Explained: how to invest your business' idle cash

Originally published at: Explained: how to invest your business’ idle cash – InvestEngine Insights

Investing idle cash is an opportunity small businesses shouldn’t miss out on. Why let your cash sit in a standard business account earning little to no interest, when low-risk investment alternatives are out there?

Here, we’ve collected the most common questions our Business Account holders ask us and answered them:

  1. How do I set up a Business Account?
  2. What makes InvestEngine’s Business Accounts different?
  3. What would I use a Business Account for?
  4. What type of business can open an InvestEngine Business Account?
  5. How much of my business cash should I invest?
  6. My business doesn’t have a LEI (Legal Entity Identifier) number. How can I get one?
  7. What do the investment returns from my InvestEngine Business Account consist of?
  8. How is InvestEngine different to peer-to-peer (P2P) lending?
  9. How are investment returns from my InvestEngine Business Account taxed?

How do I set up a Business Account?

For a DIY portfolio

  1. Click on the green Get started button on the InvestEngine website
  2. Choose ‘Business’ and enter your details to make an account
  3. Create a new portfolio, select DIY and browse our range of ETFs
  4. Select the ETFs you want to invest in 
  5. Set weights for each ETF in your portfolio. These target weights (which you can adjust at any time) are a key feature of our DIY service, helping you manage your portfolio and maintain your investment strategy.
  6. Start investing!

For a Managed portfolio

  1. Click on the green Get started button on the InvestEngine website
  2. Choose ‘Business’ and enter your details to make an account
  3. Create a new portfolio, select Managed and answer our quick questionnaire
  4. We’ll assign you a portfolio that suits your business’ financial goals 
  5. Start investing!

If you want to automate your regular investing, set up a Savings Plan for easy weekly, fortnightly or monthly top-ups.


What makes InvestEngine’s Business Accounts different

Our Business Accounts are very different from a standard business account. The key thing to know is that this is not a bank account, but an investment account. You won’t spend or transfer funds from it (you can withdraw easily however) – it is designed for investing. 

Here’s how we differ: 

  1. Invest your cash. The biggest difference is that our Business Accounts invest in the stock market, from low-risk bond ETFs and Money Market Funds to equities, offering the potential to earn more on your cash reserves. 
  2. They’re easy to set up. Unlike some other business accounts, you can have an InvestEngine portfolio up and running in a matter of days. 
  3. You can automate your investments. Our platform’s Savings Plans feature allows you to invest on a weekly, biweekly or monthly basis, fully automatically. 
  4. Easy access to your cash. We don’t charge exit fees and you can withdraw without giving us notice. It typically takes just 4-5 business days to withdraw. 
  5. We’re low-cost. Our DIY investment portfolios are completely commission-free, while our professionally Managed accounts charge just 0.25% a year.
  6. We offer ETF investing. Exchange-traded funds (ETFs) are simple and unbeatable for choice – invest in the biggest companies of today or the themes of tomorrow. 

You can find out more about how our Business Accounts differ here


What would I use a Business Account for?

There are two primary use cases for InvestEngine’s Business Accounts. These are: 

Utilising your VAT and Corporation Tax. Business owners typically put tax money aside ahead of time, ready to pay when the time comes. VAT is typically paid once a quarter, while corporation tax is typically paid once a year. During these periods, this money is idle and business bank accounts pay little interest. Instead, you can put the money to work in a low-risk Money Market Fund or Bond ETF, for example, and aim for returns on the cash. 

Long-term investments for business owners. Rather than paying out business profits in the form of dividends – and being subject to dividend tax – business owners can invest business profits pre-tax and use the investments later in their life. Situations will differ from person to person but many people have little income after retirement, so their dividends will most likely be taxed at a different (often lower) rate.


What type of business can open an InvestEngine Business Account?

Limited companies and partnerships can open an InvestEngine Business Account. If you run another business type, please contact us to discuss.

Please note: we can not onboard business accounts if any of the Directors/Persons with significant control hold US citizenship. We hope to be able to provide our service to US citizens based in the UK in the near future.

We can not open business accounts if they are registered in British overseas territories, for example the British Virgin Islands.


How much of my business cash should I invest?

The InvestEngine Business Account has a minimum investment level of £100. It is aimed at limited companies (including contractors) and partnerships that have surplus cash in their business. 

Most businesses need to retain an amount of cash for their day-to-day needs and liabilities like tax and VAT. But they may also be accumulating surplus or spare cash which is earning  little or no return. This surplus could be referred to as the cash reserves or retained profits of your business. 

How much you want to invest in the InvestEngine Business Account is down to you and your business circumstances – InvestEngine is not authorised to give financial advice. If you need advice we would suggest contacting an independent financial adviser (IFA) or a finance professional like an accountant.


My business doesn’t have a LEI (Legal Entity Identifier) number. How can I get one?

It is a general regulatory requirement for businesses to have a LEI (Legal Entity Identifier) number for financial transactions. You will need a LEI to open an InvestEngine Business Account.

If you don’t already have a LEI, InvestEngine can provide one to customers for free for the first year and it will be applied automatically after you have funded your account with a minimum of £100.

You will need to have an active LEI in your second year with InvestEngine, or you will not be able to trade. If you fund your account with £20,000 or more, we will provide the LEI for you free of charge.

If you have not funded your account in the second year to the value of £20,000, business account holders will have the option to renew the LEI themselves. If you are not able to do this, InvestEngine will have to provide the LEI for you, but will be reaching out to you to cover the £45 fee.


What do the investment returns from my InvestEngine Business Account consist of?

Your InvestEngine Business Account invests in a range of exchange traded funds (ETFs) that are listed and traded on the London Stock Exchange. These ETFs invest in shares, bonds and alternative assets such as gold.

Your investment returns could variously consist of dividend income, interest income and capital gains/losses.

The ETFs in your portfolio are domiciled (based, in legal terms⁠) in Luxembourg or Ireland. This means that the income you receive is categorised as “overseas dividends” or “overseas interest” ⁠— even where the ETF is invested in UK shares or bonds. 

You can create custom reports in your online account, including a Consolidated Tax Certificate (CTC) which will report on the income categorisation and we also provide Capital Gains Tax Reports.

See here for how to: create custom reports in your InvestEngine online account.


How is InvestEngine different to peer-to-peer (P2P) lending?

InvestEngine is not a P2P lender – with us you are investing in a portfolio of funds called ETFs that track the performance of stock markets, bonds and other assets. 

An important difference is protection of your money under the Financial Services Compensation Scheme (FSCS). With InvestEngine, individuals and small businesses  may be eligible for compensation from the FSCS. (For FSCS protection, a small business needs to meet two or more of the following conditions: under £10.2m turnover; balance sheet no bigger than £5.1m; 50 or fewer employees. See FSCS for more information.)  

This contrasts with P2P lending where your money is NOT protected by the FSCS – whether you are an individual investor or a business.   

Also, the ETFs that comprise your InvestEngine account are themselves bought and sold on the stock market. This means that if you want to withdraw some or all of your money, we can sell your ETFs straight away and you will generally have your cash back in three business days. Plus, we don’t charge for withdrawals. 

In contrast, with some P2P lenders, it can be difficult getting your money back quickly – you may have to wait many weeks. And there can often be high charges for exiting your P2P investments.


How are investment returns from my InvestEngine Business Account taxed?

InvestEngine doesn’t deduct tax from income or capital gains on your Business Account. However, your business may need to pay tax on these investment returns.

If you are investing as a UK-based company, your returns are subject to the UK corporation tax regime.

This means that interest income (from bond ETFs, for example) and realised gains (net of losses) are potentially liable for corporation tax at 19%. However, dividend income (from equity ETFs, for example) is usually exempt from corporation tax. InvestEngine portfolios generally earn both interest income and dividend income.

You may also be able to treat InvestEngine’s fees as an allowable business expense to reduce your company’s corporation tax bill.

If your company does not prepare its accounts as a “micro-entity”, then unrealised gains and losses on certain types of ETFs also need to be declared for tax purposes each year. This additional requirement covers ETFs with more than 60% cash and other interest-bearing holdings.

Trading companies should also consider the impact of investments on their shareholders qualifying for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) if the company is sold, or for Business Property Relief to reduce inheritance tax.

The above all applies to UK resident companies. If however your company isn’t resident in the UK, then dividends, interest and gains from your investment portfolio should not be liable to corporation or other UK taxes. Tax due will instead depend on where your company is resident and its tax arrangements with Luxembourg and Ireland, where the ETFs are domiciled.

For tax reporting purposes, at the end of the UK tax year InvestEngine provides Business Account holders with a Consolidated Tax Certificate (CTC) showing the interest income and dividend income their portfolio has earned, and a Capital Gains Tax Report detailing realised gains and losses on ETFs in their portfolio. Both documents cover the 12 months ending 5 April. You can also generate custom reports and statements from within your online account. See here for more information on Custom reports in your InvestEngine online account

Please note that InvestEngine does not intend the above to be tax advice and you should speak to your own tax adviser or HM Revenue & Customs to confirm the tax implications of investing your business cash. InvestEngine will not be responsible for any action or inaction as a result of this information.

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.

This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.