Effective Cash Management is vital for any company in the current climate. The way in which a company remunerates its work force and structures its accounting arrangements for VAT purposes can also be used as cash management tools. This note considers a number of steps which a company may wish to take to cut the cash flow and the absolute costs of: (a) remunerating its workforce; and (b) accounting for VAT.
- A company may wish to consider remunerating its staff through a combination of salary and “benefits in kind” rather than just salary. Certain “benefits in kind” can be provided income tax free. Examples of income tax free “benefits in kind” are mobile phones, child care vouchers, food at work, bikes and car parking spaces. The amount of the tax saving can be taken into account in setting any benefit package.
- The provision of “benefits in kind” also carries with it national insurance advantages. Generally “benefits in kind” are free of employees’ national insurance. This cuts the overall remuneration costs by 1%.
- Companies may have cash bonus schemes for mid tier and senior employees if certain performance criteria are met. A cash bonus scheme could be set up with a pensions alternative under which, if the performance criteria are met, an employer contribution is made to the individual’s pension scheme. Generally employer contributions can be received income tax free by the pension scheme and they can be paid without employees’ and employer’s national insurance. The national insurance saving cuts the cost of the remuneration package for the employer company by 13.8%.
- A salary sacrifice scheme could be implemented to take advantage of the above. For example, if employees make employee contributions to their pensions, these pension contributions could be changed to employer contributions with the employee agreeing to a corresponding reduction in salary. This again produces a national insurance saving of 13.8% in aggregate. Similarly, an employee could agree to sacrifice salary in return for a tax free benefit in kind, resulting in tax and national insurance savings for both employer and employee.
- It may be possible to give the company a cash flow advantage by structuring employee remuneration as an interest free loan which is subsequently written off rather than as an outright payment.
- It may be possible to use tax-approved share options to incentivise key staff members. Alternatively, if the company’s share price is relatively low it may be possible to use a restricted share scheme to similar effect. The individuals could be allocated restricted shares upfront and their retention of the shares could be subject to the company meeting certain performance criteria. The advantage of the restrictive share scheme is that it creates the opportunity for the key employees to get capital treatment on an exit.
- Companies that provide services may be able to restructure their accounting arrangements to defer a VAT charge until payment is received from the customer. This provides an in built protection against VAT bad debts. It can also produce a one off cash saving.