Bodmin - Essential 6-monthly Finance Directors' Update - June 2017

Bodmin Finance Directors’ Update
28 June 2017

pkf-francisclark.co.uk
Housekeeping
@pkfFrancisClark
#FDSeminar17

Staff update – newly appointed Partners
Lucinda Coleman became Business
Recovery Partner on 1 April 2017
• Licenced insolvency practitioner and
Company Voluntary Arrangements expert
• Joined PKF Francis Clark as a graduate
trainee in 2003
Jason Mitchell will become Partner on
1 August 2017
• Specialises in providing accountancy and
advisory services to the legal sector
• SRA Accounts Rules expert
• Provides a wide range of accountancy
services to SMEs across the region

Staff update – newly promoted Directors
Liam Dushynsky,
VAT Director, Exeter
Adam Kefford Corporate
Tax Director, Exeter
Katie Skea, Director,
Plymouth
Ian Pring, Tax
Director, Plymouth
Chris Watts, Tax Director,
Torquay (FCTC)
Jemima Fox, Tax
Director, Plymouth
Justin Gliddon, Director,
Plymouth
Frances Kingsnorth,
Director, Salisbury

James Barratt,
Director, Plymouth
Daniel Sladen, Tax
Director, Truro
Lisa Macpherson,
Tax Director & Head
of Tax Technical,
Poole
Martin Brown, Tax
Director, Taunton
(FCTC)
Staff update – newly promoted Directors

The technology of change
The world is changing rapidly
Area Example
Political More volatile and diverse political agenda
Social Generation X and millennials
Economy Changing market for debt funding
Culture Rise of social media
Technology Cyber security agenda

Changing cars
1950’s
1970’s
1990’s
2000’s
2010
Now

The iPhone and social media
Facebook Users9 models in 10 years

Internet use is changing
Remember dial-up?
10 fold increase in connectivity
speed in last 5 years?

People change
Millennials have a
different mind set

Change is everywhere, eventually
1990’s
1980’s
2000’s
Now

Programme
Cyber Security – Duncan Leslie
Current Issues in Financial Reporting – Stephanie Henshaw
VAT Update – Julie Towers
Corporation Tax Update – Holly Bedford
BREAK
Employment Tax Update – Holly Bedford
Pensions and Investments – Andrew Newcombe
Transactions and Funding – Richard Wadman
LUNCH

.
Summary
• What is cyber risk?
• Types and examples of cyber crime
• Facts on cyber crime
• Cyber security and SME’s
• PKF Francis Clark cyber security offering

.
What is cyber risk?
Cyber risk’ means any risk of financial loss,
disruption or damage to the reputation of an
organisation from some sort of failure of its
information technology systems
(source: institute of risk management)

.
Types and examples of cyber crime
Hacking, Malware/Spyware, ransomware,
phishing, spear phishing, DDOS
From our own clients common examples include:
• Ransomware
• Payment fraud/spoofing e-mail
• Malware and human error

.
Facts on cyber crime
• Humans are generally the weakest link in cyber
security
• British companies are reporting a 22% increase in
cybercrime in 2016 resulting in losses of more than
£1bn (source: getsafeonline)
• The UK’s 5.4 million small businesses are collectively
attacked more than 7 million times a year (source: Institute of
Directors)

.
Facts on cyber crime
• 90% of large and 74% of SME’s had suffered a
security breach (source: BiS)
• The cost of severe breaches are estimated as £1.46m-
£3.14m for large organisations (>500 employees) and
£75k-£311k for SME’s (source: BiS)
• General Data Protection Regulation (GDPR) May
2018 are new rules for processing personal data.
Loss of data can incur a fine of 4% of turnover or
€20m whichever is greater

.
Cyber security and SMEs
In summary:
• Low levels of Cyber Security in many SMEs
• General assumption that security is better than it is
• Lack of clarity and confusion about how to stop cyber
attacks
• ‘Flow Down’ of security requirements through supply
chains from larger to smaller companies often
unsuccessful leading to vulnerabilities for the whole
supply chain

.
PKF Francis Clark cyber offering
Background to Cyber Essentials
• Frustration from UK Government – many breaches
due to lack of simple controls
• Review of breaches over 4 years resulted in
identification of 5 key technical control areas
• IASME worked with UK Government to write Cyber
Essentials Requirements
• UK Government mandated them in many contracts

.
What’s involved in a cyber audit?
• Basic level Cyber Essentials - self assessment signed
off at Board Level and assessed by PKF Francis Clark
• Cyber Essential Plus includes an internal and external
vulnerability testing & onsite technical audit
• IASME Standard - this looks at more wide ranging
policies, procedures and GDPR aspects

.
• Next steps
• Further information from Richard Wilding
• Email: richard.wilding@pkf-francisclark.co.uk
• Speak to your normal FC contact

Topical issues in financial reporting
Stephanie Henshaw

Programme
• Dividends and distributions – tips and traps
following FRS 102
• Spotlight on intangible assets
• Web-based reporting - a new challenge for
business
• Company secretarial update

What do they have in common?
Next plc Betfair plc
Dominos
Pizza
Dunelm

Dividends and distributions
Identify
distributable
profits
Process where
last accounts
show insufficient
profit

FRS 102 item Realised profit? Comments
Investment property
fair value gains
No Until property is sold
Financial instruments
fair value gains
Potentially How easily can gain
be converted into
cash?
FRS 102: are fair value adjustments distributable?
General principles:
Distributions required realised profit
Losses are usually realised but not all profits are realised

FRS 102: Below market rate loans
Parent
Subsidiary
Discount element at market rate
Capital contribution in hands of
subsidiary at inception
Not distributable
Interest
free
loan £ £
Dr Cash 1,000
Cr Intra group
creditor (1,000
discounted at 5%)
784
Cr Capital
contribution (discount
at 5% over 5 years)
216
Parent lends subsidiary 1,000 interest
free for 5 years
Estimated market rate of interest is 5%
Entries in the books of subsidiary are:

FRS 102: Below market rate loans
Subsidiary
Parent
Fellow
Subsidiary
Interest
free
loan
Discount element at market rate
Deduction from retained profit of
subsidiary at inception
Realised loss
Subsidiary lends parent/ fellow
subsidiary 1,000 interest free for 5 years
Estimated market rate of interest is 5%
Entries in the books of lending
subsidiary are:
£ £
Cr Cash 1,000
Dr Intra group
debtor (1,000
discounted at 5%)
784
Dr Retained profit
(discount at 5%
over 5 years)
216

• No requirement in law or accounting standards to
disclose in accounts
• Directors need to know to avoid potential illegality (and
personal liability)
• Managing shareholders expectations
Keeping track of distributable profit

• Deals with FRS 102 impact
• Changes to definition of distributable profit are not retrospective
• New element: what constitutes a distribution in law
• Transfers of assets at undervalue e.g. sale of IP to parent co
• Assumption of liability e.g. giving of cross guarantees
• Significance of distribution definition
• If giver has distributable profits = none
• If giver has no distributable profit = potential problem, depending on imputed value of
distribution
• Important: clarification of definition of distribution is retrospective
• May impact legality of previous arrangements
• Potential commercial implications e.g. re: banking arrangements
• Corrective measures may be required
Updated guidance on distributions

Spotlight on intangible assets
• Historically
• Internally generated
intangibles not recognised
(except for development
expenditure and website
costs subject to conditions)
• Software costs – subsumed
within tangible assets
• Business acquisition or
combination – intangibles
rarely separated from
goodwill
• Under FRS 102
• Similar restrictions on
internally generated
intangibles
• Software costs – classified as
intangibles unless integral to
operation of physical asset
• Business acquisition,
combination or reconstruction
– recognise intangibles
separately from goodwill
except in limited cases

As part of acquisition or reconstruction….
Old Goodwill
Software
development
Trademarks
Licences
Patents
Customer lists
Contracts
Goodwill

• Market prices for similar assets
• Established valuation models
Valuation
methodology
• Management – skill set?
• Specialist valuer – expense?
Suitable
valuer
• Tax – for trade acquisition
• Impact on profit, EBITDA in consolidated
accounts
Other
implications
Practicalities

Triennial review of FRS 102:
proposed impact on intangibles
• Current conditions for
recognition
• Probability of economic
benefit and availability of
reliable values
PLUS
• Separable
OR
• Subject to contractual or
legal rights
• Proposed conditions
a) Probability of economic
benefit and availability of
reliable values
PLUS
b) Separable
AND
c) Subject to contractual or
legal rights
OR can choose a) only but
must be consistent for class of
assets

Web-based reporting: a new challenge
Business
information beyond
financial statements
Responding to
perceived abuses or
public pressure
New policies,
procedures and
systems of data
capture
Potential reputational
issues

Legislation Which entities When Where to report
Slavery and Human
Trafficking
Commercial
operations in the UK
AND
Turnover >£36m
Financial years
ending on or after 31
March 2016
Report within 6
months
On company
website
Link in prominent
place on home page
Gender pay gap Private and
voluntary sector
employers in GB
>250 relevant
employees on 5
April each year
Financial years
beginning on or after
6 April 2017
Report on gap on 5
April annually
Report within 12
months
Employers’
searchable website
accessible to
employees and
public
Retain for 3 years
Payment terms,
practices and
policies performance
information
Large UK
companies and
LLPs
(Turnover >£36m)
Financial years
beginning on or after
6 April 2017
Report 6 monthly
Report within 30
days
Web-based service
provided by
government
Summary of new requirements

• Already in force
• “Push down” impact on smaller entities
Modern
slavery
• Individual entity not group
• Establishing employee numbers
• Determining what is included in “pay”
• Gap = male v female as % average male pay
Gender
pay gap
• Individual entity not group (but conditions for
parent)
• Identify “qualifying contracts”
• Potentially extensive analysis
Payment
terms
Web-based reporting tips and traps

• New rules from 26 June for recording and notifying
information on PSCs (people with significant control)
• Notification becomes “events driven”
• Update PSCs register within 14 days of any change
• Further 14 days to file information with Registrar
• New forms PSC01 to PSC09
• Notification via Annual Confirmation Statement ceases
• Note: anticipated extension of PSC regime to AIM
companies
Company secretarial update

Topical VAT Issues
Julie Towers

Programme
• Brexit update
• International issues
• Cross company charges and VAT groups
• Property and pension schemes

29 March 2019
Likely that UK will leave the Customs Union as well as
the Single Market
UK will lose favourable trading status with EU and
non-EU countries
New trade agreements are likely to be put in place, but
likely to take years
Businesses who currently trade with EU should be
planning now for departure
Brexit update

Exports of goods from the UK to non-EU
countries are zero rated where
• Goods must be sent out of the EU within time
limits
• Hold official or commercial proof
• The proof must be obtained within the time
limits
International issues

Export of
goods
• Issue with proof where courier holds it on their
system
• Historically HMRC accepted
• HMRC now disallowing zero rating of exports where
trader does not hold proof within time limits
• It is not acceptable for the proof to be held by
courier unless trader has approved with HMRC
• Even if agreement sought, HMRC now query
whether trader can access historic information on
courier’s system

Registered
Exporters
(REX)
System
Preferential rates of customs duty for imports from certain
beneficiary countries
Goods must be accompanied by a Generalised System of
Preference (GSP) certificate form A
From 1 January 2017 new Registered Exporter System
introduced
Self-certification system
Exporters based in GSP countries will have to register with their
own authorities
Speak to suppliers if you import goods from GSP countries

Requirement for UK traders to register in the UK
where
• Raw materials exported to GSP beneficiary country for
incorporation and return to UK
• GSP goods re-consigned to other member states, Norway or
Switzerland
Register with HMRC online within 12 months of the
country of origin introducing REX
• Example – UK trader sending goods to India for incorporation and
return should register with HMRC by 31 December 2017
REX

Don’t forget to consider VAT
on charges made between
group companies or
companies under common
control
Normal rules apply to charges
made between entities unless
they are in a VAT group
Cross company charges

Don’t forget to account
for VAT
Date accounts
approved if no earlier
invoice or payment
Management
Charges
Directors’ services
subject to VAT
Common directors –
no supply where share
of director’s fees
recovered when one
company pays fees of
common directors
Directors

Joint contracts of employment
• No VAT on recharges where staff are jointly employed
and exact costs only recharged
• Must be clear that there is more than one employer
from contract of employment or letter of appointment
• Take legal advice if considering
• Beneficial for companies with exempt activities

Holding
company
Ltd Co 1
Sub Co
1
Sub Co
2
Ltd Co 2
Sub Co
3
VAT groups
100%100%
75%
100%45%

Holding
company
Ltd Co 1
Sub Co 1 Sub Co 2
Ltd Co 2
Sub Co 3
(Australia)
VAT groups
100%100%
75%
100%45%

Advantages
• No VAT intercompany
charges
• One VAT return
• Flexibility on members
Disadvantages
• Joint and several liability
• New VAT/EORI number
• Partial exemption
deminimis limit
• Voluntary disclosure limits
• Accelerate inclusion in
Payment on Account
scheme
• New self-billing
arrangements
VAT groups

Property and pension schemes
Holding
Company
Pension
Scheme
Trading
Company
Sale
Lease
Lease

Trading Company
owns and
occupies property
Pension Scheme
(property rental
business)
Sale
Lease

Third Party
Landlord
Pension
Scheme
Trading
Company
Sale
Lease
Lease

Trading
Company
Pension
Scheme
Sale
Lease
Third Party
(unoccupied
property)

Summary and practical points
• Pension scheme will be required to register for VAT if an option
to tax is made on the property
• For VAT purposes pension scheme registration is treated as a
partnership
• If the purchase is treated as a TOGC timing of Option to Tax
and VAT registration crucial
• Could Seller revoke option to tax?
• If the pension scheme has a mixture of opted and un-opted
properties it will be partially exempt
Property and pension scheme

And finally

Business tax update
Holly Bedford

• Philip Hammond still Chancellor of the Exchequer (wasn’t
expected to be)
• David Gauke replaced as Chief Secretary to the Treasury by
Liz Truss
• Jane Ellison is no longer Financial Secretary to the Treasury –
she lost her seat
• New Financial Secretary to the Treasury Mel Stride has
responsibility for HMRC & tax including Making Tax Digital
Election outcome – who’s who

• Government will struggle to pass tax legislation - majority too small
• Taxes more likely to rise
• Reduction in corporation tax rate to 17% already legislated (FA 2016)
• Labour likely to attack tax breaks for corporates
• Conservative MPs likely to be seeking re-election soon so won’t stick
their necks out
Election outcome – how it looks at the moment

• Corporation tax:
• Substantial Shareholdings Exemption (SSE)
• Interest restriction
• Changes to tax losses
• Will Labour/SNP look to challenge proposals now?
• R&D tax reliefs
• Making Tax Digital – still on track?
Big business tax stories

• CT exemption on disposals of shares by companies
• New conditions from 1 April 2017 - not in pre-election FA
• Meant to help institutional investors
• Uncertainty as to the new rules’ impact on business sales
• Was an issue before the election but now a bigger issue
• Safest to use a solution that worked under the old rules for now
• Clearance is possible
Substantial shareholdings exemption (SSE)

Substantial shareholding extension
(from 2 to 6 years)
• At least 10% for a 12m period starting no more than six years before
the disposal
• Easier to sell shareholdings in multiple tranches
6 years
-25% - 5%
12m 5 years
1.1.17 31.12.17 31.12.2022
• i.e. sell shares 31.12.2017, reduces stake from 25% to 5%
• SSE available during 5 year period as held >10%, for 12 months, in
last 6 years

• Investing company – trading requirement for before & after sale
removed
• Investee company – need only be trading prior to disposal (trading
requirement after sale removed)
• Trading status post sale has been an issue for years
• Under the old rules there is a liquidation exemption
• Many deals – large and small – held up
• Careful thought required to get the deals done
SSE – trading status

.
Corporation tax – interest restriction
• Announced as effective from 1 April 2017 - Draft
legislation still has flaws
• Net interest limited to greater of:
• De-minimis £2m
• Fixed ratio: 30% of the tax EBITDA (default)
• Group ratio: net third party interest expense/ tax EBITDA
(election)
• Group election possible

ABC Ltd has a net interest expense of £3m for the year
ended 31 March 2018. Tax EBITDA is £4m. 30% of
EBITDA = £1.2m.
Interest needs to be restricted as
• Net tax interest expense’ (£3m) > interest capacity (min
£2m)
• Disallow excess of £1m (£3m - £2m)
• Carry forward £1m to use in future if spare capacity
Corporate interest restriction example

In the year ended 31 March 2019 net interest expense is
£1.5m. Tax EBITDA is £9m. 30% of EBITDA = £2.7m.
This gives rise to spare capacity as
• Net tax interest expense’ (£1.5m) < interest capacity
(£2.7m)
• Spare capacity £1.2m (£2.7m- £1.5m)
• Allowable interest is £2.5m (£1.5 + £1m)
• Spare capacity to carry forward is £0.2m (£1.2 - £1m)
Corporate interest restriction example (cont.)

• Generally a big company issue BUT…
• Low profitability companies with big debts at
unfavourable interest rates
• Property developers
• Crowdfunded companies
• What if interest rates go up?
• Could de-minimis be reduced?
Corporate interest restriction – where are we seeing this?

.
Corporation tax - losses
• Announced as effective from 1 April 2017
• Loss relaxation
• All types of carried forward losses available to set off against all
types of profits
• Carried forward losses (rather than only current year losses)
available for group relief
• Loss restriction
• Impacts group profits above £5m
• Subject to £5m group allowance
• Profits against which brought forward losses may be relieved
restricted by 50%
• Losses incurred pre 1 April 2017 continue to be subject to existing
restrictions

• Deferred tax: more loss flexibility – justify recognising an
asset?
• Losses less valuable in future with tax rate falling?
• Capital allowances – consider disclaiming in loss making
company in order to shift losses to post 1 April 2017
Corporation tax losses – what to think about

• Very favourable tax break and likely to continue
• Support for investment in R&D post Brexit (maybe
without state aid rules)
• Many claims missed out on due to lack of awareness
• Not just for niche sectors - is intended to be applied to
any industry
• Large R&D team at PKF Francis Clark
R&D incentives – make the most of them

• SMEs
• Tax relief on allowable R&D is 230%
• £4,600 tax saved for £10,000 of spend
• Repayable tax credit of 14.5% on R&D losses - net saving of
33.5% on qualifying R&D spend
• Advanced assurance scheme – first three claims not subject to
enquiry
• Large companies
• Research and development expenditure credit scheme – RDEC
• Taxable credit of 11%
• Net saving of 8.8% on qualifying expenditure
• Receive a tax credit – ‘above the line’
R&D incentives

• Fundamental changes to tax system
• Ambitious plan with ambitious timescale
• Staggered timescale
• Quarterly updates
• Corporates & large (>£10m partnerships) from April 2020
• End of year adjustment - ten months after the year end/31 January
• Inconclusive general election effect on roll out of MTD?
Making tax digital (MTD)

.
Making tax digital (MTD)
• Online banking/payroll/RTI
• IT systems (BA systems and NHS)
• Pilot is currently behind schedule
• Australia has a digital tax system
• PKF Francis Clark investing in cloud solutions for MTD & in touch with PKF Australia
• Communicate to HMRC via Digital Tax Account (DTA)
• DTA replaces tax return • View tax affairs in real-time
• Single view of all taxes, CT,VAT,PAYE • Data from third parties
• Link accounting software to DTA • Agent access

Employment taxation update
Holly Bedford

Programme
• Self-employment under attack?
• Workers providing services to the public sector
• Apprenticeship levy
• Incentivising employees
• Salary sacrifice changes
• Employee shareholder shares
• EMI update

• Driver for self-employment is employment rights
• Employment law - self employed, worker or employed
• Tax - self-employed/employed only - worker can be either
• Worker status being encouraged
• Matthew Taylor review
• Labour Manifesto (page 51):
• employment status review commission
• assumption that a worker is an employee
• all workers to have employment rights
Self-employment under attack?

• IR 35 hasn’t worked
• New measure in Finance Act 2017 - effects intermediaries caught
by IR35 where end-user is a public authority
• Onus on public sector body to decide status, pay tax and NIC
• Applies to payments on or after 6th April 2017
• Employment rights not affected
• Ties into the online employment status tool
• Guidance on Gov.uk
• Practically cumbersome
• Shape of things to come?
Workers’ services provided to public
sector through intermediaries

• Subject to Freedom of Information Act
• Schedule 1 – very long list
• Includes:
• Local authorities
• NHS
• Armed forces
• Ofsted
• BBC & Channel 4
Meaning of public sector

• Newspaper headlines on changes in NHS – suggestion
employees wouldn’t work for the pay on offer
• Likely outcome is that self-employed individuals have to
become employees
• Do you have disguised employees?
• EG - marketing consultants/IT consultants etc
• Review and assess financial impact
• Who is carrying the risk of a re-classification?
• Jump before being pushed?
What is your businesses financial exposure?

Example of tax impact only – 2017/18
Employed Self employed
Worker
Income 50,000 50,000
Income tax (8,700) (8,700)
NIC (4,523) (3,562)
Net income 36,777 37,738
Company
Payments to worker 50,000 50,000
NIC 5,773 0
CT relief at 19% (10,597) (9,500)
Total expense 45,176 40,500

• Is the worker getting more income than if employed on a
salary?
• What are the contractual terms?
• Who is taking the tax risk?
• Exposure on a single worker isn’t great but what if multiple
individuals over many years
• Documentary evidence of considering the position a useful
defence
• Take advice
• PKF Francis Clark have a specialist employment status
team
Who gets the tax saving?

Paying the apprenticeship levy
• From 6 April 2017 – via Government Gateway
• No change where apprenticeship started pre 1 May 2017
• Annual payroll bill >£3m
• Levy 0.5% of payroll bill
• Government top up by 10%
• Accumulates in DAS account (recovered through
apprenticeships training)
• £15,000 allowance available to offset the levy
• Means an annual payroll bill < £3m – no levy
• < 2% of employers will pay
• Apprenticeships co funded (government pays 90%)
• Connected payrolls – one £15,000 allowance

Each apprenticeship has an allocated band value which
determines the levy recoverable
• 15 bands which range from Band 1 (£1,500) to Band 15
(£27,000)
• E.g. two apprenticeships in band 10, recover £54,000
• Employers to negotiate a price
• If insufficient funds in DAS account – excess is co funded up to
band level
• Costs over funding band limit – employer pay in full
Paying the apprenticeship levy

• Review current payroll costs
• Impact of future cash flow forecasts
• Review current recruitment/employment structures
• Need the right apprenticeship programme
• Enter into the agreement
• Put in place a training provider
• Maximise use of government top ups
• Penalties for non – compliance
• Guidance on Gov.uk
Benefiting from the apprenticeship levy

• Salary sacrifice rule changes from 6 April 2017
• Amount subject to income tax and NIC is the higher of
amount sacrificed or the BIK value
• Loss of income tax and NIC advantages
• No change to childcare, cycle to work & mobile phones
• Pension arrangements unchanged for now
• Income tax benefit on car schemes, car parking & vouchers
removed
Salary sacrifice arrangements

• Transitional provisions mean previous exemptions kept in
place until earlier of 6 April 2018 or the date of variation
of terms
• Review salary sacrifice arrangements
• Review automated processes
• Update contracts of employment?
Salary sacrifice arrangements

• The tax advantages awarded under employee shareholder
status (ESS) abolished if entered into after 1 December 2016
• Whole status likely to be abolished in near future
• Previous exemptions (now abolished);
• NIC/ IT on first £2,000 of shares issued
• CGT on gains made on first £50,000 of shares (£100k cap)
• Now assessable on full market value of shares on award
• Was all about employment rights
• Alternative methods to incentivise staff?
Employee shareholder shares

• Be aware of fair value pitfalls - especially for leavers and
on buy backs
• Long running saga of Rangers Football Club (Murray
Holdings) EBT planning coming to an end – take action
by November 2019
• EMI remains a hugely tax efficient incentive and retention
tool (subject to qualifying conditions)
• There are alternatives to EMI e.g. growth shares
• PKF Francis Clark specialist reward team headed up by
Martin Brown
• It is Form 42 time again!
Long term employee incentives

Financial Planning
Andrew Newcombe

Programme
• Pension Lifetime & Annual Allowance tax issues
to be aware of
• The Pensions Dashboard – what is it and will it be
useful?
• Pension Freedoms 2 years on, how the market
has adapted and options that have emerged for
savers
fcfp.co.uk

• Lifetime Allowance now reduced to £1m
• Fixed & Individual Protection 2016 still available
• Beware of Defined Benefit pensions
• MPAA was going to be reduced to £4,000p.a.
now deferred because of GE
• Age 75 – warning – pension assets retested
against Lifetime Allowance
Lifetime and Annual Allowance

• Available 2019
• See all your pension plans in one place
• And your State Pension estimate
• Login via Government Gateway
• All pension providers have to comply
• Will assist with retirement planning for individuals
– also benefit employers
Pensions Dashboard

Pensions Dashboard

.
Pension Freedoms 2 years on
A brief recap on what they are
• Leave your pension pot untouched
• Purchase an annuity
• Take a variable income (flexi access drawdown)
• Take the whole pot as a lump sum or series of lump
sums (known as UFPLS – uncrystallised funds
pension lump sum)
• Take a combination of the above

.
Pension Freedoms 2 years on
Death benefits also changed
• 55% tax charge on death when in drawdown removed
• Majority of pension funds exempt from IHT whilst
assets remain in the pension plan
• Nominee & successors drawdown introduced
• Death before 75 – beneficiaries can access unused
pension fund with no tax consequences
• Death after 75 – beneficiaries pay tax on withdrawals
from deceased's fund at their marginal rate

.
Case Study – flexibility in action
John & Sarah Weary
• John (55) & Sarah (55) are married with 2 (almost)
non-dependent children
• They would like to retire in 5 years at age 60
• They have identified a need for £30,000 per annum
net income to meet core living costs
• They have various assets and sources of income
available to provide for them in retirement

.
Asset Value
Main Residence £500,000
Cash Deposits £75,000
John Investment ISA £100,000
Sarah Investment ISA £75,000
John Pension Assets £275,000
Sarah Pension Assets £125,000
• Sarah also has a preserved final salary pension
payable at age 67
• They both qualify for full State Pensions at age 67
John & Sarah Weary

.
John & Sarah Weary
They have a number of concerns:-
• Will our assets be sufficient to provide the
income/lifestyle we desire?
• How do we bridge the gap between retiring at 60 and
our State Pensions/Sarah’s final salary pension
starting at 67?
• How can we adapt our requirements if circumstances
change?
• How do we minimise risk when drawing down on our
assets?

.
John & Sarah Weary
We follow their retirement through 4 stages to
demonstrate the power of pension flexibilities
1) Immediate actions
2) Age 60
3) Age 67
4) John’s death at age 82

.
John & Sarah Weary
Stage 1 - Immediate Actions
• Existing pension plans were replaced as they didn't
provide for pension freedoms flexibility
• Investment strategy was revised to align with their own
risk tolerance comfort level and timeframe
• Cashflow forecasting was carried out to establish if the
funds could realistically provide the identified income
• A Strategic Plan was produced mapping out the
strategy for the next 3 stages

.
John & Sarah Weary
Stage 2 – Age 60
• Both retire, now time for the flexibility of the pension plans
to kick in
• £30,000 per annum required for 7 years
• Each immediately drew £15,000 of their pension funds
• 25% (£3,750) tax free, remaining £11,250 fell within their
Personal Allowance
• This was repeated for 6 more years
• Zero tax payable as only other income was deposit
interest which fell within Personal Savings Allowance

.
John & Sarah Weary
Stage 3 – Age 67
Income Source Amount
John State Pension £9,947
Sarah State Pension £9,947
Sarah Final Salary Pension £12,000
Total Net (assuming £15k P.A) £30,505
• They now require £40,000 per annum net income due to inflation
eroding purchasing power
• John’s private pension pot now worth £322,000
• Sarah’s private pension pot now worth £82,000
• The gross income shortfall is £10,605 per annum
• This is taken as a withdrawal from John’s private pension
equating to 3.29% of the fund

.
John & Sarah Weary
Stage 4 – Age 82
• Sadly John dies at age 82, Sarah is still in reasonable
health for her age
• John had nominated Sarah and their children as
potential beneficiaries on his pension fund
• The fund is now worth £367,210
• Sarah’s private pension fund remained untouched post
age 67 and is now worth £147,000

.
John & Sarah Weary
Stage 4 – Age 82
• Cash reserves have been depleted to pay for holidays,
car changes and property expenses and now stand at
£20,000
• They had been drawing £7,500 p.a. from their ISAs
since age 60 to defray the extra expenses
• Sarah has inherited John’s ISA and the combined ISA
value is now £248,000

.
John & Sarah Weary
Stage 4 – Age 82
• There is an income shortfall for Sarah of £15,000 p.a.
• She decides to draw down this entire shortfall from the
ISA portfolio as it would potentially be subject to 40%
IHT on her death
• Using flexible pension death benefits she decides to
‘step aside’ as a beneficiary of John’s pension and the
entire fund is split 50/50 between the children
• The children are now in their early 50’s and this
enables them to consider earlier retirement

.
John & Sarah Weary
Reducing volatility is key when drawing down

.
John & Sarah Weary
Have we met their concerns?
• Will assets be sufficient to provide the income/lifestyle
we desire? Cashflow forecast confirmed feasible
• How to bridge the gap between retiring at 60 and State
Pensions/Sarah’s pension starting at 67?  Flexible
access drawdown
• How can we adapt our requirements if circumstances
change?  Varied pension income and passed on
John’s fund to children
• How do we minimise risk when drawing down on our
assets?  Tailored investment approach

No responsibility can be accepted for any action taken as a result of information contained in this presentation. We therefore strongly
recommend that no action should be taken before obtaining detailed professional advice.
Past performance is not a guide to future returns and the value of investments and income from them may go down as well as up and an
investor may not get back the amount invested.
PKF Francis Clark Financial planning and wealth management is a trading name of Francis Clark Financial Planning Ltd which is authorised
and regulated by the Financial Conduct Authority. Registered Office: Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF.
Registered in England No. 05413603.
Francis Clark Financial Planning Ltd is a member firm of the PKF International Limited network of legally independent firms and does not
accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
Exeter | New Forest | Plymouth | Poole | Salisbury | Taunton | Torquay | Truro
Disclaimer & copyright
fcpp.co.uk

Transactions and Funding changes
Richard Wadman

Programme
• The evolution of Due Diligence
• Alternative Finance and Mini-bonds
• Models misbehaving

It’s used when Funders or corporate acquirers want to
‘check out’ the asset that they are thinking of acquiring
Due Diligence
Old style:
• Full investigative team on site
• Carried out over many weeks
• Overt, via direct questions
• Selective areas viewed
Current/Future:
- Limited or none
- Can analyse data in seconds
- Covert via dataroom
- ALL data can be seen

This refers to qualitative and quantitative techniques
and processes used to review data to identify:
• patterns and trends
• relationships between data
• exceptional items
This is generally to drive business strategy, enhance
productivity and achieve competitive advantage
Data analytics

• Used to gain an independent view of the financial and
non-financial data
• Can highlight unusual activity
• Excellent for trend analysis
• May identify opportunities…and issues
BUT
• Can give misleading views if explanations are not considered
Data analytics in Due Diligence

How to approach it:
• Accept huge data access/confidentiality issues – or restrict it
• Recognise that it is difficult to hide matters
• Undertake your own review beforehand or Vendor DD
• Ensure that explanations are prepared and thought through
DA in DD is in its infancy – wrong conclusions will be reached
Data analytics in Due Diligence

“Financial instruments that have emerged outside
traditional channels”
Peer-to-Peer (P2P) and Crowdfunding – Debt and Equity
But there has also been a broader change with:
• Limited and distinct types of finance becoming blurred
• A continuum with even debt and equity becoming mixed
Alternative Finance

Debt market continuumABL
CorporateLoan
ABL+
StretchedSenior
HighYieldMezz
UniTrancheDebt
ThinCapLeveragedBuyOut
Traditional credit – yield & fees Total return – yield & equity
Debt
quantum
Cost
Serviceability and asset security Future value/incentivisation and
bullet repayment

Alternative Finance - example providers

Alternative Finance - growth

UK – by Jan 2017 > £7 Billion
Now > £10 Billion Global - > £100 Billion
Funding Circle - £2.2 Billion (since 2010)
Wellesley £429m
Minton E190m (since 2015), 63 countries
Growth – 67% in 2016
Innovative Finance Individual Savings Account (IFISA) will
support further growth in 2017
Alternative Finance - scale

• Some start at 3%
• Many from 7%
• Numerous are > 10%
Fees for Borrowers 1% - 5%
Generally far higher than traditional finance, but the risk
profile of the Borrower is often higher
Alternative Finance – rates for Lenders

• Often fixed term debt (1, 3, or 5yrs) with a fixed interest rate
• Mini-bonds - not-listed on the SE ‘ORB’ service, non-
tradeable, with no Financial Services Compensation Scheme
• Hotel Chocolat, Naked Wines, John Lewis, and the Eden
Project have all issued bonds
• Interest rates often 5% - 9% (10% gross in wine credits!)
• Retail bonds - £3.5 Billion raised on ORB so far, no SD
• Retail Charity bond (5% 2026), Paragon Group (6% 2024),
Premier Oil (5% 2020)
Mini-bonds and Retail bonds

• Generally suited for higher risk, smaller issues
• Either using brand name or paying high coupon
• Total cost (interest, fees, issue costs and Management
time) often far higher than traditional debt
• But, can be much faster (e.g. P2P/Bank)
• Often could be refinanced later on at a lower rate
Alternative Finance - summary

• Can you trust them?
• Do they have a life of their own?
• Familiarity can mean that they are not regularly checked
• Are they safe?
• Bad habits can creep in
• How many tabs are you keeping on them?
• Are they fit for purpose?
Models misbehaving

• Used daily to support a wide range of business decisions
• Also reviewed by Funders and Acquirers
• Start with the strategy, plan, words & big picture – then
build in the numbers!
• Errors can have wide implications
• Output should be ‘sense-checked’
Financial models

Some errors are obvious and will be highlighted to you,
others can be more subtle and need checking:
• Incorrect formulae/arithmetical errors
• Sign (+/-) incorrect
• Including subtotals
• Hard coded input
• Incorrect links to other input files
Financial models – common errors

• Don’t be deceived into thinking the more granular your
assumptions are, the more accurate your model will be
• Inaccuracies can appear trivial at a granular level but be
significant in aggregate
• So stand back and look at the overall output
• E.g. - one model audit noted that sundry expenses were
calculated down to the cost per staff member of a
Christmas bottle of wine, but £’000 Corporation tax was
paid in the wrong month…
Financial models – false accuracy

• Consider starting afresh – it’s often quicker
• Include an instructions page
• Always have an input page – no hard coding
• Try and keep inputs in one place, not spread across several tabs
• Assumptions to be documented
• Include checks and use model audit tools
• Have it independently reviewed
• Sense-check it
Make sure that there is suitable narrative to support it – numbers
by themselves are often meaningless as there is no context or
explanation
Financial models – good practice

• Simple annual inflation…
• Both sets of numbers and formulas below are EXACTLY the same,
however the decimal points are hidden (not rounded)
Financial models – decimal errors…
• Excel setting ignored decimal points
• In a recent model review, compound error >£250k by final year
• A very technical error, BUT spotted during a high level review
1% inflation
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 year 7 Year 8 Year 9 Year 10
40.0 40.4 40.8 41.2 41.6 42.0 42.4 42.8 43.2 43.6
1% inflation
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 year 7 Year 8 Year 9 Year 10
40 40 40 40 40 40 40 40 40 40

• Be prepared for Data Analytics and use it when suitable
• Consider Alternative Finance, but evaluate it appropriately
• Financial models – have a good starting point, ensure they
are reviewed before they go outside the Finance function
.......and finally,
consider the unexpected!
Summary

• Plymouth - Tuesday 7th November, Plymouth Science Park
• Exeter - Wednesday 8th November, Exeter Racecourse
• Taunton - Tuesday 14th November, Somerset County Cricket Club
• Bournemouth - Wednesday 15th November, AFC Bournemouth
• Bodmin - Wednesday 22nd November, Lanhydrock Golf & Country Club
November FD Seminars

(c) copyright PKF Francis Clark, 2017
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PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered
number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for
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does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
Disclaimer & copyright

Bodmin - Essential 6-monthly Finance Directors' Update - June 2017

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