Bodmin - Essential 6-monthly Finance Directors' Update - November 2017
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Our six-monthly Finance Seminars provide an overview of the most important technical developments in financial reporting and taxation. The seminars address the key topical financial matters, the opportunities they present, how they affect your business and the pitfalls you can avoid. Following the brief look at cyber security during our last round of events, our cyber team will be examining the issues we are finding in practice from the work we are doing with clients. We will also assess the impact of the upcoming GDPR legislation coming into force on 25 May 2018.
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Bodmin - Essential 6-monthly Finance Directors' Update - November 2017
- 1. Duncan Leslie, Corporate Partner Chair’s welcome
- 3. The Role of the FD Finance Custodian Operational Leadership Execution Insight ServiceChange Finance Oversight
- 5. Friendly Food Ltd - background • Niche luxury pet product business • Makes and sells expensive treats for pets • Historically UK only through pet shops • Started as food treats but now also toys and accessories • Rapid expansion through web sales • Expanding overseas in US, China and Northern Europe • Owned by Kat (85%) and Fred (15%) – they are unrelated • Kat is looking to retire in the next 2 years, Fred within 5 years • Second tier management are strong • They may have some overseas employees in the near future • Manufacturing and refrigerated storage is energy intensive
- 6. Friendly Food Ltd - financials FY18 Budget £’000 FY17 Actual £’000 FY16 Actual £’000 FY15 Actual £’000 Sales 33,000 24,000 19,000 16,000 Gross profit 12,000 9,000 7,500 6,500 GPM 36% 37% 39% 41% Net profit 1,900 1,400 1,100 1,000 Net margin 5.8% 5.8% 5.9% 6.3% Cash 5,400 3,600 2,500 1,500 Net assets 7,900 6,100 5,000 4,000 P+L reserves 7,800 6,000 4,900 3,900
- 7. Programme Topic Speaker FD role Financial reporting update Stephanie Henshaw Custodian Cyber security Richard Wilding Custodian Topical VAT issues Julie Towers Operational Brexit Duncan Leslie Leadership Business tax update Daniel Sladen Leadership Auto enrolment & payroll update Michelle Willcock Operational Energy & sustainability Andy Thornhill Execution Management buy out Paul Crocker Execution
- 8. 8 Stephanie Henshaw, Corporate Partner Financial reporting update
- 9. Programme • FRS 102.2: what to expect from the forthcoming update • Keeping on top of intercompany accounts • Spotlight on share buybacks • PSCs: are you making notifications on time?
- 10. FRS 102.2: Where are we now? FRS 102 • Current version FRED 67 • Incremental improvements FRS 102.2 • Periods beginning 1/1/19 onwards
- 11. Summary of expected changes • Policy choice introduced: fair value or depreciated cost • Option to use FV as deemed cost on transition rather than prior period reversal of value Intra group property rental • Removal as part of accounting policy process • Example impact: must split mixed use property between investment and operating elements Undue cost and effort • Confirms exemption from discounting for loans TO small companies by director-shareholders and their close families • No extension to non-small entities or intra group loans Non-market rate loans
- 12. Summary of expected changes • Relaxation of separate recognition of intangibles on acquisition • Separation is policy decision on first acquisition – choose wisely Goodwill and intangibles • New description of “basic” (non FV) financial instrument to support detailed conditions Financial instruments • Reintroduction of Net Debt reconciliation • No separate key management personnel compensation when only KMPs are directors Disclosure changes
- 13. Forthcoming changes under IFRS • Periods beginning on or after 1 January 2018 • Requires detailed analysis of contracts to determine when and how much turnover to recognise • Restatement of prior year profit in some cases IFRS 15: Revenue • Periods beginning on or after 1 January 2019 • Requires lessees to bring all leases on balance sheet • Restatement of prior year balance sheet and associated profit impact IFRS 16: Leases
- 14. Illustrative example: IFRS 16 impact Current rules £000s IFRS 16 £000s Property plant and equipment 2,500 Includes future lease obligations 4,250 Current assets 3,500 3,500 Current liabilities (3,000) Includes 12 months lease rentals (3,350) Net current assets 500 150 Non- current liabilities (1,500) Includes 4 years lease rentals (2,900) Net worth 1,500 1,500 Note to accounts Operating lease commitment (5 years x £350k) 1,750
- 15. 15 UK to IFRS convergence? • Originally FRC proposed triennial reviews of FRS 102 (2019,2022,2025 etc) • Now awaiting practical implementation experience of IFRS 15 and 16 before reviewing • FRS 102 not intended to mirror IFRS exactly or automatically • Watch this space….
- 16. In the meantime…. Companies with significant operating leases, especially property: • Consider potential impact on bank covenants of bringing leases onto balance sheet • Covenants incorporating movements in creditors • If negotiating new funding and covenants consider • Right to adjust back to “old rules” if accounting rules change • Right to revisit covenant thresholds without triggering repricing • IFRS 16 - affected companies having lengthy discussion with banks already
- 17. www.website.com Keeping on top of intercompany accounts • Interdependence of many group companies • Efficient use of cash and resources • Tax mitigation via management charges • “Housekeeping” tips • Intra group waivers – points to watch
- 18. Good housekeeping matters… Control and transparency Regular reconciliations Clearing down balances – avoids risk of unrealised profit Controlling currency differences Separate longer term funding and trading elements
- 19. Intra-group waivers • Formal release from liability, not provision for doubtful debt • On reorganisation, before disposal of subsidiary • To reflect reality of investment by parent • Recognition in accounts when release occurs • Plan in advance • Documentation
- 20. Intra group waiver: parent to subsidiary In parent’s books • Dr Cost of investment • Cr Intra group debtor Note – may need to consider impairment of investment balance if NAV of subsidiary < cost of investment In subsidiary’s books • Dr Intra group creditor • Cr Reserves Note – generally accepted practice is that waiver of loan is form of capital contribution therefore cannot include in profit for the year
- 21. Intra group waiver: subsidiary to parent In subsidiary’s books • Dr P&L Reserve • Cr Intra group debtors Note: waiver is form of distribution so must be shown as part of equity. More importantly, cannot waive unless subsidiary has sufficient realised profit to cover waiver In parent’s books • Dr Intra group creditor • Cr Distribution received – via P&L Distribution may not be realised profit unless waiver represents release of liability in relation to cash advanced. E.g. waiver of debt for transfer of property = unrealised profit
- 22. www.website.com Spotlight on share buybacks • Mandatory redemption or ad hoc repurchase • Contractual, take out minority shareholder, provide partial exit route for majority shareholder • Key legal requirements • Distributable (realised) profit • Capital Redemption Reserve • Consequences for failures in process • Penalties for late filing • Ineffective buyback – impact on disposal of company!
- 23. Sufficient distributable profit? Last annual accounts £000s Distributable? Share capital 50 No Share premium 2,000 No Revaluation reserve 2,700 Only if distribution involves revalued asset Profit and loss account (includes £900k fair value gains) 1,350 £450k – yes £900k – probably not Shareholders’ funds 6,100 Also consider: 1. performance since last annual accounts 2. Changes to accounting policy or adjustments affecting opening reserves Company wants to buy back 10,000 shares for £500,000
- 24. What if insufficient distributable profit? Which is most appropriate? Dividend up from subsidiary Capital reduction (share premium, CRR) Bonus issue from revaluation reserve, then capital reduction
- 25. Capital redemption reserve • Potential consequence of buyback or repurchase • Hold uncancelled shares in “treasury” – separate debit line on balance sheet • Cancel shares • Nominal value of cancelled shares is transferred to Capital Redemption Reserve • Applies irrespective of where shares were classified on the balance sheet i.e. as debt or equity
- 26. Illustrative example: buyback with capital reduction £000s Capital reduction Revised balance sheet Buyback £000s Net assets 6,100 6,100 (500) 5,600 Share capital 50 50 (10) 40 Share premium 2,000 (1,000) 1,000 1,000 Revaluation reserve 2,700 2,700 2,700 Capital redemption reserve 10 10 Profit and loss account – realised 450 1,000 1,450 (500) 950 Profit and loss account - unrealised 900 900 900 Shareholders’ funds 6,100 6,100 5,600 Company wants to buy back 10,000 shares for £500,000
- 27. 27 PSC notifications Persons with significant control • From 26 June – “events driven” notification • Update PSC register within 14 days of change • Notify registrar within further 14 days (forms PSC01-09) • Notification via Annual Confirmation Statement has ceased • Importance of updating share register promptly for changes - prima facie evidence of title to shares, dividend entitlement etc
- 28. www.website.com Audit reports • Revised format for periods beginning on or after 17 June 2016 • Reordered and expanded wording • Specific reference to going concern where no issues…. • See example handout
- 29. 29 Stephanie Henshaw, Corporate Partner Financial reporting update
- 30. 30 Richard Wilding, Head of cyber security Cyber Security
- 31. Cyber Crime is growing • Cyber criminals have huge technical know-how. Far superior to most legitimate businesses. • Businesses are often oblivious to the threat that results from their lack of cyber security. • A company doesn’t have to have a transactional website to be vulnerable. • Many SME’s possess intellectual property that has significant financial value to cyber criminals
- 32. Current risks and threats Current examples: • AA, NHS, Deloitte hack, Equifax • Ransomware, malware, fictitious e- mails, requests for changes to master files
- 33. www.website.com Fred the FD as custodian • Fred is concerned about cyber security and its risk • Fred feels he should do something and would like some more comfort • Awareness/training, policies/controls and audit
- 34. Awareness and training • Human error is often the weak link • Establish a staff induction process (not a one off exercise) • Maintain user awareness of the security risks faced by the organisation • Monitor the effectiveness of security training
- 35. www.website.com Controls/policies Policies Controls Produce a user security policy Include in employment contracts Online payments Supplier detail changes Passwords
- 36. Giving the company and FD comfort/assurance • Cyber Essentials • Cyber Essentials PLUS • IASME accreditation
- 37. Cyber Essentials • Self-assessment questionnaire for the company to complete • Covers 5 key areas/71 questions • We provide upfront assistance (1.5 days needed) to support how to complete and progress • It is submitted via a secure portal for us to assess • Basic vulnerability scan performed • Assessor feedback provided • Once successful can use the Cyber Essentials logo for 12m • Limited insurance provided/can help reduce further cyber insurance
- 38. Cyber Essentials PLUS • We audit and test the 5 key control areas • Includes detailed vulnerability and limited penetration testing • A report is then issued • Once successful can use the Cyber Essentials PLUS logo for 12m • Can help to reduce cyber insurance further
- 39. General Data Protection Regulations 2018 • What is GDPR? • What are the consequences – 2 levels? Higher of up to 20m Euro’s/4% of global turnover Higher of up to10m Euro’s/2% of global turnover • What should I do?
- 40. IASME (Information Assurance for Small and Medium Enterprises) • IASME – two levels standard and gold • 180 questions (including those in Cyber Essentials) • Includes GDPR specific questions • Akin to ISO27001 • A report is then issued • Once successful can use the IASME logo for 12m
- 41. www.website.com Next steps • See brochure in pack • Complete form • 6 December cyber event • Contact your PKF Francis Clark adviser or e-mail: cyber@pkf-francislark.co.uk
- 42. 42 Richard Wilding, Head of cyber security Cyber Security
- 43. Julie Towers, VAT Partner VAT update
- 44. VAT “It is a matter of life and death, a road either to safety or to ruin. Hence it is the subject of inquiry, which can on no account be neglected” - Sun Tzu, The Art of War
- 45. VAT “I think I got it wrong again…” - Dick Emery, Actor, comedian, philosopher
- 46. 46 VAT - Agenda • What’s new? What’s changed? • Top 10 Tips, Tricks, Twists & Trips…in 20 mins!! • Whisper it…Brexit
- 47. www.website.com VAT – What’s New? Disbursements • Brabners case • Re-charge of e-search fees • No VAT on cost • Re-charged to customer with no VAT • HMRC view: component of taxable supply • Tribunal agreed • Assessment upheld £78k • History relevant to legal firms, BUT…principles are generic
- 48. VAT – What’s New? Disbursements (cont.) So what is a disbursement? • Agent is authorised & acting for client in paying 3rd party • Client actually receives & uses the goods/services • Client is responsible for paying the 3rd party • Client aware that goods/services being provided by 3rd party • Agent’s outlay must be separately itemised, and… • Must recover only the exact amount paid to 3rd party • Goods/services must be clearly additional to agent’s supplies
- 49. 49 VAT – What’s New? Disbursements (cont.) How does this affect me? • Be clear as to whether cost is component or addition • Where qualifies, either: o Gross in/gross out; or o Reclaim/recharge VAT • Issues only when treatment changes: In → Out
- 50. www.website.com VAT – What’s New? Goods vs Services • Mercedes Benz Financial Services CJEU case • ‘Agility’ optional purchase scheme • Agreement end – options: o Purchase car (final payment) o Return Car o Commence new agreement • Found: o C. 40% final payment to purchase o C. 50% customers opted to purchase
- 51. 51 VAT – What’s New? Goods vs Services (cont.) • Historic treatment: o Supply of goods o FULL VAT due at outset • Ruling: o Supply of services o VAT due on each payment • Impact o VAT cash-flow → Supplier o VAT recovery (part) → Customer…?...NO!!
- 52. VAT – Top 10 Tips, Tricks, Twists & Trips 1. Business Mileage • Pence Per Mile (PPM) Paid for business mileage • HMRC accept proportion as ‘fuel’ • AA tables can be used…or • Apply 1/3rd !* • VAT recoverable @ 1/6th • Fuel receipts should be retained… • Can go back four years *100% where company car
- 53. www.website.com 1. Business Mileage - Example • Friendly Food Ltd: o 40 sales staff o Avge 15,000 business miles each pa. o Mileage rate @ 45ppm • VAT recovery: VAT = 15,000 x 40 x £0.45 x 1/3rd x 1/6th VAT = £15,000 VAT – Top 10 Tips, Tricks, Twists & Trips
- 54. VAT – Top 10 Tips, Tricks, Twists & Trips 2. EU Trade Friendly Foods…now selling into Europe • Distance Selling o Non-VAT registered EU customers o UK VAT; BUT o Register & charge EU VAT if > threshold in calendar year o Threshold varies per EU country €35k or €100k • Distribution Depots o Move Own goods to EU warehouses/stock hotels o Distribute from EU locations o EU VAT registration required!!
- 55. VAT – Top 10 Tips, Tricks, Twists & Trips 3. Imports Friendly Foods…importing from outside the EU • Deferment Account • Simplified Import VAT Accounting (SIVA) • Inward Processing Relief (IPR) • Customs Warehousing • Binding Tariff Information (BTI)
- 56. VAT – Top 10 Tips, Tricks, Twists & Trips 4. Bad Debt Relief…and Creditors Bad Debt Relief (BDR) • VAT recoverable: o Debtors > 6m old o Write-off to a VAT BDR a/c • BUT: o VAT must have been originally accounted for o Debt must not have been paid, sold or factored o Adjust for any subsequent receipts
- 57. 57 4. Bad Debt Relief…and Creditors Creditors…the sting in the tail! • VAT repayable: o Creditors > 6m old o Irrespective of whether supplier has claimed BDR • BUT: o VAT can be reclaimed if debt settled WARNING HMRC are getting really hot on this one!! VAT – Top 10 Tips, Tricks, Twists & Trips
- 58. VAT – Top 10 Tips, Tricks, Twists & Trips 5. Request For Payments • Time of supply – services: o Basic – when performed; or o Issue of invoice; or o Receipt of payment • BUT NO ‘Basic’ Tax Point where: o Ongoing/continuous services o Long-term project/periodic payments Consider: ‘Request For Payments’ (RFP)
- 59. www.website.com 5. Request For Payments • RFP o Looks like an invoice… o But omits key features (VAT # etc.) Prompts payment Initial significant VAT saving Ongoing VAT cash-flow BDR by default X Increase administration X Possible negative customer reception VAT – Top 10 Tips, Tricks, Twists & Trips
- 60. VAT – Top 10 Tips, Tricks, Twists & Trips 6. Partial Exemption • VAT Recovery Taxable supplies √ Exempt supplies X • Mixed supplies o Attribute costs o Apportion ‘mixed use’ costs o De-minimis & NO restriction if Exempt Input VAT (pa): < 7,500 and < Total Input VAT
- 61. 61 6. Partial Exemption • Beware ‘non-standard’ Exempt Activity e.g.: o Finance/insurance income o Property letting/sales Friendly Foods…letting unused warehouse • Exempt income • VAT on refurb./operational costs? • De-minimis? • If not, restriction! • …or Opt To Tax? VAT – Top 10 Tips, Tricks, Twists & Trips
- 62. VAT – Top 10 Tips, Tricks, Twists & Trips 7. Preregistration Input VAT • Goods o Up to 4 years < registration o On hand at date of registration o Purchased by the registered entity o HMRC backed down on ‘depreciation’ argument • Services o Up to 6 months < registration o Cannot have been ‘consumed’ < registration Can be issues with partially exempt businesses
- 63. VAT – Top 10 Tips, Tricks, Twists & Trips 8. Z/R Certificates • Charities o Medical equipment o Relevant goods o Certain building adaptions o Advertising services • Buildings o Relevant Residential Purpose • Ships o Qualifying vessels (supply/repair/maintenance)
- 64. VAT – Top 10 Tips, Tricks, Twists & Trips 9. Transfer Of Going Concern (TOGC) • VAT-free sale of business, IF: o Business or part of a business o Capable of operating as such o Similar business o No immediately consecutive transfers o No significant break in trading o Must be registered or liable to be
- 65. www.website.com 9. Transfer Of Going Concern (TOGC) Beware: • A → B → C ≠ TOGC • Land & Property o Opted & new commercial properties o Capital Goods Scheme o Property letting • VAT charged…OR NOT CHARGED • Registration! VAT – Top 10 Tips, Tricks, Twists & Trips
- 66. VAT – Top 10 Tips, Tricks, Twists & Trips 10. Reverse Charges Services received ex-UK – no VAT but: • VAT Registered Businesses: o Reverse charge applies o May not be entitled to full recovery • Non-VAT Registered Businesses: o If value exceeds threshold (currently £85k pa)… o VAT registration required o …and may not be entitled to recovery
- 67. VAT – Top 10 Tips, Tricks, Twists & Trips + VAT! Cars vs. Commercials When is a car not a car? When it’s a commercial… ‘Car’ ≠ Payload ≥1 Tonne Consider twin-cab pick up AND reclaim the VAT!! Friendly Foods…Fred & Kat both drive Porsches… Bye-bye Porsche…hello Mitsubishi L200!!
- 68. VAT – Brexit What happens post-March 2019?! • VAT will still exist in the UK! • Adoption of all current UK/EU law… • …but with more flexibility
- 69. VAT Remember, always look beneath the tip of the iceberg What? For whom? When? Where? … and for how much? Who?
- 70. Julie Towers, VAT Partner VAT update
- 71. 71 Duncan Leslie, Corporate Partner Brexit – what should you be doing now?
- 72. PKF FC Brexit team leaders Stuart Rogers, Head of International Tax Liam Dushynsky, Customs Specialist
- 73. Change management – contingency planning • Brexit – known unknowns & unknown unknowns • FDs need to show leadership, execute changes & consider operational impact • How could Brexit impact your business? • What are the possible options & opportunities for your business? • Risk management
- 74. 74 Brexit possibilities • No Brexit • Exit March 2019 - no deal with EU • Exit March 2019 - same terms as now (WTO approved free trade arrangement) • Transitional period from March 2019 – probably on same terms as now
- 75. www.website.com Impact on business • Impact on sales, direct costs & overheads? • Consider: • Tariff impact – imports/exports • Exchange & interest rates • Subsidies • Labour supply • Border logistics • Restrictive practices • Likelihood of impact? • Timescales for change?
- 76. Operations management • Supply chain options • Sales & costs – both in the EU or neither in the EU • Does Inward Processing Relief help? • Manage exchange rate risk? • Contractual risks? • Financial impact if outsourced arrangement fails? • Transport, storage & ports - do you need AEO status? (https://www.gov.uk/guidance/authori sed-economic-operator-certification)
- 77. www.website.com What should you be doing now? • Have contingency plans & team in place • Explore all options • Have alternatives • Watch long term commitments & legal undertakings • Get in early as HMRC may not be able to cope • Be prepared for opportunities
- 78. 78 Duncan Leslie, Corporate Partner Brexit – what should you be doing now?
- 79. Coffee Break
- 80. Daniel Sladen, Tax Director Business tax update
- 81. Business tax • The liberalisation of substantial shareholdings exemption • Group vs parallel company structuring • Corporate loss changes and restriction • Corporate interest restriction
- 82. Substantial shareholding exemption (SSE) • Exemption of certain gains • Major changes effective 1 April 2017 • Historically restricted to trading groups • Extended to include investment groups • No impact on other areas of tax law • No change to the specific issue regarding FA2011 changes
- 83. Substantial shareholding exemption (SSE) Key Criteria Pre 1 April 2017 Post 1 April 2017 10% ordinary share capital Yes Yes Minimum twelve month holding period in two years prior to sale Yes 2 yrs now 6 Target is a trading company before Yes Yes* Target is a trading company after Yes No* Disponor is a trading company or holding company of a trading group before Yes No Disponor is a trading company or a holding company of a trading group after Yes No
- 84. Group vs Parallel? • During growth – typically group structure • Access to group relief • Access to SSE – reinvest profits tax free • Continued status as a trading group • Commercial strength • Banking requirements / cross guarantees
- 85. Group vs parallel company structuring Hold co (Friendly Food Ltd) Trade co1 Trade co2 Fred Friendly Food Ltd disposes of Trade co2 and claims SSE Friendly Food Ltd pays a dividend to Fred, taxable at up to 38.1% Friendly Food Ltd reinvests proceeds tax free into group
- 86. www.website.com Group v parallel company structuring Trade co1 Trade co2 Fred Fred disposes of Trade co2 and are taxed at CGT rates (20% / 10%)
- 87. Demerge? • Transition from group to parallel? • (Largely) tax free demergers • Statutory demerger (a distribution in specie) • Non statutory demerger • Complex transactions • Accounting implications • Advance planning a must
- 88. Why Demerge? • The sale of only part of the group is likely thus demerging enables proceeds to be paid directly to the shareholders. • Splitting of commercial risk and isolating high risk activity from low risk – “protect the crown jewels”. • Splitting ownership of the group into separate entities/groups to resolve shareholder dispute • To assist with family succession – different parts of the business to be owned and operated by different family members • Preserving trade related tax reliefs on the trading arm of the group by removing investment activity
- 89. Corporate tax losses - pre and post April 2017 losses • Pre and post April 17 losses to be split • Post April 17 losses – offset against profits on group basis • Pre April 17 losses – subject to old rules • Choice on what to use in priority • Transitional rules will create some complexity • Increased compliance burden
- 90. www.website.com Corporate tax losses £5m deduction allowance • UK company's / groups entitled to £5m ‘deductions allowance’ • Exceed allowance – only 50% profits are reduced by b/f losses • Large b/f losses & large profits – unexpected CT • Transitional rules – review opening year positon • Allocation of the £5m allowance
- 91. Corporation tax losses Example – Friendly Food Limited Loss memo Brought forward loss £10m Against CY profit (£5m) Against CY profit (£1m) Carry forward £4m
- 92. www.website.com Corporate interest restriction • OECD BEPS driven • Applies if net interest expense of ≥ £2m • Fixed ratio rule - 30% of Tax EBITDA • Group ratio rule (by election) • Interest not deducted is carried forward
- 93. Corporate interest restriction Who will be affected? • Highly leveraged groups • Members of multinational groups • Private equity owned companies / groups • Property investment / capital intensive • Companies expanding by acquisition
- 94. Autumn Budget 2017 • Government wants (needs) to raise more tax revenue • Tax clampdown on freelancers using personal service companies • Patient Capital Review – announcements expected on EIS/SEIS etc • How long will favourable capital tax reliefs last? • This and more will be picked up at our Spring Tax Update.
- 95. Daniel Sladen, Tax Director Business tax update
- 96. 96 Michelle Willcock, Chartered Financial Planner Auto Enrolment & Payroll Update
- 97. Agenda • Contribution Increases • Cyclical Re-enrolment • Developments • Reviewing your existing scheme • NOW:Pensions • Payroll Outsourcing • Questions
- 98. Contribution Increases • Minimum contribution rates increase on 6 April 2018 • and again on 6 April 2019 • The minimum rates may differ slightly if an alternative salary definition has been adopted. The Pension Regulator website provides full details; http://www.thepensionsregulator.gov.uk/en/employers/phasing-calculating-contributions-using-different-elements-of- pay.aspx Date From Minimum Employer Contribution Staff Contribution Minimum Total Contribution Current 1% 1% 2% April 2018 2% 3% 5% April 2019 3% 5% 8%
- 99. www.website.com Cyclical Re-enrolment • ‘Re-enrolment’ has to be carried out every 3 years • flexibility on the date you select to complete the process • ‘Eligible’ staff (between age 22 and state pension age and earning above £10,000p.a.) who opted out of pension scheme previously will have to be re- enrolled • A re-declaration of compliance has to be made to the Pension Regulator
- 100. 100 • October 2017 - 5th anniversary of Auto Enrolment • All existing employers subject to duties by February 2018 • New employers must start duties as soon as they start paying staff • ‘Master Trust Assurance Framework’ voluntary standard • The Pension Schemes Act 2017 - stronger regulation of master trusts • With experiences it is now possible to review; investment performance service levels scheme governance/financial stability charges • Significant differences in scheme provider offerings – not all good Developments
- 101. www.website.com Reviewing your existing scheme • An important employee benefit • Staff recruitment and retention • Review for continued suitability • Scheme providers successes and failures - some Master Trusts have already closed • Poor performance, or scheme closure detrimental to the employers affected • Significant hassle to rectify closed scheme • Unsettling for your employees
- 102. NOW:Pensions – a failing scheme? • Historic poor service levels - to employers and employees • Contributions not allocated correctly • Member charges increasing to £1.50 per month from April 2018 • Removed from the Master Trust Assurance Framework • Large financial losses – £16.6 million loss related to £1.3 million revenue in 2016 • NOW:Pensions suggest members with small preserved funds transfer to alternative scheme • Francis Clark Financial Planning Ltd can review your existing AE scheme and recommend the best way forward
- 103. 103 Michelle Willcock, Chartered Financial Planner Outsourcing Payroll & AE Administration
- 104. Risk Areas of Payroll Compliance • Real Time Information, Auto Enrolment, Gender Pay Gap reporting and Apprenticeship Levy – Government changes to legislation • GDPR– May 2018 • Fines imposed on the employer • In-house costs • Responsibility and anxiety of providing this. Outsourcing costs may pleasantly surprise you!
- 105. 105 Fear of outsourcing • Loss of control • Concerns on data protection • Incorrect or late payments • Inadequate reports • Errors not corrected You authorise the payroll and payments Personalised reports Dedicated team of professionals providing support
- 106. www.website.com Benefits of outsourcing • Skilled payroll professional processing your payroll • Ensure compliance with legislation • Business Intelligent reports • Employees paid on time and accurately • Neutralising compliance risks
- 107. 107 Health Check • Review of internal processes and software • Review of data processed to date • Advice on correcting potential risk • Advice on how to stay compliant with legislation • Implement contingency plan • Guidance on completing the re-enrolment process • Skilled payroll professional contact
- 108. 108 Michelle Willcock, Chartered Financial Planner Auto Enrolment & Payroll Update
- 109. 109 FD seminars - Market changes Q4 2017 Energy Andy Thornhill, Corporate Finance Director
- 110. 110 www.website.com 1. Manage costs: Corporate PPAs 2. Leverage estate: On site generation and storage 3. Create investment income • Owning generation assets • Demand side response Combatting energy costs Q4 2017 Transforming a variable cost into an opportunity
- 111. 111 Projects seeking fixed price power price agreements (“PPA”s) • Large number of new projects seeking offtake agreements • No requirement for physical relationship Benefits of a corporate PPA to you • Price stabilisation and potential cost savings • Achieve sustainability and decarbonisation objectives • Provide additionality Recent UK examples Corporate PPAs Q4 2017
- 112. 112 www.website.com New projects being constructed despite subsidy cuts Proximity to the grid is key Investment case is strengthened by co-location On-site generation Q4 2017 Emergence of subsidy free generation Relevance to Friendly Foods Ltd Deliver attractive investment return Enable private PPA with generating asset Delivering significant reduction to annual energy cost
- 113. 113 Energy storage Q4 2017 Need driven by increase in UK intermittent generation Developers seeking sites with good access to grid Units typically the size of a shipping container Opportunity to generate additional revenue Options for Friendly Foods Ltd Rental income* Investment return* Rental model £20k-£50k p.a Rent only Self develop £400-£500k/MW >10% * Numbers are for illustrative purposes only and will be site specific
- 114. 114 Demand side response Q4 2017 Being smarter about how and when we use energy By managing the timing your power demand you can receive payments for this flexibility Example – Sainsbury’s smart refrigeration system Relevance to Friendly Foods Ltd Become part of a virtual power station Responding to frequency response demands and earning income: Managing refrigeration demand Managing heating demand
- 115. 115 Increased price of secondary assets due to limited supply Index linked returns for up to 25 years • Onshore wind and solar investment returns – 6-7% • Higher for Biomass/EfW Removal of subsidies requires the supply chain to adjust Energy infrastructure investment Q4 2017 Relevance to Friendly Foods Ltd Utilise surplus cash to deliver >6-7% return Scope to include within the pension plan Assets qualify for Business Property Relief
- 116. 116 FD seminars - Market changes Q4 2017 Energy Andy Thornhill, Corporate Finance Director
- 117. MBO / alternative to a full business sale Paul Crocker, Corporate Finance Partner
- 118. Objectives of today Exploring future plans of business owners in order to allow business continuity • Kat looking to retire in 2 years • Fred within 5 years Alternatives to sale: - Share buyback - MBO’s 1. What is an MBO? 2. Why an MBO maybe preferred over a full sale? 3. How to fund an MBO?
- 119. What is a MBO? • Purchase of a business by its management • Allows management to participate in equity and success • Management are purchasing future cash flows • Value is realised through exit, either trade sale…or secondary MBO! • Types - Vendor backed MBO, FAMBO • Once in a lifetime opportunity
- 120. www.website.com Why is a MBO preferred over a 100% sale? • Price – Trade does not always result in higher value • Flexibility on timing of exit (for Kat) • Enables de-risking with possible upside investment • May allow for continued involvement • Confidentiality maintained • Allows for non-financial considerations • Incentivises and rewards management • Less Warranties and Indemnities
- 121. Friendly Food Limited Friendly Food Ltd FredKat 15% Valuation 2017 (Adjusted EBITDA) £2m Profit Multiple 6 Enterprise Value £12m Add Property £4m Less Debt (£6m) Equity Value £10m Kat Selling 60% £6m Kat roll over 25% £2.5m Fred roll over 15% £1.5m 85%
- 122. Example Structure NewCo Kat Fred A N Other Friendly Food Ltd Value - £10m Kat £6m Funding 60%25% Friendly Food Ltd FredKat 15%85% A N Other A N Other 5%5% 5% Kat
- 123. www.website.com How we can help • Assisting owners and managers overcome potential lack of awareness of options • Team has undertaken >100 MBOs • Assist with initial feasibility report • Optimum structure for all (valuation, payment terms, tax considerations) • Favourable environment for MBOs • Assist with business plan / projections • Aware of active funders and terms Making sure the right deal is secured for the management team and owner in a timely manner
- 124. MBO / alternative to a full business sale Paul Crocker, Corporate Finance Partner
- 125. Glenn Nicol, Corporate Partner Chair’s close
- 126. Dates for the diary FD seminars June 2018 • Plymouth – Monday 11 June, Boringdon Park Golf Club • Exeter – Wednesday 13 June, Exeter Racecourse • Bournemouth – Thursday 14 June, AFC Bournemouth • Bodmin – Tuesday 19 June, Lanhydrock Golf & Country Club • Taunton – Wednesday 20 June, Somerset County Cricket Club (tbc)
- 127. Disclaimer & copyright c) copyright PKF Francis Clark, 2017 You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by PKF Francis Clark in any format whatsoever unless you have obtained prior written consent from PKF Francis Clark to do so and entered into a licence. To the maximum extent permitted by applicable law PKF Francis Clark excludes all representations, warranties and conditions (including, without limitation, the conditions implied by law) in respect of these materials and /or any services provided by PKF Francis Clark. These materials and /or any services provided by PKF Francis Clark are designed solely for the benefit of delegates of PKF Francis Clark. The content of these materials and / or any services provided by PKF Francis Clark does not constitute advice and whilst PKF Francis Clark endeavours to ensure that the materials and / or any services provided by PKF Francis Clark are correct, we do not warrant the completeness or accuracy of the materials and /or any services provided by PKF Francis Clark; nor do we commit to ensuring that these materials and / or any services provided by PKF Francis Clark are up- to-date or error or omission-free. Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law and related regulations on the re-use of Crown copyright extracts in England and Wales. These materials and / or any services provided by PKF Francis Clark are subject to our terms and conditions of business as amended from time to time, a copy of which is available on request. Our liability is limited and to the maximum extent permitted under applicable law PKF Francis Clark will not be liable for any direct, indirect or consequential loss or damage arising in connection with these materials and / or any services provided by PKF Francis Clark, whether arising in tort, contract, or otherwise, including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for death or personal injury caused by our negligence, or for any other liability is not excluded or limited. 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 inspection and at www.pkf-francisclark.co.uk. The term ‘Partner’ is used to refer to a member of Francis Clark LLP or to an employee. Registered to carry on audit work in the UK and Ireland, regulated for a range of investment business activities and licensed to carry out reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Partners acting as insolvency practitioners are licensed in the UK by the Institute of Chartered Accountants in England and Wales. A partner appointed as Administrator or Administrative Receiver acts only as agent of the insolvent entity and without personal liability. Francis Clark LLP 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.
Editor's Notes
- In our seminar this morning we will be focusing on the roles of the FD, how they are very varied, challenging and ever changing. Our usual mix of high quality hot topics will be linked through a single case study that we will return to throughout. Background to that business case study, including the FD that is involved in that business is coming up. Before that, I would like to take you through the Roles of the FD as we see them in a bit more detail. Custodian. The FD is a custodian in charge of the protecting and preserving the critical assets of the organisation. If there is a fraud, an IT issue or a property problem, it usually comes back to the FD in one way or another. As custodian the FD is also responsible for the accurate reporting of those assets to all relevant stakeholders to the extent necessary. Most FDs would self assess themselves quite highly in this respect as it corresponds well with the usual personality traits of an accountant. 2) Operational In this aspect of the role, the FD is responsible for the smooth running of the back office of the business. They are in charge of invoices getting raised, invoices getting paid (or not paid) and employees getting paid the right amount. They have to make sure that the books are balanced and the business has the resources to fulfil its core objectives. Again, most FDs would self assess relatively highly in this objective, the smooth running of the ship 3) Leadership In this aspect of the role the FD is key in determining strategic business direction, M&A ideas, financing requirements, and longer term strategic direction of the business. This is perhaps less comfortable ground for the FD where decision making can often be left to the CEO or COO. We will be picking up as we go through where FDs can demonstrate more leadership at the board table 4) Execution This is centred around the execution of the strategy that has been determined by the leadership team – driving through change and change management. The FD is often left to ‘make it happen’ sometimes against competing objectives and unrealistic plans and timescales. However, being the catalyst of these changes is something that is within the FDs job description. Many FDs struggle with this aspect, as they are much more comfortable with a low change environment, rather than creating and instigating change.
- FreD is the FD of our case study business. FreD is 53 years old and not untypical in terms of his range of skills. He has self assessed himself on the aspects of the role as on the screen. As a custodian, he has a good handle on the assets of the business. He has implemented a system of control which means that the bank account is secure with only a few people being able to make payments. He is aware of the risks of unauthorised payments leaving the business. He is worried about Cyber security as he doesn’t really understand where the risks lie. In terms of operational processes, he runs a tight ship. Payroll is in-house, credit control is well managed, sales rebates are all authorised through the finance team and the management accounts are produced by the end of day 5 each month. However, the business is expanding overseas and he is unsure what additional processes will be needed for that side of the business. On leadership, FreD is comfortable if uninspiring. He is vocal at board meetings and has a good eye for risk, and is prepared to put his foot down if necessary. Employees respect him and the tone from the top in finance creates a strong culture of compliance. However, when the CEO is a more charismatic figure and is better at being the public face of the business and has more ideas of changes that need to be made in terms of business direction. FreD would prefer a quieter life. Execution. FreD doesn’t like change and hence his lower score in this area. He put off having a new IT system for years as he didn’t like the thought of the disruption to the day to day, despite the obvious business benefits that it would bring. So that is FreD in a nutshell. Now for some more information about the business itself
- Sales have been growing from websales direct to consumers. Budget includes £4m of new overseas sales GPM is healthy but falling as extra discounts need to be offered to shops Net margin is also falling with higher distribution and premises costs Cash is healthy as dividends are low at £100k p.a. No external debt and a strong balance sheet
- This is a session on business planning and commercial management
- We’re focusing on Brexit as a firm and have a dedicated team led by Stuart on business structuring and Liam on indirect tax implications. The more general commercial issues are being picked up more widely by partners and staff throughout the firm. We’re investing in the support our clients need. There is a tax focus to this but the real driver is commercial requirements and that is what businesses need to identify first. Customs is administered by HMRC
- We can’t avoid talking about Brexit and it will feature in our future FD Seminars. It is difficult to be definitive at this stage because the position is so uncertain but that doesn’t mean that businesses should be doing nothing. Now is a time to be planning for the future and making sure that you obtain the information that you require to be able to plan and implement a Brexit strategy for your business. Brexit should be identified on your risk register as a business and the focus of this presentation is on what you should be doing now. It is important to approach this issue objectively and adopt a systematic approach. Whilst I’m sure that you’ve been thinking about Brexit and the impact on your business, have you done that systematically and documented your thoughts? Also there are timelines here. Getting Authorised Economic Operator (AEO) status takes time.
- The point here is that whilst we don’t know what is going to happen in March 2019, there aren’t that many possibilities because a be-spoke deal isn’t possible in that timescale. We’ve either agreed a trading arrangement similar to the current arrangements – long term or transitional only or we’ve left without a deal. WTO = World Trade Organisation
- Adopt an approach of going down the profit and loss account and considering the potential Brexit impact on a line by line basis. This could be a direct impact or an indirect impact such as on interest and exchange rates and on the labour force as well as on border delays. There are 16,000 different possible tariffs. Do you know which ones (if any) could apply to your business? Do you need to consider Inward Processing Relief (IPR)? It’s not just about a single market in goods. Services are very significant to the UK economy and softer barriers to entry are possible where services are involved by having restrictive practices.
- AEO status is for businesses that are established in the EU, actively involved in customs operations and international trade and have an Economic Operator Registration and Identification (EORI) number. AEO status is an internationally recognised quality mark. A business can have AEO status for customs simplification (AEOC), AEO status for security and safety (AEOS) or both. Inward Processing Relief - https://www.gov.uk/guidance/inward-processing. Capacity for HMRC to cope with applications?
- This is a session on business planning and commercial management
- Carrying on the case study, As the FD of Friendly Food Ltd, Fred has been considering the recent tax changes and how this will affect the company. The focus of this session is to (quickly) cover the basics in relation to the package of corporate tax measures which are to be effective 1 April 2017 and forwards. These are the changes to the Substantial Shareholdings Exemption, corporate losses regime, and restriction on tax deductions for interest. I will also touch upon the choice of company ownership – whether to hold via a group structure or to hold them in parallel.
- The substantial shareholding exemption, SSE, is available to corporates only. Where the conditions are met, the gain arising on disposal of shares in trading companies is exempt from corporation tax. Clearly this is a beneficial exemption where applicable. The problem historically is that the legislation is complex and this has led to some apparent anomalies and uncertainties as to whether a disposal indeed qualifies for SSE. Recognising the unsatisfactory nature of some parts of the legislation, we have gone through a consultation process leading to some key and welcome changes to SSE. In broad summary, SSE is being extended and we envisage that SSE will be more widely available in the future. However, one note of caution is that not all of the problems with SSE were dealt with and some traps for the unwary still exist. Therefore careful planning within the group structure is still required.
- This table summarises the key conditions for SSE eligibility under the old and new rules. To just pick up on a couple of key changes: Requirement remains that the disposing company must hold at least 10% of the OSC of the target company for a minimum period of 12 months. This requirement can now be met at any time within the six years prior to disposal (extending from two years). Perhaps the most fundamental change is that the disposing company is now no longer required to be a trading company or a member of a trading group before or after the disposal. This is a significant relaxation. Previously where a group was carrying on mainly investment activities the sale of a trading subsidiary would not have qualified for SSE. From 1 April 2017 that disposal will now qualify. There are also changes where the owners of the group include qualifying institutional investors e..g pension funds. In broad terms, part of the gain arising on disposal of non-trading companies may also qualify for SSE.
- As mentioned, SSE is only available to corporates. Therefore it can only ever be in point if there is a groups structure. This leads nicely into one of the more common questions we are asked by clients – when looking to move into new products or a geographic market should they do this via a group structure or should they hold shares directly in a parallel structure. When establishing new additional businesses and/or expanding existing business, funding often comes from the profits of an existing business. This makes a group structure attractive. Profits from one company can be passed to another tax free, and as already explained the proceeds from a share disposal can be tax free – thus maximising post tax receipts for reinvestment. It is not unusual for a new business to incur start-up losses in the early years of trading. A group structure enables the tax losses of those companies to be offset against the tax profits of other companies within the group. This can assist with reducing tax outflows at a time the group is investing heavily. Such an option would not be available in a parallel structure. If proceeding with a group structure, it is important to keep an eye on the continued trading status of the group. Trading can mean different things for different taxes but generally tax reliefs / lower tax rates are only available for shares in trading groups.
- I wanted to show a quick example of how the tax position can differ between the two structure choices. This slide shows what happens if one of the trading subsidiaries is sold to a third party. Friendly Food Limited disposes of Tradeco 2 and the gain at a corporate level is treated as exempt under the SSE legislation. There are two options at this stage. FFL could reinvest the proceeds into Tradeco 1 or perhaps a new business venture. This is attractive as no tax was paid on the disposal. Alternatively, the group may have no need for the cash and the shareholders wish to benefit from the sale proceeds. In this case, the only feasible way of returning funds is by paying a dividend which is subject to income tax at up to 38.1%.
- If Fred held the shares in a parallel structure, it would be Fred who is disposing of shares in Tradeco 2 (not a holding company). The disposal is subject to CGT in the hand of Fred (either at the main rate of 20% or 10% if he qualifies for ER) – much less than the 38.1% payable on a dividend.
- Quite often was are asked to look at existing group structures where it is likely that there will be potentially different buyers for different parts of the group. The goal being to ensure any sale proceeds are paid directly to the shareholder and the more beneficial rates of CGT achieved. Provided we have time before a sale, it is possible to move from a group to parallel structure largely tax efficiently. There are a number ways this can be achieved and the preferred route will always depend on the facts and circumstances. There aren’t straightforward transactions and I do recommend early thought is given to the longer term strategy and objective of the shareholders. This allows us, as advisors to understand the shareholders goals and devise a plan that suits. Also important to consider both the commercial and accounting implications of the demerger. What are the accounts going to look like once demerged? As Stephanie mentioned earlier on share buy backs, it is important to understand the accounting treatment and the impact on things such as credit rating and bank covenants. Demerging is a big decision but certainty from a tax perspective significant tax savings can be achieved by taking this route.
- To try and put some more context there are several reasons why a demerger may be considered (and not always tax related. Run through a couple of the points on the list.
- Moving on to the topic of corporate tax losses. The changes here represent a significant overhaul of the losses regime and how we deal with losses going forwards. The changes relate predominantly to how we deal with losses carried forward to future years. There are numerous changes to the rules and this slide provides an overview of the one of those changes which amounts to a relaxation, so a good thing. In basic terms most losses incurred from 1 April 2017 are capable of being carried forward and offset against future total profits. This contrasts to the previous position where losses were typically only available for offset against profits of the same source on which the losses arose. This change provides greater flexibility in how losses can be utilised and will be beneficial to the majority of our clients. With more options being available the expectation is that losses will be utilised sooner than under the old rules – thus improving company cashflow. Losses incurred pre 1 April and carried forwards will still need to be streamed in accordance with the old rules and will only be eligible for use by the company that incurred them. Thus companies will need to monitor the use of old and new losses. Given the increased flexibility for post April 17 losses it is generally speaking going to be more efficient to utilise the pre April 17 losses before post April 17 losses. Having studied the legislation in a lot of detail recently it is clear that the new system has increased in terms of complexity. Not only have the options for utilising losses changed, we will need to consider in some cases the rules for both pre and post April 2017 losses during the transitional period. Things should simplify once a company or group have fully utilised their pre April 17 losses. Inevitably there is going to be an increased compliance burden as a result of the further complexity.
- We have spoken about a relaxation to the rules and now we concentrate on the main restriction. The second main feature of the changes to corporate losses is the loss restriction. Each UK standalone company / group has a deductions allowance of £5m per twelve month accounting period (reduced pro rata for shorter periods). The deduction allowance relates to the utilisation of losses brought forward into the current period and capable of offset against current year profits. The first £5m of taxable profits in the current year can be offset without restriction. Where profits exceed £5m, then only half of the excess can be relieved by brought forward losses. This is regardless of whether the losses are pre or post April 17 losses. As a result of the restriction, companies with large brought forwards losses and current year profits may find that they have corporation tax to pay far earlier than anticipated. The £5m allowance applies to the whole group, not to each company in the group - there will be an increased compliance burden here as there is a need to consider the best allocation of the allowance in light of available b/f losses in the group. In addition an annual group statement will need to be filed with HMRC showing how the deduction allowance has been allocated across the group. Large companies who are within the Quarterly Instalment Payment Regime need to understand the impact of the deductions allowance on the group tax positon. Companies may also find that they fall within the QIP regime unexpectedly as they are no longer unable to fully utilise losses in the year. We are already looking at a number of June year ends, and we can see the restriction is having an impact on tax payable. One difficult issue is dealing with the transitional period where the accounting period straddles 1 April. 2017. The guidance released by HMRC (150 pages of it) includes very little on how they are interpreting the legislation on the straddling rules. Additionally, HMRC cannot currently accept any returns which straddle 1 April 2017 and taxpayers are being advised to sit on tax returns and not submit them. The corporation tax software companies are also playing catch up as they are unable to release updates until the Finance Act receives final Royal Asset.
- This slide sets out a very simple example of how the restriction will work – in practice it will be significantly more complex in many situations. We have moved forward several years from the case study and FFL has grown substantially. It has current year profits of £7m and £10m of losses brought forwards The deductions allowance of £5m is available so the first £5m of profits can relieved in full by b/f losses. This leaves £2m of profits remaining but due to the loss restriction only 50% of that £2m can be offset by the b/f losses. £1m of profit is left in the charge to corporation tax despite their being losses in excess of the profit earned.
- Now moving on to the new restriction for the tax deduction of interest expense. The OECD BEPS recommendations from October 2015 included a recommendation to restrict the amount of interest that multinational groups could deduct in calculating their taxable profits. The issue being that groups could structure their finance arrangements so that interest is paid from high tax jurisdictions with the corresponding interest income sitting in no or low tax jurisdictions. Whilst the UK already had several layers of interest restriction rules (e.g. thin capitalisation being the most obvious one) the Treasury felt that further defence mechanisms were required. The intention of the restriction is to prevent multinational groups getting excessive interest deductions in the UK compared with their overall group wide external interest expense. Helpfully, not all companies / groups will be affected as each UK group has a de-minimis allowance of £2m of net interest expense. Therefore if the UK part of the group has less than £2m of net interest expense, there is no restriction to the tax deduction. If the net interest expense is in excess of £2m, then the default position is that the interest deduction is restricted under the fixed ratio rule. If the net interest expense exceeds the 30% ratio then the excess is non-deductible in the year of expense and instead carried forwards until there is spare capacity in a future period (if there is ever spare capacity). Quickly define tax EBITDA – basic level it is taxable profits before capital allowances, interest and tax deductible amortisation. [to double check!] Recognising that some groups may have high external debt it may not be fair to restrict interest deductions by reference to the fixed ratio rule. It is possible to elect to use the group ratio rule and clearly this is beneficial if this results in a smaller restriction than under the fixed ratio rule. Importantly however, the external interest will specifically exclude interest payable to related parties. As a result highly leverages businesses with interest payable to a related party may still suffer from the restriction.
- So who are most likely to be affected by the interest restriction. Here we have a list of who we think will be effective and this to consider the new rules in further detail. Clearly highly leveraged groups will need to assess position, if only to make the group ratio election to ensure they are not inadvertently restricted. Those companies that are part of multinational groups will likewise need to look closely at the interest restriction. However the most likely candidates to be affected by the new rules are those companies owned by private equity houses. Typically such companies will be highly leveraged and will likely be paying a large amount of interest to the PE house who would be a related party. Consequently interest may be restricted as the group ratio election would not come to the rescue. That concludes the business tax section, I hope you have find it useful and I will be around at lunch should anyone want to discuss further.
- The minimum workplace pension contribution levels are required to increase from the current 1% Employer, 1% Employee rates in two phases; on 6 April 2018 and then again on 6 April 2019 This is referred to as ‘contribution phasing’ If a salary definition other than Qualifying Earnings has been adopted, the minimum may differ slightly. Please see Pension Regulator website for full details;
- A re-enrolment process has to be carried out every 3 years after your original ‘staging’ date (when Auto Enrolment duties commenced) There is some flexibility (within a 6 month period) on the actual date you select for the process to be completed Any ‘Eligible’ staff (any staff aged between 22 and the state pension age, working in the UK and earning above £10,000 per annum) who have opted out of workplace pension scheme previously will have to be re-enrolled into the scheme Once the process has been carried out an online re-declaration of compliance has to be made to the Pension Regulator
- October 2017 marks the fifth anniversary of auto-enrolment All existing employers will be subject to auto enrolment duties by February 2018 Any new employers will have to commence duties as soon as they start paying staff. There are no longer ‘staging dates’ or a lead- in period. AE starts with the first PAYE submission ‘Master Trust Assurance Framework’ introduced in 2014 by ICAEW and the Pension Regulator. Enables trustees of ‘master trust’ schemes to demonstrate to employers that their scheme is managed to a high standard The Pension Schemes Act 2017 places duties on those involved with running master trust pension schemes. This includes a duty to report certain events to the Pension Regulator which may indicate that the scheme cannot continue to operate. With 5 years experience of the marketplace it is now possible to review investment performance, service levels and charging structures of Auto Enrolment scheme providers. there is a huge array of Auto Enrolment scheme providers out there. Levels of service, fund performance and charges differ massively. Charges – although the government stipulate that AMC must not exceed 0.75% on default funds, Providers can, and do, make administration or allocation charges which are outside of the government restriction. For example – Standard Life have introduced an ongoing employer admin charge of £100 per month across all clients. Our experience has highlighted that service levels delivered by providers are a very significant aspect of the scheme’s overall performance. Some providers are currently delivering service levels we consider to be considerably under par. This, in turn, generates real problems for employers and members.
- A quality pension scheme represents an important employee benefit The standard of the pension scheme you provide is now a significant factor in the recruitment and retention of staff Very important to review your scheme to ensure it’s the most appropriate for both you and your employees We have seen successes and failures from scheme providers. Some Master Trusts have not met the ‘critical mass’ required to make a profit and have already closed down. Poor investment performance, service, or even worse - closure of a pension scheme is detrimental to the employers affected. It causes you significant additional hassle to rectify the situation plus is an unsettling experience for your employees
- Multiple examples of contributions not being allocated correctly. NOW:Pensions has been unable to rectify these errors over a number of years Member charges being increased to £1.50 per month from April 2018 onwards for all active & preserved members (Previously £0.30per month for members earning less than £18,000per annum). Removed themselves from the Master Trust Assurance Framework in July 2017 Recently suggested by NOW:Pensions that members with small preserved funds should transfer to an alternative scheme as potential for administration charges to be higher than the investment returns achieved by the scheme Francis Clark Financial Planning Ltd can provide a review of existing AE schemes, recommend changes to elements of the scheme basis or a complete change of scheme provider as required. We can help with pension transfers on an individual or bulk basis.
- Pressure on existing resources, either as a result of growth or changes in payroll legislation. Benchmarking the risk Operational Leadership Execution GDPR - legislation will effect all employers as of 25 May 2018. An audit of the data held and review of Contracts of Employment. Implement procedures for new employees Late filing or potentially incorrect data. Fines can lead to investigations – not limited to just payroll and pensions Cost of payroll software is increasing as the legislation becomes more technical. Add on’s for particular areas i.e AE. Finance department normally tasked with payroll, not a specialist area and their time may be more valuable on the broader business goals.
- Main concerns of outsourcing payroll What we do to minimise these
- No time spent dealing with HMRC or other government agencies Additional costs (an inconvenience) of covering payroll with staff leave. Staff leave isn’t always planned! Work stream of existing accountancy adding greater value of your business.
- What if outsourcing isn’t for you? Consider a Payroll and Auto Enrolment Health check. - Highlighted weaknesses in current processes - Opportunity to ‘make good’ errors and report to government agencies - Minimise risk of errors impacting employees Annual payroll updates (February). - Training and guidance on the current and new legislation - Platform to ask specific questions with on of our payroll professionals
- Discuss state of the economy – good for a transaction: Interest rates Availability of funding Favourable tax regime Reasonably buoyant economy Recognising: Brexit around the corner Elections (Potential Labour Govt)
- Purchase of a business by its management, usually with help of external financial backers Allows management to participate in equity and success of the business Management are purchasing future cash flows of the business, which they use to pay interest and repay the capital borrowed Value is realised through exit, either trade sale…or secondary MBO! Types - Vendor backed MBO, FAMBO Once in a lifetime opportunity, involves risk and can be complex, but can reap significant and life changing returns
- Entrepreneurs Relief
- Freda will hold some shares in Newco depending on amount retained amount Newco can afford to buy (and when) tax consequences Funding Mgt Equity Institutional equity Vendor involvement Deferred consideration Senior debt Working capital / asset backed
- Entrepreneurs Relief Company valuation: Amount that can be funded and % of shares Kat will retain. Tax considerations - HMRC approval of transaction, tax paid by Kat, implications on Management team. Kat is a seller and a buyer Funding: How much can be raised? Consideration of the property situation. Need to develop business plan. 3 Year projections including integrated financial model. Commence discussions with funders Management: Who is involved? Shareholding structure? What equity contributions could be made (may be driven by bank)? Separate advice
- Discuss state of the economy – good for a transaction: Interest rates Availability of funding Favourable tax regime Reasonably buoyant economy Recognising: Brexit around the corner Elections (Potential Labour Govt)