How to prepare your business

Today’s blog comes from our Corporate Finance Partner, Michael Smith

One of the questions I get asked most frequently is, ‘How do I prepare my business…’ either for sale, or for fundraising? There are common themes for both, which I will outline below.  In my next two blogs, I will focus on the specific preparation for a prospective sale and then fundraising.

The key issues I encounter when helping clients to prepare their business fall under these main headings:

  1. Build a financial story
  2. Improve your financial efficiency
  3. Understand your market
  4. Do your housekeeping!
  1. Your financial story

Whether you are trying to sell or persuade a funder to invest in your business, you need to tell the external party a coherent story, the basis of which is the underlying financial trajectory – so you need to have up to date, reliable and robust management accounts.  You also need to have realistic forecasts that the external reader can depend upon to provide a reasonable estimate of future performance. KPIs included in management information should show you how you are performing against business plan and remember that most readers will be interested in cash generation, as well as profit.

  1. Improve your financial efficiency

This is an area focused on cost control, working capital management and accessing opportunities. Benchmarking your gross margin, overheads and tax costs is a great way to assess whether you are as efficient as you could be. With working capital, answer these questions:

  • Do I need this much stock?
  • Are my debtors being collected as quickly as possible?
  • Do I get as much credit from my suppliers as I can?

The efficiently run business will also look at ways in which it can minimise tax cost (think R&D tax credits, capital allowance reviews) and obtain grant funding for revenue and capital projects.

  1. Understand your market

Buyers and funders have research at their fingertips to compare you to your peers, so how does your growth rank against your competitors?  What type of funding are others in your market using?  If there is M&A in your market, who are the buyers, what are they looking for and what price are they paying? On a macro level, what are the issues that could impact significantly on your business and what are your plans to address them e.g. are you expecting commodity price fluctuations?

  1. Housekeeping

The external party looking at your business will undertake some form of due diligence when contemplating purchase or funding transactions.  So, make sure all your principal legal documents (leases, banking facilities, customer and supplier agreements) are up to date.  Are all of your key employees tied in to the business for an appropriate period of time?

For further advice regarding preparing your business, please contact Michael Smith on 0191 285 0321 or email michael.smith@taitwalker.co.uk.

Changes to Stamp Duty Land Tax – Do you know what they mean for you?

In a further attempt to dampen the UK Buy to Let market, the Chancellor announced that higher rates of stamp duty land tax (SDLT) would apply to purchases of additional residential properties, such as second homes and buy to let properties, from 1 April 2016.

The current rates and new rates of SDLT for additional residential property purchase are:

Band Existing SDLT rates New additional property SDLT rates
*£0 – £125k 0% 3%
£125k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m + 12% 15%

 

* Only applies to purchases over £40,000

Consultation Document

On 28 December 2015, a consultation document was issued which gives some answers on the detail of the new rules, although the document also creates some questions.

The higher rates will not apply to purchases below £40,000, purchases of caravans, mobile homes or houseboats. Also the new rates will not apply to the purchase of a main residence to replace your current main residence, if your current residence is sold on the same day. However if the sale of your current main residence is delayed and so for a time, you will own both houses, you will have to pay the higher rate of SDLT and then apply for a refund if the old house is sold within 18 months.

The document also refers to a possible exemption from the higher rates for purchases by corporate investors or funds making significant investment in residential property. However the consultation document includes various questions on the possible scope of this relief. If planning for a transaction now, reliance on this relief will carry a risk until the scope of it is clarified.

Commencement Date

SDLT is normally payable on completion or, if earlier, on substantial performance.

The higher rates will apply to all contracts entered into on or after 26 November 2015 where completion takes place on or after 1 April 2016, or where there is substantial performance of the contract on or after 1 April 2016. Therefore if substantial performance of the contract be on or before 31 March 2016, the higher rates of SDLT will not apply.

Buy to Let Restructuring

Restrictions to tax relief for interest on buy to let mortgages are causing some buy to let investors to consider transferring their properties into limited companies. In addition, some investors are choosing to sell some of their properties to reduce debt levels on their remaining portfolio.

Both of these options could be caught by the new higher rates of SDLT and so where possible it would be better to ensure that there is substantial performance by 31 March 2016.

Next Steps

The consultation process is still ongoing, but although the detail of the new rules is being ironed out, the principle of higher rates of SDLT for second properties and buy to let properties will happen and so you need to plan on that basis. If you would like advice on the scope of the new rules, please contact Alastair Wilson or Chris Hodgson.

Good news for North East companies investing in tooling in 2016

A new and perhaps unknown source of funding for those North East manufacturers looking at tooling investments in 2016 comes from Birmingham Finance which operates a national £24m Tooling Funding Programme.

Each funding loan has the following features and benefits:

  • Loan of £50,000 to £1m to support an investment in tooling
  • Must be for the design, development and manufacture of tooling (where the component manufacture and tooling finishing must be within England)
  • Funding is in the form of a loan up to 18 months
  • Up to 90% of tooling costs are funded
  • 1% arrangement fee
  • Limited security (a company debenture behind existing funders and no personal guarantees)

Applicants need to demonstrate:

  • A firm order for products from an OEM or 1st tier supplier;
  • That UK jobs are safeguarded/created; and
  • That they are unable to secure funding in whole or in part from existing banks.

Further details can be found at www.financebirmingham.com/funding/tooling/

If you have any queries about this or other sources of funding for your investment plans then please contact Steve Plaskitt at Tait Walker on 0191 285 0321 or at steve.plaskitt@taitwalker.co.uk.

Autumn Statement 2015 – Stamp Duty Land Tax

Higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes, from 1 April 2016.

The higher rates will be 3 percentage points above the current SDLT rates. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.

The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.

The government will use some of the additional tax collected to provide £60 million for communities in England where the impact of second homes is particularly acute.

SDLT: changes to the filing and payment process

The government will consult in 2016 on changes to the SDLT filing and payment process, including a reduction in the filing and payment window from 30 days to 14 days. These changes will come into effect in 2017 to 2018.

 

 

Source: http://www.gov.uk

Autumn Statement 2015 – Capital Gains Tax Payment Window

From 6 April 2019, it is proposed that the capital gains tax payable on the sale of a residential property will be payable 30 days after the sale of the property. At the moment, the tax is payable between 10 months and 22 months after the sale.

This new deadline will require solicitors and accountants to work together to calculate the gains in this new payment window and allow clients to meet their obligations.

At the moment the rate of capital gains tax is dependent on your income in the same period and there is also an annual exemption which might be set against the gain. Detail is awaited on how this new payment window will dovetail with the above matters and with the wider capital gains tax legislation. It may be that there will be a flat rate deduction of 28%, with the taxpayer having to reclaim any overpayment.

It should also be remembered that the sale of your home is exempt from Capital Gains Tax if it is your Principal Private Residence.

Autumn Statement 2015 – Tax Credits

A big surprise from the Chancellor in his announcement that Tax Credits are not to be reduced as originally planned.

The rate at which a claimant’s award is reduced as each pound of their income exceeds the income threshold (known as the taper rate) will remain at 41% of gross income from April 2016.

The income threshold will remain at £6,420 per year from April 2016. Claimants earning below this amount will retain their maximum award. Consequently the income threshold for child tax credit-only claimants will remain at £16,105 in 2016 to 2017.

 

Autumn Statement 2015

In what was expected to be an Autumn Statement filled with cuts and bad news, the measures set out today were much less than expected and there were some surprising and very positive announcements from the Chancellor. Higher tax receipts have given George Osborne room for manoeuvre in relation to spending, while also reducing the deficit ahead of target. In particular, he was able to perform a U-turn on the proposed changes to tax credits.

As expected, a country which lives within its means, supports its hard working people and improves living standards for all were certainly at the top of the agenda.

 

The North East

The Northern Powerhouse got a lot of air time, with clarity on the £400m fund which is set to aid regional development and help smaller businesses to grow. When taken together with separate funds across the North East, £500m will be available across the Northern Powerhouse.

Other measures designed to boost the North include:

  • £50m for transport in the North and £150m to make oyster style ticketing a reality across the whole of the North
  • £22m for Northern Powerhouse trade missions and new investment taskforce
  • £7m of funding through the regional air connectivity fund to support new air routes, promoting domestic and international connectivity. This will include new routes from Newcastle to Norwich.
  • New enterprise zones to attract private sector investment, 7 new zones will be created within the Northern Powerhouse region
  • Power over uniform business rates control to be devolved to local councils, “to help tackle geographical imbalances and give power to elected mayors to benefit local economies”

Stop Press: Four new grants announced…

Four new grants have been announced…

Two new grants for Teesside companies and two new grants for national companies – impacted by SSI’s recent closure anouncements in the steel indusry – have been announced.

The details are yet to be confirmed, but there will be more on the Tees Valley Unlimited website in due course.

  1. SSI Supply Chain Working Capital:

    a. Working capital grant of up to 200,000 Euros

    b. Applicants must demonstrate an impact due to the SSI announcement e.g. bad debts or working capital stress

    c. Nationwide

  2. Capital investment:

    a. 50% grant against capital investment of up to 200,000 Euros

    b. For SSI supply chain companies (manufacturing/service)

    c. Nationwide

  3. Teesside capital investment:

    a. 30% grant of up to £50,000 against capital investment

    b. Capital investment for growth purposes

    c. Tees Valley applicants only

    d. No due diligence or administration fees will be charged

  4. Teesside professional services:

    a. Grants for professionals services to help with growing companies or overcoming growth barriers

    b. 50% grant of between £2,500 and £25,000 against professional fees

    c. Tees Valley applicants only

Application is via two routes:
Or you can call Lee Jefferson or Steve Plaskitt at Tait Walker on 01642 676 888, who can assist with your grant applications and also with your business plans and growth strategy.

Update on the Base Erosion Profit Shifting (BEPS) Project

INTRODUCTION

Over the past two years over sixty countries have been working together to identify gaps in international tax rules that allow multinational corporations to legally but artificially shift profits to low or no-tax jurisdictions. It is estimated that tax losses from BEPS amount to 4%-10% of global corporate income tax revenues (conservatively estimated to be $100-240bn annually).

On 5th October, the OECD presented its final package of measures to deal with BEPS. These measures are to be discussed further by G20 Finance Ministers on 8 October with the aim of generating co-ordinated reform of international tax rules.

The UK has taken a proactive stance to BEPS and has already introduced legislation around some of the recommendations. It has also taken a rather broad brush approach with the introduction of the diverted profits tax (DPT) legislation (see below). Furthermore, HMRC are in the process of setting up a DPT governance process and a specialist team to apply the DPT legislation in tandem with the UK’s transfer pricing and controlled foreign companies’ rules.

The key changes for multinational corporations and the UK’s response/actions are set out below.

NEW TRANSFER PRICING APPROACH

 

Both the OECD and UN model Tax Treaties require the application of the OECD’s Transfer Pricing Guidelines. A new consolidated version of the OECD’s Transfer Pricing Guidelines will be published in 2017 which focuses on the economic substance of activities rather than their legal form, with the aim being to ensure that operational profits are allocated to the economic activities which generate them.

Finance Act 2015 which received Royal Assent on 26 March 2015 introduced diverted profits tax (DPT) legislation. This seeks to target profits which have been “diverted” from the UK tax net, either by the involvement of entities or transactions lacking economic substance, or through an avoided Permanent Establishment.

The legislation is complex and its interaction with the BEPS programme is unclear. If the OECD’s work on BEPS is successfully implemented across jurisdictions, it is possible that DPT could be withdrawn. However, for now the rules around DPT must be adhered to within the UK.

 

STANDARDISED COUNTRY-BY-COUNTRY REPORTING

The aim of this measure is to give tax administrations such as HMRC a global picture of where MNE profits, tax and economic activities are reported. The tax administrations can then use thin information to assess transfer pricing and other BEPS risks.

The filing requirement will be on MNEs with annual consolidated group revenue equal or greater than EUR 750m. It is recommended that the first Country-by-Country reports be filed for accounting periods commencing on or after 1 January 2016. So for a company with a December year end, the Country-by-Country report must be delivered to tax authorities by 31 December 2017, which will in turn distribute it by 30 June 2018.

Finance Act 2015 included provisions to implement the OECD Country-by-Country reporting guidelines in the UK. On 5th October, HMRC published a technical consultation paper to open a discussion around how the rules will be implemented in the UK.

 

PATENT BOX AND OTHER INTELLECTUAL PROPERTY REGIMES

 

The aim of this measure is to ensure that Patent Box type incentives are only given where the related R&D is conducted within the same entity within that country.

The UK government has already amended its Patent Box regime to account for this provision. There are grandfathering rules under which IP within existing regimes by June 2016 can continue to obtain the full benefit of the regime until June 2021, at which point the new rules will apply.

 

HYBRID MISMATCHES AND INTEREST RESTRICTIONS

 

Hybrids are an instrument or entity through which different treatment in two countries leads to two tax deductions being taken for the same expense, or one deduction without the equivalent income being taxed.

The OECD reports recommend that countries should disallow the expense where the payor country does not tax the related income. The difficulty in implementing this recommendation will be obtaining sufficient information to establish that there is a hybrid effect.

There is a further recommendation for Interest Restrictions. These state that countries should limit interest deductions to a fixed percentage of earnings before interest, tax and depreciation (EBITDA). The cap may be in the range of 10%-30%.

The UK tax code already incorporates rules around the “World Wide Debt Cap” to ensure that the interest relief claimed in the UK does not exceed the amount attributable to the group’s total worldwide external debt. However, it is likely that the UK will begin consultation in late 2015 on bringing its rules in line with OECD recommendations.

 

MULTILATERAL INSTRUMENT TO AMEND DOUBLE TAX TREATIES

 

Instead of having to renegotiate individual treaties, the OECD has been working with over 90 countries to develop a multilateral instrument in order to allow countries to incorporate the tax treaty related BEPS measures into the existing network of bilateral treaties.

The multilateral instrument will be completed by the end of 2016, and will then be available for countries to ratify. It is expected that there will be significant optionality within the Instrument, such that participating countries may make different choices.

 

NEW MODEL TREATY PROVISIONS

 

Proposed new model treaty provisions include:

  • Definition of the Permanent Establishment – The new definition will lower the threshold for recognising a taxable presence
  • Treaty Abuse – Countries have agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping
  • Dispute Resolution – the measures aim to strengthen the effectiveness and efficiency of the Mutual Agreement Procedure (where cases are settled between countries)

 

SUMMARY

The UK appears to be taking a lead in tackling aggressive tax planning in the global economy. However, implementation of the BEPS measures by jurisdictions across the world will be testing. The challenge will be to knit the various outcomes into a structure which reduces unfair outcomes and increases transparency without leading to excessive reporting requirements and harming international trade.

If you have any queries please contact Louise Barker or Alastair Wilson on 0191 285 0321.

 

Pension Awareness Day, 15th September 2015 – Top Tips

With huge pension reforms in place and lots of opportunities for savers, we’re pleased to see National Pension Awareness Day is hitting the Press today.

We’re working with our clients to help them make the most of the changes and plan for the future they want. Here are some tips from Scottish Widows to celebrate Pension Awareness Day:

  1. Don’t rush decisions
    First, remember to take your time. You have a lot to consider with a variety of savings options and new Pensions Freedoms. It’s important you don’t feel pressurised when deciding what to do, especially as some decisions can’t be changed. You could spend a long time retired – nearly one in five people currently in the UK will live to see their 100th birthday. Source: Age UK.
  2. Make use of the help available to you
    To help you understand your choices there’s a lot of support available online and in person. Do your homework and read all the information offered. We can arrange a free and impartial initial consultation to help you weigh up the pros and cons of different decisions. Your Financial Adviser can also share their expert opinion and discuss the options available to you.
  3. Plan the retirement you want
    If you don’t have a plan for the future, it’s important to focus on the sort of life you want first – and then find the retirement solutions to fit with it. You can fund your retirement with more than just your pension savings so consider all of your options and don’t forget to include the State Pension.
  4. Don’t pay more tax than you need to
    Consider how you take money from your savings as it can affect how much tax you will have to pay. For example, spreading your income over different tax years could dramatically reduce your tax bill. And if you take some of your pension pot while you are still working, it is added onto your salary for tax purposes. Tax rules can change.
  5. Scams awareness
    We know you may be concerned about who to trust and making the right decisions when it comes to retirement. Unless you know or recognise the brand name or company, be cautious if you are offered a free pension review. A great starting place is your existing provider, employer etc.

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For further advice, please contact our Wealth Management team on 0191 285 0321.

Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority.

All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change

Tax planning is not regulated by the Financial Conduct Authority.

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