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Growing up Fast

Posted on: 05 Feb, 20

Are ethical considerations key to your business as it grows or is it just a load of hot air?

Responsible Capitalism. That is a word you are going to hear more than Veganism and Megxit in 2020. Legislation around the world is being introduced to require companies to report on more than profit. For instance

  • UK: Quoted companies are required to produce a strategic report which includes information on annual greenhouse gas (GHG) emissions, diversity and human rights under the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013
  • EU: The EC Directive on Disclosure of Non-Financial and Diversity Information (2013) aims to increase the transparency and performance of EU companies on environmental and social matters. These will require disclosure of material environmental, social and employee-related matters, including human rights and anti-bribery and corruption. This will impact certain large and public-interest companies (approximately 6,000 companies in the EU).
Clark says...
Oury says...

But that’s just for these big companies though?

If you’re a company just starting out then you need to focus on the core business.

It’s enough work as it is to keep all those plates spinning that come with early-stage business – business development, employment matters, money in, money out, tax – without bringing ethical matters into the mix.

You can’t actually afford the advice you would need to do everything correctly, let alone afford to enact the advice. So at the start you simply have to boot strap. And what that really means is get the principal of the business generating money, and try to keep costs to an absolute minimum.

I’m not so sure. Suppliers to big companies are first in line, there is such a deep routed sea change going on in how we all have to operate, and business needs to lead the way. It looks like the world of business has recognised and accepted that the principle of shareholder primacy – that corporations exist principally to serve shareholders – is giving way to the idea that companies must work for the benefit of all stakeholders and that includes customers, employees, suppliers and communities as well as for shareholders.

Seriously. It’s a big thing. They’ve even been talking about it at Davos!
Clark says...
Oury says...

Ok, but without even thinking about the ethical issues, a company already has to work seriously hard to get off the ground and fulfil the endless compliance obligations.

For instance when a company hits at least two of the below thresholds it is no longer considered a “small” company:

  • Turnover of £10.2m or more
  • Total assets of £5.1m or more (and remember that asset value isn’t reduced by loans)
  • 50 or more staff

That means it has to put time, money and some good-old-thinking-time towards:

Statutory Audits

Meaning the company must have its financial statements audited (although exemptions apply where you have gone above the threshold temporarily). This is an expensive exercise even for small companies costing £5k plus, and can take up a lot of time.

But there are upsides.

Growing for exit? You might want to start earlier and voluntarily have an audit done to give any potential purchasers more comfort on your numbers. Certainly they often require it once you have a VC on board.

Are you really on top of things? Especially if you are not there every day as you run an international business, it’s quite possible without realising you have been slowly getting your VAT wrong (for instance) and suddenly find out you are going bust because of a huge VAT bill. The upside of audit is that it does tend to highlight issues, and indeed straighten the backs of people knowing that there will be an audit.

Involved in regulated activities like financial services? Be careful, the rules on audit are more complicated and may apply even when below the thresholds.

Fair point. And auditing thresholds are where you will see the reporting requirements come in on sustainability.

Clark says...
Oury says...

And what about employment vs consultant. That old debate – most start ups require labour as cheaply and flexibly as they can – and most labour want flexibility – and the technology is undermining the old rules. So already all businesses need to worry about:

IR35
Businesses starting out, particularly in the tech sector, will often engage contractors in order to keep the workforce agile and lean.

This arrangement is tax efficient as the company is not liable for employment taxes and the contractor can pay themselves by way of a dividend provided they provide their services through a limited company (which must be their choice to do so).

IR35 has been around for ages, but changes come into force in April 2020 in order to tackle this perceived form of tax avoidance where the liability for mistakenly treating them like contractors, when they are essentially employees, falls back on the provider of work.

Companies will need to start asking whether these contractors are employees in all but name? Do they provide a personal service, via a company structure, solely to the company and no-one else?

Where the answer is “Yes” (and you meet the audit thresholds) then you need to review all of your contracting relationships and issue a determination statement stating whether the relationship is one of employer-employee or a true contractor relationship (i.e. whether they fall inside or outside of the IR35 rules). The determination statement must be sent to the personal services company (the PSC) and the consultant and they have a right of appeal.  Where an arrangement falls within the IR35 rules, the final party in the chain before the PSC must operate payroll for the individual.

If you’re a small company, the obligation to assess the true nature of the relationship rests with the PSC or the individual if no PSC.  But that doesn’t get you off the hook because, unless you review the nature of your arrangements with your contractors, it will likely cost you as HMRC will calculate any employment taxes owed to it on the total value of the invoices…and they’re much more likely to go after you rather than the contractor (or both) to recover the employment related taxes that are owed.

Size seems to matter when it comes to ethical considerations too. Companies would like us all to think that they are getting on board with certain ethical issues out of the goodness of their hearts but there are legal requirements too.

Modern Slavery Statement
UK companies who are part of a group with a global turnover of £36million (or who generate that amount of revenue in the UK alone) must publish a modern slavery statement.

The statement is published on the company website and sets out the steps taken to ensure slavery and human trafficking are not taking place in the business itself or any of its supply chains. These statements may also reference the company’s other policies regarding Anti-Bribery, Ethics and Sustainability

Gender Pay Gap Reporting
Employers with 250 or more employees are required to publish statutory calculations every year showing how large the pay gap is between their male and female employees.

It can be useful to voluntarily publish a modern slavery statement and keep gender pay gap information even where the thresholds are not met.

There is not only the positive impact this has on brand and reputation to consider but larger companies that you engage with commercially, such as suppliers, may require that you to produce a modern slavery statement and gender pay gap information regardless of your turnover and size.

And then there’s privacy concerns don’t forget. That really is a biggie and the potential fines for getting it wrong are pretty scary.

Data Protection/GDPR
Your company will likely have some kind of data protection obligations from the moment it begins to trade.

These increase as you start to employ more staff and deal with personal data for commercial purposes. Impact assessments and addendums, retention policies and breach registers will become commonplace as you grow in size.

Where your business model involves processing personal data on a large scale then the appointment of a Data Protection Officer (DPO) may be required, particularly where special categories of data such as information on an individual’s health or ethnic origin is processed.

Again, the voluntary option is there and appointing a DPO voluntarily can help reassure clients and ensure compliance.

Clark says...
Oury says...

I am not sure investors are ready for it though. There is impact and ethical investing and where it is for the real reasons, not just more profit in disguise, or trying to balance the fact that you make your money from slaves – it’s a wonderful thing.

But in practice at the early stages of business if you bring in a charitable element too early, or play too much of a sustainability card – most investors will think that is off putting. The initial focus has to be – can the business make money – or it’s not a business.

If it is, then adding on top positive ethical things is good, further down the track.

There is a growing consensus that businesses adopting an all-stakeholder approach have advantages in three key areas: attracting customers, attracting and retaining the best people, and, increasingly, being attractive to investors.

The ever-increasing focus of various stakeholders and the wider community on ethical and sustainable practices means that a lack of transparency or discernible effort to improve can negatively impact your business as much as, if not more than, regulatory action.

But if you are a start up you have to focus initially on the key point of whether this a business that can make money and scale, that you comply with all tax and legal requirements as soon as you can, and as best you can – to ensure your calculations of profit, and ability to scale are sound. You may well even be doing something that has a hugely positive impact for society or humanity.

And be aware that people are increasingly going to really struggle to buy into something if all you do is make reusable plastic from China that ends up in landfill within 6 months.

We all need to dream bigger and better ideas, the principal should be something that is positive in its nature. Then the question is – is it a business, or a charity, or just not something that will ever make money?

Okay. And what do you think about floating a company on a stock exchange vs raising money privately?

Clark says...
Oury says...

Well there is certainly more regulation floating, even on AIM and it has become rather unpopular as currently you simply do not need to find your money that way. It is to a great extent where the rules exist, but these rules are too focused on shareholding reporting at the smaller level, and endless compliance statements which take up time, and often bring little value to anyone.

Effectively by floating you expose yourself to more regulation and the cost of professional advice to even understand the regulation, let alone the action you can take. But bringing in VCs will add its own level of compliance. The truth is that VCs unless they have an ethical tilt, will be focused on brutal profit, and can be fairly ruthless about it – no matter how nice they, or their offices, appear. So arguably an ethical route is perhaps better suited to floating and receiving pension fund money – or even private money and crowd funding money that understand your business. This is where you get into the smart money – investors who do care about more than money – and will go on the journey with you. You should really understand the VC interests that you are getting in bed with.

But this much is true, times have changed. Off shoring your tax, and producing crap that makes money, isn’t so “du jour”as it used to be.

Well then, there’s only one thing for it now, let’s grab a vegan sausage roll and discuss whether “Keeping up with Sussexes” can be the next big thing.

Clark says...
Oury says...

I’m in!

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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