Andy Dalziel

Macron plans for single European tax rate blasted

Irish MPs are amongst the many politicians and legislators who have reacted angrily to French President Emmanuel Macron’s proposal to introduce a single European corporate tax rate. Macron has domestically been calling for a single-bloc rate, but such a plan has little support outside France.

Irish MEP, Brian Hayes, is one such opponent, saying “Marcon’s new corporate tax rate band may go down well in Paris, but there is overwhelming opposition in most of Europe to harmonisation of tax rates.”

Hayes also pointed out that corporate tax rates are not in the gift of the EU, but are for Member States to decide.

Macron has been accused of a conflict of interest, with critics citing the difference between the French corporate tax rate of 30% and the 12.5% rates which prevail in Ireland and Cyprus, with the President seen as trying to prevent smaller countries in the European Union from being able to attract foreign direct investment (FDI).

Hayes commented” Tax competition between countries is good for Europe and good for European investment. Tax competition keeps Europe on its toes and makes sure that business stays in Europe”.

This is not the first time that Irish politicians and the EU have found themselves in conflict over corporate tax policy in recent weeks. Last week, Irish MP, Michael Fitzmaurice, accused European Commissioner Jean-Claude Juncker – who he described as an unelected bureacurat – of acting like a dictator when it comes to tax, saying that, under no circumstances should he be “allowed to dictate what should happen with regard to tax rates in Ireland or anywhere else for that matter“.

Ireland has also reacted angrily to last week’s decision to refer the country to the European Court of Justice for its failure to recover €13 bn. in back taxes from Apple, whose European headquarters is based in Dublin. They contend that the EU does not understand Irish law, that the interference by the EU, in what they regard is a domestic tax matter, is an infringement of national sovereignty, with a spokesman for the Finance Ministry in Dublin previously commenting “Ireland does not do deals with taxpayers”.

At least it appears that Macron’s proposals do not have much current traction, with Vanessa Mock, the Commission’s spokesperson for taxation and the customs union declaring “when it comes to taxation, tax rates are an area of national sovereignty, and the Commission has no intention of interfering with that. Neither do we plan a harmonisation of corporate tax rates.”

Inheritance in Cyprus

Introduction

Whilst there is no inheritance tax in Cyprus, it is still essential that you have a will which covers all your assets in Cyprus, irrespective of whether you are a Cypriot national or not. This is because if you die intestate, your estate will be disposed of according to Cypriot laws of succession.

Domicile

The concept of domicile can be complex and it may be appropriate to seek legal advice as to your status, because this can be key when it comes to inheritance. Basically, everyone acquires a Domicile of Birth, which is the country in which you were born. This can be changed to a Domicile of Choice, although in practice this is very difficult to do and, in some cases (for example, if you were born in Denmark or the US), is virtually impossible.

In order to make somewhere your Domicile of Choice, you need to set up home in another country and sever all links with your country of birth and show you have no intention of ever returning there (and even that may not be enough in some instances)!

At the very minimum, if you want to make Cyprus your Domicile of Choice, you must prove you are permanently resident in the country, and intend to stay here for the rest of your life.

The Estate

An estate consists of two elements – the immoveable and the moveable assets. Immoveable assets consist of land and property; moveable assets consist of everything else – for example cash, money held in bank accounts, household goods, cars etc.

Intestate

Dying without a will is known as dying intestate. If you die intestate, you have no choice as to how your estate is distributed; it will be divided according to the laws of intestacy in the country in which you are domiciled.

If you die intestate in Cyprus, then your domicile will be used to determine the distribution of your assets.

Overseas Domicile

The immovable estate is distributed according to Cypriot laws of intestacy; the moveable estate will be distributed according to the intestacy laws of your country of domicile. And, even if you reside in Cyprus which has no inheritance tax (IHT), you may be subject to such taxes on your estate according to local law there.

Cyprus Domiciled

Both your immoveable and moveable estate are distributed according to Cypriot laws of intestacy.

Testate

If your father was born in the UK or any other Commonwealth country, then you have the freedom to dispose of your whole estate (both immoveable and moveable) by Will. However, if that is not the case then things get more complex.

Cyprus has a complex set of Succession laws which are based on the principles of “forced heirship”; in essence, assets are distributed to your surviving relatives in an order of precedence which dictate who should get what and under which circumstances.

Broadly, an estate will be divided in two parts – the disposable section and the compulsory section.

In the case of the disposable section where a will has been made but which is not covered by the Commonwealth provisions, then between a quarter and a half of an estate can be passed by Will (the exact portion depends on which of the deceased’s relatives are alive at the time of their death). In the event that somebody dies and leaves no spouse, child, descendants of a child or parents, then the whole estate can be distributed by Will.

The balance of the estate will be distributed according to the forced heirship rules. In the simplest case, where somebody dies and leaves a spouse and children, then only a quarter of the estate can be distributed by Will; the rest is then passed to the wife and children in equal shares, including the matrimonial home.

Where the complexity arises is if the deceased’s family situation is not so straightforward at the date of their demise. If the deceased left a spouse and parents, but no children, for example, or left a spouse, had no children or grandchildren, but had surviving brothers and sisters.

There is a complicated set of rules and order of precedence which needs to be followed in such cases, depending on the actual family situation of the deceased at the time of their death. Those potentially affected by such a situation may want to seek legal advice as to implications of their circumstances.

Conclusion

All experts agree that it is important not to die intestate because otherwise you have no control over how your assets will be divided; they will be subject to the intestacy laws in your country of residence and Domicile of Birth (unless you have managed to pass the rigorous tests for electing somewhere else as your Domicile of Choice).

If you have a father born in the Commonwealth, then if you have a Will you have complete freedom as to how your estate will be distributed. However, for those whose father does not qualify under the Commonwealth rule, things may be more complicated, and their ability to dispose of their assets as they wish, limited by the law.

EU proposing major overhaul of VAT to combat tax fraud

The EU is proposing a major overhaul of European VAT rules to combat tax fraud which is reported to cost the bloc €50 billion annually (although Europol, the EU crime agency, estimates that the figure could be double this).

The isting EU VAT rules were introduced in 1993 at the time of the creation of the single market, and were intended to be a temporary fix until such time as rates could be harmonised across member states – a project now long abandoned. However, the result is a hotchpotch of differing rules and provisions, with the need to make any meaningful reform complicated because all changes at a European level need unanimous approval, which is very difficult to achieve in reality. This leaves the existing VAT system open to abuse and fraud.

EU Commissioner for taxation, Pierre Moscovici said “VAT rules are a quarter of a century old and no longer fit for purpose. Fraud today is not something citizens can accept any more, particularly when it finances organised crime and terrorism”.

The new rules will have two broad objectives – to prevent fraud and to simplify the lives of companies in the EU, with Moscovici estimating EU companies will save up to €1 bn. a year in administrative costs with the new rules.

One practice that the EU in particular wants to target is the scam known as the “missing trader fraud”, which involves cross-border sales of high value portable products such as mobile phones, computer chips and even credits on carbon dioxide emissions.

The fraud enables a trder to buy goods from a supplier in one country, VAT-free, and then sell those goods at full price, including the VAT in another country. The trader then “disappears”, taking the VAT with them. Meanwhile, the original supplier of the imported goods is able to reclaim the full VAT from their government.

The logical extension of such practices are the creation of so-called “carousel schemes” where criminals create a network of suppliers and traders which continuously indulge in such trades, stealing millions of VAT payments which are due in the process.

The proposed reforms, which the EU hopes to have in place by 2022, will see suppliers charge VAT on all EU sales.

These proposals are part of wider global efforts to reduce tax avoidance, and aggressive tax evasion, and forms part of a broader programme by governments and regulators to promote greater transparency and harmonisation when it comes to tax, including initiatives such as BEPS, CRS and new rules on transfer pricing.

Why is opening a bank account so difficult now?

In the good old days it was easy to open a bank account – select your bank, turn up at a branch with your passport, proof of address and suitable reference letter, and an account would have been opened for you the same day or next. Unfortunately, all that is now history. Banks, like reformed sinners, are determined to learn from their past mistakes and now choose their clients carefully. They will even shut down accounts if extensive due diligence procedures are not followed. Compliance, once a back-office function, is now firmly in charge of commercial banking policy and practice.

The global financial crisis of 2007 – 2008 has been widely blamed on the banks and their willingness to give credit and cheap loans to people who could not, once interest rates increased, be able to service their debts and repay their loans. At the same time, the role of major banks in money laundering activities and the financing of terrorism has come to prominence, with leading institutions such as HSBC, BNP Paribas and Standard Chartered just a few of the banks who have been convicted of such crimes, and had sanctions running into billions of dollars levied on them for their misdemeanours.

As a result banks have become highly risk averse and unwilling to lend money to clients without intense scrutiny beforehand as to the purpose and terms of the loan, and without strict repayment terms being applied. Existing customer accounts are closely monitored and, in some cases, can be shut down without adequate warning, or explanation. And new account procedures have been tightened to the extent that KYC (Know Your Client) policies have become so stringent that they represent a serious barrier to entry for some banking customers.

There is a strong argument to suggest that banks have now forsaken one of their fundamental purposes – to be a facilitator of global trade and commerce – in favour of a role more akin to that of an international policeman, regarding all clients with inherent suspicion, ready to penalise them at the first sign of impropriety.

Regrettable as this may be, however, this is now the new economic reality and needs to be accepted, if not embraced.

This is not to say that it is impossible to open a bank account; just be prepared to answer a lot of questions and provide substantially more documentation than once would have been the case.

For an individual customer, as a bare minimum, a bank will require a copy of your ID or passport, a recent utility bill in your name and at your address (not less than 3 months’ old), and a reference letter from a suitably qualified person – such as accountant or lawyer. They may also require you to disclose information about your income, employment and personal circumstances – age, marital status, dependents etc. Be prepared to give them all they ask.

In case of a corporate account, all the company registration documents – Certificate of Incorporation, Memorandum & Articles of Association, List of Directors and Secretary, and proof of Registered Office Address – will be required. If the company is part of a structure, then you will need to present the equivalent documents for all the companies in that structure.

From the bank’s viewpoint, one of their paramount objectives is to be able to identify and verify the Ultimate Beneficial Owner (UBO) behind any company or group. It is vital that this is disclosed, along with all their personal information (passport/ID, address, profession etc.). If, for any reason, you do not want to disclose the UBO, then you can forget any hopes of opening a bank account at all.

Providing the requisite documentation is only one part of the account opening process, however. The bank will need to have a very clear idea of the nature of your business and with whom you are likely to trade – customers and suppliers.

For example, if your business involves gambling, casinos, alcohol, tobacco or the arms industries, you may find it hard to get any recognised commercial bank to open an account for you. Equally, if your activities are regulated and you do not hold an appropriate licence (or your licence has been issued by a non-European jurisdiction or body), you are likely to have difficulty finding a banking partner.

The same goes for the geographical nature of your trading parties. There are some countries which are on the proscribed list for most banks and will automatically disqualify you from holding a bank account with them. These include any country which is subject to international sanctions. or associated with terrorism, civil strife or perceived criminal activity. It is probably best to check with the bank first to see if any of your trading partners fall into one of these categories; if so, consider replacing them.

For any financing activity, the bank will need to know the source of funds and the nature of the company’s financing arrangements. Equally, loans between unrelated parties should be avoided. A bank would always expect a loan transaction to be made either at arm’s length on commercial terms, or to be made amongst parties trading within the same group or under the same beneficial owner. Money lent to friends, associates or family members will always arouse suspicion.

For substantive loans, the bank may well ask to review the loan agreements, including purpose, repayment terms, interest rate charged and security.

Equally, for major transactions, the bank may ask to see contracts, invoices or bills of lading to verify their validity. In the case of services, make sure these are fully described on any invoice, and avoid generic terms such as consulting, advertising or referral fees.

Promissory notes should be avoided. These have been extensively used for money laundering activities in the past, and, therefore, have been classified as high risk investments by many Central banks.

Above all, be ready to advise your bank of any major change in your company’s activities – if, for example, you begin trading with a new partner, expand into a new territory or open another line of business. Failure to do so could lead them to place your account (s) under review, and lead to a lot more scrutiny of your activities.

For all the money that they spend on expensive advertising, banks are a lot more difficult to do business with now, than they were in the past. Undoubtedly they are subject to much greater regulatory pressures now – something that, many would say, they brought on themselves. Their response has been to emphasise compliance at the expense of the commercial imperative.

This is the new reality – the tail is wagging the dog. So, if you want to open a bank account with a commercial bank – unless you have and want to main high credit balances you can forget the private banks – get all your documentation in order, make sure there is nothing in your activities that will sound any alarm bells, and be prepared to answer all the questions that will be thrown at you.

Amazon and Apple targeted in new EU tax crackdown

Both Amazon and Apple were the subject of a fresh crackdown by the European Union on Wednesday over the amount of tax they pay on their European operations.

In the case of Amazon, the company has been ordered to pay €250 million in back taxes, following the decision of the European Commission that the technology giant had been given an unfair tax deal in Luxembourg.

Apple meanwhile was hit by the news that the Commission plans to take Ireland to the European Court of Justice (ECJ) for failing to recover 13 billion in back taxes from the US corporation.

European Competition Commissioner Margrethe Vestager said that under their agreement with Luxembourg, Apple had arranged to pay substantially less tax than other companies in Luxembourg, which is illegal under state aid rules. Under the 2003 agreement, Amazon was allowed to move a substantial part of its profits from Amazon EU to Amazon Holding Technologies, which was not subject to tax. In doing so, they ensured that almost three-quarters of the profits earned in Luxembourg were not taxed. Vestager commented “Member States cannot give selective tax benefits to multinational groups that are not available to others”.

The case is slightly embarrassing for the European Commission because its current president, Jean-Claude Juncker, was the prime minister of Luxembourg back when the deal was struck.

Amazon for its part denies receiving an special tax benefits from Luxembourg, with a spokesman commenting that the company was studying the ruling of the Commission and was evaluating the legal options available to it, including an appeal.

Meanwhile the decision to refer Ireland to the ECJ is the latest salvo in an ongoing dispute which has seen the European Commission arraigned on one side, with Apple and the Irish Republic on the other.

The European Commission argues that Apple’s tax arrangements in Ireland, where the company has its European headquarters, are illegal, in as much as the company pays tax at an effective rate of only 1% there. Apple contend that it is not an issue of what tax it pays, but where the tax is paid; as most of their products and services are “created, designed and engineered in the US, that is where they pay most of their tax.

Ireland, for its part, has always claimed that this is a matter of national sovereignty, and that the European Commission has misunderstood the relevant facts and Irish law”.

The Irish government have said that they are extremely disappointed with the Commission’s decision and intend to vigorously defend the case, although, in reality, it may be several years before the matter comes to court.

However, whatever the rights and wrongs of the individual cases, the message from the European Union is clear, with Ms. Verstager commenting “I hope that both decisions are seen as a message that companies must pay their fair share of taxes, as the huge majority of companies do.”

Cyprus Social Security going online

All individuals employed in Cyprus – both employed and self-employed – are obliged to make Social Insurance Contributions based on their earnings; monthly in the case of those employed, and quarterly for those self-employed. One feature of this system, up to this point, has been the manual nature of the process. Individuals, employers or their representatives have been required to physically present themselves at the relevant Government office in order to make the relevant cash, cheque or card payment, together with the presentation of the necessary documentation. It is, therefore, welcome news that finally there are plans to move everything online.

Cypriot legislation requires employers to calculate Social Insurance Contributions based on the monthly emoluments of their employees, and pay them within a month of the applicable contribution period i.e. within one month retrospectively. In the case of the Employee, their share is deducted automatically from their earnings by the employer, and paid on their behalf to the Government.

The current Social Insurance Contribution rates are as follows:

	Employer	Employee
Social Insurance	7.8%	7.8%
Redundancy Fund	1.2%	NIL
Industrial Training	0.5%	NIL
Social Cohesion	2%	NIL

In addition, there is a holiday fund of 8% which most businesses can claim exemption from by proving that they offer their employees paid leave as part of their conditions of employment.

The Social Insurance, Redundancy Fund and Industrial Training contributions are restricted to €54,396 annually (equivalent to €1,046 per week or €4,533 a month). However, the Social Cohesion Fund part is unlimited and is not regarded as deductible for the purposes of calculating corporation tax.

Failure to pay contributions on time leads to penalties which range from 3% to 27%, depending on the period of time that the payment has been delayed, and the amount of the contributions due.

Self-employed contributions are paid on a quarterly basis as follows:

January to March – must be paid by the following May 10th;
April to June – must be paid by the following August 10th;
July to September – must be paid by the following November 10th; and
October to December – must be paid by February 1oth of the following year.

There are minimum limits of annual income on which self-employed people must pay social insurance contributions, and these vary by profession such as:

Occupation	€
Persons exercising a profession: · For a period under 10 years · For a period exceeding 10 years	19,949 40,351
Wholesalers, estate agents, insurance agents, manufacturers and other businessmen	40,351
Clerks, typists, cashiers, secretaries	19,496
Shopkeepers	18,589
Designers, computer users, marine engineers	19,949

This list is not exhaustive, but AJD Consultants can advise if a particular occupation is not covered above.

Despite all this, the intensively manual nature of the Social Insurance payment system has made this a very ineffective process hitherto. This is why the announcement that the whole system is going to be automated so that payments and monthly submissions can be made online is very welcome. Launched under the joint auspices of the Ministry of Labour, Social Insurance and Welfare, and the Social Insurance Services, the new system aims to improve the productivity and effectiveness of both the private and the public sector, whilst aiming to eliminate the waste of productive time.

Under the slogan “Do It Electronically”, a special website has been created, giving taxpayers more information and allowing them to register for the scheme (http://www.kepa.gov.cy/yka/).

Unfortunately the website is currently only available in Greek, so AJD Consultants has contacted the department responsible, asking when an English version will be available.

New report highlights reasons for tax evasion

A recent report published by HMRC in the UK – research report 433 – has looked at the causes of small and medium-sized businesses to evade tax, and has sought to identify if holding particular beliefs or attitudes makes people more likely to indulge in tax evasion.

The report “Understanding evasion by small and mid-sized businesses” was conducted on a relatively small sample size (40 small and 5 mid-sized businesses), so may not be indicative of more widely held beliefs. Furthermore, as it focused on those businesses which were actually engaged in tax evasion, the findings do not mean, statistically, that such practices are common.

Nevertheless, the report does identify a number of differing attitudes which distinguish evading from non-evading businesses, including:

Sense of citizenship – an individual’s core beliefs and values;
The ability to distinguish and respect the difference between business and personal assets – the extent to which what belongs to a business is kept separate from what belongs to an individual;
The perception of risk – both in terms of the risk itself and the ability of the business to manage that risk;
The prospective financial incentive or reward (the amount of tax which could be evaded); and
The willingness to actively seek or create opportunities for tax evasion; the degree of strategic planning which goes into evading activities.

From there, the report links these attitudinal variances to external influences, such as social norms, media coverage, and market forces, to identify four main types of tax evader.

The Unthinking Evader – those who habitually indulge in low level tax evasion without conscious thought almost;
The Invested Evader – businesses which regard themselves as driven by financial necessity to evade tax in order either to survive or grow;
The Lifestyle Evader – those who regard tax evasion as a way of having a lifestyle that they could not otherwise afford, and justify their actions by pointing to the tax that they actually do pay; and
Systematic Evader – as the name suggests, those who actively contemplate tax evasion and make it an integral part of their business model.

The sort of evasion recorded in the report ranges from businesses who deal in cash in order to under-declare income, to others which “employ” teenage children who do not really work but whose personal allowances are used to save tax. Then there are those business owners who claim personal expenditure items as business expenses, and others who have bought assets for the business, such as computers, and then taken them home for personal use.

Many of these examples are small in themselves; however, added-up they can represent a large tax loss to the economy. And, while the HMRC report is focused on the UK, such practices are common in many other economies and may be even more rife.

Forming a Private Limited Company in Cyprus

The most popular type of company in Cyprus is a private company limited by shares (Ltd) – also known as a private limited company. There are a number of relatively simple steps which must be followed when incorporating such a company, and which, depending on workload at the Registrar, can take as little as 4 to 6 weeks to complete from start to finish.

Name Approval

The first step is to get the proposed name approved by the Registrar of Companies. When proposing a name, it is important to make sure that the name is unique, that it is not similar to any existing name, trademark or brand and that, if initials are used, then the definitions of those initials can be explained to the Registrar. It is recommended that you check with the Registrar’s website (http://www.mcit.gov.cy/mcit/drcor/drcor.nsf/index_en/index_en?opendocument) first to check if the name you want to use is potentially available.

Memorandum & Articles of Association (M&A)

Every company must have both a Memorandum and Articles of Association. The Memorandum outlines the objective of the company; the Articles its internal regulations and procedures. The M&A is signed by the subscribers being the first shareholders of the company.

The M&A has to be drafted in Greek – although an English version is often recommended as well for international companies – and must be signed by a qualified company lawyer, and a copy deposited with the Registrar when the company registration is filed. Although an individual company have its own M&A requirements, time and money can be saved with the use of a generic template. AJD Consultants can assist both with this and with the provision of an appropriately qualified lawyer.

Share Capital

There is no minimum share capital requirement for the establishment of a private limited company in Cyprus, although €1,000 is frequently used (which does not need to be paid-up). Although the share capital can be in any currency, the Euro (the currency used in Cyprus) is employed by the majority of companies.

Directors

Under Cypriot law, the Directors have responsibility for the operations and day-to-day management of a Company. By law, the minimum number of directors is one – this does not need to be an individual, however; corporate directors are allowed.

Although a director can be of any nationality, their tax residency can be important when determining the status of the company. To be regarded as a Cypriot resident company, eligible for the 12.5% corporate tax rate, and protection, by double tax treaty and other relevant legal provisions, from taxation in another jurisdiction (potentially with higher tax rates), at least one of the directors needs to be a Cypriot tax resident (not national). AJD Consultants can help with the provision of a suitably qualified Cypriot resident director if required.

Registered Office

A company also needs a registered office address in order to receive legal notices and to serve as the company’s home. Whilst this may not be in the Republic, choosing an office outside Cyprus will make the company non-resident, and thus it will not avail of the benefits of a resident private limited company.

Having a registered office address does not mean renting an office space, however. It simply requires an address in Cyprus where mail can be sent, and, if need be, phone calls can be directed. Again, AJD Consultants can help with the provision of a suitable registered office address is required.

Incorporating a private limited company in Cyprus is relatively easy, and there are a number of favourable benefits to doing so, either as a stand-alone entity or as part of a broader group structure. Provided that the steps outlined are followed, a company can be incorporated in a matter of weeks and can begin to start trading. For further information or help with incorporating your new Cyprus company, please contact us directly.

The importance of break-even analysis

Break-even is a term that is part of the lexicon of everyday life; applied to fields widely different from finance. However, it is in the world of business that it has its greater application, and where its importance as a concept is most relevant.

Simply put, a firm has reached break-even when the money it makes from its sales is sufficient to cover all of its costs, both variable and fixed. From that point forward, provided that sales are maintained and expenses and costs not increased disproportionately, then the business will be in profit.

In most cases, a business will require some form of financial investment before beginning operations – in stock or machinery, for example. And, even once a business has started, it can take some time before its sales are such that it is no longer operating at a loss. When the business is no longer loss-making but has yet to be profitable, it can be said to have reached the break-even point.

The break-even point is not only important for the business as a whole but is relevant for calculating the viability of any new business or product line, or potential source of revenue. If that new business or product has a break-even point far-off in the future, or requires substantial additional investment before it can be reached, then small business owners should consider deferring or cancelling the project altogether, because it will dilute the profitability of the existing business.

In determining the break-even point, it is important to distinguish between the different types of cost for a business. Fixed costs are expenses that stay the same, irrespective of the level of sales. These might include the rent on a building, management or administrative salaries, or subscription costs. Regardless of the level of activity, these costs will remain constant, at least in the short-term.

Fixed costs are difficult to reduce, except in the longer-run. An office cannot just be vacated; rent will need to be paid for several months whilst a notice period is served and new premises located. Salaries can normally only be radically reduced if there is a headcount reduction programme which many have legal and other ramifications, as well as additional cost implications, such as compensation and redundancy payments.

Variable costs, on the other hand, are dependent on the level of sales. These might include materials, shipping or production labour costs in a business which produces goods, or travel and advertising costs in a service industry.

When calculating the break-even point both the variable and fixed costs need to be taken into account (a fact sometimes forgotten by the unwary!).

The calculation of break-even itself is quite simple.

First of all, deduct your variable costs from your revenue to determine your gross profit (or gross margin). Then deduct your fixed costs. If the net result is positive, then you have broken-even and are profitable. If the net figure is negative, you have not broken-even and are trading at a loss.

Based on this formula, you can also determine what level of sales you need to achieve – assuming that your variable and fixed cost assumptions are right – in order to achieve break-even.

This can be very important in determining price and marketing initiatives – for example, offering promotions or price discounts to increase sales – without endangering the longer-term profitability of your business.

There is more than one way of achieving break-even – for instance, raising prices to increase the gross margin. or reducing expenses. By knowing what your break-even point is, you can judge the relative impacts these various strategies will have on your business.

From the viewpoint of an investor in a business, the break-even point is a key indicator. When they invest they want to know not only what the return on their investment is likely to be, but also when it will be realised. The further the break-even point is in the future, the greater the risk that a business will fail to achieve it, and the less likelihood there is of somebody being willing to invest in it. And, if they do invest, they will demand a greater return on their investment as a risk premium.

Break-even then is an important metric for a business; for the operation as a whole, as well as for any new product or service which it intends to introduce. Business owners should know how to calculate their break-even point, and what strategies to adopt in order to achieve this benchmark as quickly as possible. Furthermore, for those looking for outside investment, it is crucial to be able to tell would-be financiers what the break-even position is, and to keep them regularly informed as to progress in reaching that level.

Business Continuity and the Small Business

The term business continuity refers to the set of activities required to keep an organisation running during a period of displacement or interruption of normal operations.

According to a 2016 study by the Business Continuity Institute, the top ten global threats to business continuity were:

Cyber attacks
Data breaches
Unplanned IT or telecoms outages
Terrorism
Security incidents
Utility supply interruptions
Supply chain disruption
Lack of available key skills
Health and safety incidents

Although terrorism and security incidents may grab the headlines, the risk of cyber attack, data breach or an IT outage is actually much more likely. It is estimated, for example, that cybercrime costs the global economy US $450 billion a year, whilst audit and consulting giant Deloittes have reported (https://dupress.deloitte.com/dup-us-en/deloitte-review/issue-19/loss-of-intellectual-property-ip-breach.html) that the impacts of such an attack go way beyond the known problems such as reputational damage and compliance issues. They note that the true cost of such an attack can take several years to surface, and may include “hidden” effects such as increased insurance premiums, the devaluation of trade names and Intellectual Property (IP), and a loss in customer relationships.

Another study by The Ponemon Institute found that, in 2017, the likelihood of a business suffering a data breach was as high as 1 in 4, whilst airlines, banks and phone companies, as well as public bodies such as the National Health Service, are just a few of the industries which have been hit by massive IT outages in the past few years.

One common misconception is that it is only the large organisation or business which is the object of cyber attacks, and data breaches, or which suffer IT outages. Nothing could be further from the truth.

It may be that these are the organisations which grab the headlines but, in reality, all businesses are vulnerable and, arguably, a small business is more like to suffer than a larger enterprise. They have less redundancy built-in to their processes and systems, are likely to have less rigid data protection and security protocols in place, and have less ability to withstand a serious attack. The financial impact on them can also, in relative terms, be more severe, in some cases threatening the very viability of their business.

Yet the importance of business continuity for a small business is often overlooked. This is a mistake. Having a process in place to manage a devastating attack or disruption to operations can be the difference between business survival or extinction.

A key defence in the event of a major attack or disruptive event is a disaster recovery plan. Such a plan should include, at a minimum, the necessary steps which would need to be taken to restore business and IT systems to a state which can support the business after a disaster. Whilst such a plan in the past may have been messy and cumbersome for a small business to implement – involving, for example, backing up data to a tape or floppy disk and storing offsite – this no longer need be the case. The advent of cloud applications and storage now offer a cost-effective means of storing data “outside” the office or business environment, whilst allowing easy retrieval whenever anybody needs to access that data. There are a range of cloud-storage options now available which can suit any budget, so it is simply too risky not to consider, at least, putting some some of data back-up system in place, simply hoping for the best instead.

However, although related, disaster recovery and business continuity plans are not one and the same thing. A disaster recovery plan helps a business rebuild after a disaster has taken place; a business continuity plan allows it to maintain operations, even in the event of unexpected disruptions.

Such a plan would identify who was responsible for overseeing and implementing it, outline the process for managing, reporting and communicating key incidents and the business response, and capture important information such as key staff, customer and supplier details.

Whilst such a plan can be as detailed, or as scant as the owner of a small business wants, or feels that they have need for, one consideration to be borne in mind is the old adage “fail to plan; plan to fail”. This means, in essence, that the more steps and processes which are documented in advance, the easier they may be to follow when needed.

When a disaster – cyber attack, data breach or major IT failure occurs – there will often be confusion and panic whilst people struggle to identify the cause and implications of what has occurred. Having a detailed continuity plan in place can provide clarity, guidance and reassurance during what can be a stressful and distressing time.

Businesses are more vulnerable than ever before to global threats; whatever your size of business, it would be foolish to ignore the potential consequences such events could have on you. To counter this, it is recommended that a business prepare a Business Continuity Plan which outlines the key processes to follow and steps to adopt if such an event occurs. These would include implementation of a disaster recovery plan, but also should include broader strategies of ensuring that not only can business be recovered, but to allow operations to continue as normal.