is likely to be eligible.

Is that you?

There’s a real good chance it is, and frankly HMRC are desperate for SMEs like you to claim the tax relief, regardless of the sector you operate in.


Some research suggests the largest number of claimants are in construction, and not high tech companies as you might expect.

I personally know of landscape gardners, web companies and very small manufacturers who have been successful in getting actual cash back from the tax man… and they did it all themselves.

How’s it work?

If you’ve spent money on R&D costs such as wages, raw materials & software then you can deduct up to 225% of these costs from your taxable profits. You can go back up to 3 years, and if that means you’ve overpaid tax then HMRC will send you a cheque.

And they send that cheque real quick.

Who does the claiming
Your accountant should be able to do it for you… but often they won’t, and frankly some don’t know how.

‘It’s not for companies in your sector’
‘It’ll mean masses more paperwork’
‘You have to produce a huge technical report.’
‘It will probably spark a tax investigation from HMRC’

Just some of the things accountants have told companies I know… so I told those companies to call HMRC directly and do it themselves… and they were all successful in getting the reliefs… without their accountant’s help… or fees.

A word on consultants & what will they cost?

There are some very good ‘no gain, no pain’ consultancy firms who will help you claim the tax relief. That means no payment unless they get you some tax money back.

Personally I know Terry Toms at RandDtax.co.uk… and they do a great job… taking 18% of the money recovered

There are others (eg Jumpstart ) and terms differ so it’s worth checking just what you’ll be paying out if successful (& for how long… I’ve heard of one that takes a cut for the next 4 years too… which is a touch too generous!)

Your first Claim

Have a poke around the HMRC website. See if you roughly match the basic criteria. Then give them a call. They really are very friendly and helpful … at least when it comes to R&D tax reliefs!

HMRC’s eligibility criteria can look daunting (there are links below)… but it’s not

Try asking yourself these questions :

Technology : Does my company attempt to develop new technology, with no guarantee of success?

Improvement : Does my company try to make objective, measurable, and significant improvements to the design and implementation of its products, services or processes?

Problem solving  : Does my company use appropriately qualified or experienced internal staff to solve a challenging technical problem (although you can use sub-contractor for parts of the project)?


Here’s the way HMRC frame those questions… this is an email from an HMRC R&D tax relief officer…
1 What is the scientific or technological advance?
Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.
Science does not include work in the arts, humanities and social sciences (including economics).
It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
2 What were the scientific or technological uncertainties involved in the project?
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.
You should set out at a high level, in a form understandable to the non-expert, what these uncertainties were and when they started and ended.
3 How and when were the uncertainties actually overcome?
Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.
4 Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case a valid technological uncertainty can still exist.
Alternatively, if the project is one where there is little public information available, you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate set out the details and have evidence available if needed.