Contractors' Questions: On top of IR35, how else can a business plan help?

Contractor’s Question:  I’ve not long been out of permanent employment but have already racked up a second client for what will be my third temporary computer contract as an independent consultant. But having been mainly used to 9-to-5 employment, I’m not familiar with writing a business plan.

Yet I’d like to put one in place, not least because new IR35 guidance from HM Revenue & Customs ascribes one point if I have a business plan (with a cash flow forecast) that I update regularly. This criteria is part one of the Business Plan test in the HMRC guidance, where a higher point-score signals lower risk of HMRC investigating me under IR35. Other than allowing me to accumulate points to help ensure I stay outside IR35, how else can a business plan be beneficial?

Expert’s Answer: Over the years, I have witnessed many examples of potentially great ideas falling by the wayside through the lack of a coherent plan or roadmap. I have seen businesses start up and spend significant sums, only to find that insufficient research had been carried out and their business model was fundamentally flawed.

So barring the odd ‘no brainer’ [idea for a business], the general rule is that if you fail to plan, you plan to fail. Apart from anything else, this is because a properly executed business-planning process will make you consider a host of issues that might otherwise slip under the radar.

Contrary to some entrepreneurial thinking, planning need not dampen drive or hamper creativity or passion. Indeed, planning can be an illuminating and inspiring part of the business-building process, as research leads to new ideas and, occasionally, that elusive Eureka moment!

Another powerful reason for having a business plan is that it creates a stake in the ground and a roadmap which gives guidance and can be followed. If you choose to take an alternative route, which from time to time will be both inevitable and desirable, the business plan will be there to remind you that you are changing your approach. It will prompt you to evaluate and justify your actions. Without a plan, many businesses simply drift from one unfocused activity to another, not really understanding what they are doing and why.

Fortunately, a carefully researched roadmap can provide focus, prevent business drift and reduce risk. It will help business owners to prioritise, set and achieve their goals.

But what about flexibility? What if you need to change your plan? Business plans should not be written and put in the bottom drawer. They are living documents that need reviewing and updating on a regular basis, enabling you to focus on the right priorities at the right time and moving each area and function of your business towards your chosen goals.

The expert was Guy Rigby, head of entrepreneurs at chartered advisory Smith & Williamson.

Wednesday 13th June 2012