Plymouth - Essential 6-monthly Finance Directors' Update – Nov/Dec 2016

Finance Directors’ Update
Plymouth

Chairman’s welcome
Duncan Leslie, Audit Partner Nov 2016

pkf-francisclark.co.uk
.
Housekeeping
@pkfFrancisClark
#FDSeminar16

Holly Bedford, joins PKF Francis Clark
as Tax Partner, 1 December 2016
• Based in the Plymouth office, remit across
the West of the region.
• Strong corporate expertise, including
transaction and international tax.
• Worked for some of the world’s largest
accountancy firms, both here and in the
USA.
Partner appointment

South West Insider Dealmaker Awards 2016:
Young Dealmaker of the Year – Matt Willmott
British Accountancy Awards 2016:
Shortlisted for National Firm of the Year – winner to be
announced soon….
Awards

Top 150 companies in Devon & Cornwall
Top 150 Companies
PKF Francis Clark 40
Big 4 45
Other 39 smaller firms 65

Programme
Brexit and Autumn Statement Update – Duncan Leslie
Current Issues in Financial Reporting – Stephanie Henshaw
VAT Update – Liam Dushynsky
BREAK
Tax Update – Ian Pring
Pensions and Investments – Richard Wright
Transactions and Funding – Paul Crocker
LUNCH

Brexit update & Autumn Statement briefing
Duncan Leslie, Audit Partner

• Brexit – it’s a geo-political event
• Strategic planning issue for businesses
• Financial impact on the UK
• Growth in UK has been better than EU
• Changing power blocks in Europe/Middle East
• EU options for re-location
• Major geo-political risks
Brexit – broader implications

.
Financial position – Autumn Statement
• Further borrowing of £161bn by 2020/21
• Additional £122bn since March 2016
• Brexit cost - £59bn
• Tax receipts lower that forecast:
• Less from self-employed
• Less due to incorporation
• National Productivity Investment Fund - £23bn

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Financial position – Autumn Statement
-20
0
20
40
60
80
100
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Public sector net borrowing £bn
Autumn Statement 2015 Budget 2016 Autumn Statement 2016

UK economy – GDP growth

Europe & Middle East

Comparison of Eurozone with other
economies, 2012
Population GDP
Eurozone 335 million $11 trillion
EU (28) 506 million $17 trillion
United States 314 million $16 trillion
China 1.354 billion $14.9 trillion
India 1.200 billion $6.8 trillion
Japan 128 million $5 trillion
Economic comparison

Eurozone
By Ssolbergj - Own work, Public Domain,
https://commons.wikimedia.org/w/index.php?curid=2922522
Eurozone
ERM II
Other EU members
Unilaterally adopted

• Ireland – 12.5%
• Malta – effective 0%-10%
• Gibraltar – 10%
• Cyprus – 12.5%
(% tax rate as applicable to trading profits)
Staying in the EU?

• Points to consider:
• Treaty network
• Withholding tax rates on payments to company
• Withholding tax rates on profit extraction to UK
• Substance of activities overseas
• Understanding local laws and regs
• Any language barrier
• Cultural differences
• Does it satisfy objectives?
Other EU jurisdictions

• Global reach
• 400 offices in over 150 countries
• Emphasis on collaboration throughout the network
• Access to local overseas expertise
PKF Network

• How reliant are you on sales & purchases with EU?
• US is the UK’s biggest export customer
• China is the UK’s 6th biggest export customer
• Only 9 of top 25 UK export customers are in EU
• Time to seek opportunities elsewhere?
• Staying in the EU is a possible outcome
The Future

“I would never have dared, and if I had
dared, I would certainly never have dared
stop”
Churchill, when asked if he would have acted as Eden had done in Suez.
Brexit means Brexit?

Thank you
Duncan Leslie, Audit Partner

Current issues in Financial Reporting
Stephanie Henshaw, Corporate Partner

Today’s session
FRS 102: tips and traps
What next for FRS 102?
Company law round up
Financial reporting and Brexit

Brexit: potential implications for
financial reporting?
• Weakness of sterling may make hedging more attractive e.g. use of
forward contracts
• All transactions translated at spot rate
• Fair values required – potential impact on P&L
• Reflect via hedge accounting = policy choice for each arrangement
• Minimises impact of fair value changes on P&L
• Fair value or cash flow hedge?
• If not first year of FRS 102, must document at the outset – hedged item,
hedged instrument, economic relationship, basis of hedge effectiveness
• More general point – risk of increased exchange differences and how
those are disclosed and reported

Practicalities
• Changes built into management
reporting?
• Realised and unrealised?
Monitoring forex
• Management accounts reflect
hedging arrangements?
• Impact of Fair value losses on Net
Worth
Communicating
with the bank

Brexit: potential implications for
financial reporting?
• Potential impact on risk and interest rates will impact on discount rates
• Relevance in financial statements
• Determining return on net assets/ liabilities in DB pension scheme
• Assessing present value for Value In Use calculation as part of
impairment review: goodwill, investments
• Discount rates for interest free non-current loans
• Interest-bearing related party loans – assessment of market rate of
interest for new loans
• Covenant implications - Net Worth, EDITDA?

FRS 102 measurement issue:
Assessing market rate for related party loans
• Reminder: FRS 102 requires all basic loans to be measured at amortised
cost using market rate of interest
• Challenge: are related party loans charged at market rate?
• Factors to consider
• What rate/range of rates would be available if borrowing from bank?
• Duration and amount of loan
• Security available
• Ability to service
• Importance of explaining basis of judgement - part of accounting policy
disclosure
NB: loans to directors must be approved shareholders if >£10,000 borrowed

FRS 102: recognition issue:
Waiver of intercompany indebtedness
• Waiver must be complete at year end to permit release of
liability
• Parent lending to subsidiary
• Waiver in books of parent = increases cost of investment
• Waiver in books of subsidiary = capital contribution
• Subsidiary lending to parent = distribution made/received
(i.e. straight to reserves)
• Tax treatment has been simplified, depending on period in
which waiver occurs

FRS 102 recognition and measurement issue:
Acquisitions
• Reminder: FRS 102 requires analysis of assets acquired to
split out intangibles where legal title or practical control
• Trade marks, patents and other IP
• Licences
• Software
• Customer contracts
• Record at fair value, where can be assessed reliably
• Establish useful life for each asset
• Depresses value attributable to goodwill

FRS 102 presentation issue:
Reconciling net cash flow to net debt
• New format cash flow statement focusses on cash and
cash equivalents only
• Reconciliation explains relationship between cash and debt
position
• Once a mandatory requirement, not included in FRS 102 but
voluntary inclusion permitted
• Analysis of changes in net debt may also be useful to
explain other elements that may impact overall gearing,
liquidity etc

Example: reconciliation of cash to
net debt
2016
£
Increase in cash and cash equivalents in
period (per cash flow)
3,081
Repayment of loan 2,149
Change in net debt 5,230
Net debt at 1 January 2016 (4,903)
Net debt at 31 December 2016 327

Example reconciliation: changes in
net debt
At 1 January
2016
Cash
movements
Non cash
movements
At 31
December
2016
Cash at bank
and in hand
42 847 889
Cash
equivalents
250 450 700
Overdraft (1,784) 1,784
(1,492) 3,081 1,589
Current debt (2,149) 2,149 (230) (230)
Long term
debt
(1,262) 230 (1,032)
Total (4,903) 5,230 327

FRS 102 measurement issue:
Is it investment property?
• Reminder: FRS 102 presumes property held for rental is
investment property and therefore to be carried at fair value
• To obtain rental income stream or for capital appreciation
• Impact on subletting of part of premises?
• Duration of lease, proportion of premises
• Intra group property rental
• Formal lease or informal dividend substitute?
• Property held for “protective” reasons
• Strategic intentions? Supporting evidence?
Basis of judgement may need to be given in accounting policies

FRS 102 presentation issue:
DB pension schemes and deferred tax
• DB pension surplus or deficit shown as separate item on balance sheet
• FRS 102 change: no offset of DT against DB pension surplus/deficit
• Deferred tax liability recognised as Provision
• Deferred tax asset recognised as part of Current Assets
• Provided evidence of recoverability
• May be debtor due after one year – separate identification in notes
or on face of balance sheet
Potential impact on Net Current Assets?
Or use permitted alternative balance sheet format to disclose DT asset as
Non current asset?

What next for FRS 102?
• Notification process to be withdrawn apb 1/1/16
• Disclosure in accounts will remain
• Must check all exemptions properly identified
Reduced
disclosure
exemptions
• First update effective 1 January 2019
• FRC proposals expected early 2017
• Areas for potential improvement in FRS 102?
Triennial review
of FRS 102
• FRC leaning towards inclusion of IFRS 15 and 16
• Potentially effective 1 January 2022
• Impact on clients with significant operating leases
IFRS and FRS
102

Company law update:
Accounting for reconstructions
• New rules for reconstructions – application of merger accounting in
consolidated accounts
• Periods beginning 1 January 2016
• Previously – detailed conditions to permit merger accounting, including
90% acquired
• Now
• Ultimate control is the same before and after the reconstruction
• Control must not be transitory – beware exiting shareholders
Note: no change to rules governing merger relief on share for share
exchange (i.e. to avoid share premium)

Company law update:
narrative reporting and audit reports
• Additional requirement for periods beginning on or after 1
January 2016
• More “policing” of narrative report content
• Auditor reports on compliance with legal requirements
• Key points to watch
• Principal risks and uncertainties – to the business as a
whole, update for Brexit?
• Discuss position as well as performance
• Further changes to audit report format for periods beginning
on or after 17 June 2016

Modern Slavery Act 2015
Effective for accounting periods ending on or after 31 March
2016
Applies to businesses
• With turnover in excess of £36m (entity/ group)
• Carrying on business in the UK
“Slavery and human trafficking statement” on website
• Steps taken to ensure not taking place within business
or supply chain
• No such steps taken

Practicalities of new statement
“As soon as reasonably practicable after year end”
• Link to publication of accounts?
• No obligations for auditors
Authorisation
• Must be approved by board
• Signed by director
Commercial aspects
• Reputational risk?
• Impact on winning of contracts?

Thank you
Stephanie Henshaw, Corporate Partner

VAT update
Liam Dushynsky, VAT Consultant

Agenda
• Update
• Brexit – likely impact
• Property issues
• VAT and staff benefits

• Restrictions to reduced rate for installation of energy
saving materials in residential property
• Due to be effective from 1 August 2016
• Not implemented
Update

• 1972 European Communities Act – Incoming Tide
• Taxpayer can challenge parliament
• EU legislation
• Regulations – Compulsory – Auto law
• Directives – Bit of scope to interpret / enact
• Treaties – Amsterdam 97, Lisbon 07
• Decisions – European Court of Justice - King
Brexit – likely impact

• EU legislation ceases to apply in the UK
• UK provisions would need to be interpreted on their
own terms
• UK free to amend legislation
• OR UK could import EU principles into domestic
legislation – Fiscal Neutrality, State aid, abuse of rights
• OR EU legislation could continue to apply as part of
price for keeping access to the single market
• VAT can be covered by General Anti Avoidance Rules
(GAAR)

Time line - Case law impact
Art 50
All
Change
Can’t go
Back Decision
2 years 4 years 5 years

.
Biggest impact on international trade
• VAT free export of goods
• Movement of goods in EU more complicated
• Customs duty and VAT payable on imports of goods
• Services
• Reclaims 8th Directive goes all become 13th Directive
• Excise Duty – procedural changes no minimum rates
• Other Indirect Taxes – No restriction

Be proactive not reactive
• Start reviewing your supply chains, if China to France
to UK then you may be hit with double customs duty
• Can you go straight from China to UK?
• Can you claim reliefs to avoid / suspend the duty?
• If you repair faulty goods which were shipped to EC
countries you may have to pay import duty on arrival
• Learn about inward processing relief
• Learn about returned goods relief

Property issues
Questions you should always ask when buying:
• Is VAT chargeable on the property and why?
• If because of an option to tax can you see a copy?
• What was the vendor using it for before?
• If letting what was the turnover and what was the tenant using
it for?
• Is the property in the capital goods scheme?
• What will we be doing with it?
• If we are letting it, who are / will be the tenants?
• What is the VAT stagger of the seller?

Property issues
Property for sale £500,000 + VAT, tenant being
transferred, current rental £80K / annum.
Potential outcomes:
1. Transfer as a going concern (TOGC) therefore no VAT on transfer
2. Not a TOGC, have to fund extra VAT temporarily, costs an additional £5,000
SDLT
3. Not a TOGC, will not be able to reclaim VAT £100K, costs an additional £5,000
SDLT
4. Not a TOGC, no VAT charged, no additional SDLT
Scenario 1 – Pension Scheme Purchase – SIPP / SSAS

Property issues
Manufacturing business merged with another
company and moved all operations centrally.
Property was purchased 2 years ago,
£100,000 VAT was reclaimed. Found new
tenant and charging rent
Potential outcomes:
1. Do not charge VAT on the rent, clawback of £80,000 over the next 8 years
2. Opt to tax the property, do not charge VAT on the rent, clawback of £80,000 over
the next 8 years
3. Opt to tax the property, charge VAT on the rent, no clawback
4. Do not opt to tax the property, charge VAT on the rent (storage), no clawback
Scenario 2 – Surplus property rental

.
VAT & staff benefits
Cycle to work scheme
• The employer is buying the bike and hiring it to the
employee
• The employer can recover the VAT charged on the
purchase of the bike
• VAT should be accounted for on the hire charge made
to the employee
• Various options at end of hire period

.
Uniforms
• French Connection case
• Gift Rules – Over £50 need to account for output VAT

.
Christmas party
• Recover VAT in full to extent that only staff attending
the party
• If non-staff attending only recover VAT to extent of
staff
• If any non-staff making payment account for VAT on
receipts but recover VAT on expenditure

.
Telephone
• Has to be minimal personal usage
• If not incidental – output VAT charge
Relocation
• Professional fees, carpets, bespoke curtains
• General items not covered (Stereo)
• Not if single allowance paid

And finally …..

Thank you
Liam Dushynsky, VAT Consultant

Corporation Tax update
Ian Pring, Tax Consultant

Corporation tax update
Topics
• Tax rates and deferred tax
• State Aid and the EU
• Capital investment:
• Tangible assets
• Intangible assets
• R&D & Training
• Making the most of tax losses

pkf-francisclark.co.ukpkf-francisclark.co.uk
.
Tax rates and deferred tax
• Corporation tax rates:
• Currently - 20%
• From 1 April 2017 – 19%
• From 1 April 2020 – 17%
• Lower post-Brexit? (15%?)
• Consider the impact on deferred tax provisions
• Tax relief now better than tax relief later – investment
reliefs worth more currently

International tax - key challenges
• Digital economy – permanent establishment
• Tax treaty shopping & abuse of reliefs
• Economic substance
• Transfer pricing (including royalty and interest deductions)
• State Aid – impact on EIS/SEIS, R&D tax credits, grants
• EU pronouncements

.
Apple and the EU
• 30 August – EU Commission decided Irish tax
agreement with Apple is State Aid
• Penalty of 13bn euros
• Per EU - Head Office exists on paper only
• Lack of economic substance
• Concern over other structures
• Supports HMRC challenges

Diverted Profits Tax (DPT)
• From 1 April 2015 – 25% tax rate
• Tax avoidance motive or entities that lack economic
substance
• Notification requirement but HMRC assess
• SME exemption
• HMRC being more aggressive in their use of DPT
• DPT being used in cases where transfer pricing challenges
have failed
• Care required over royalties being paid to overseas IP
entities

Tangible assets – capital allowances
• Rates of plant & machinery allowances:
• Main pool 18%
• Special rate pool 8%
• Fixtures & integral features
• Annual allowance £200k
• Accelerate capital allowances as tax rates falling
• When expenditure incurred:
• Unconditional obligation to pay
• Agreement to pay within 4 months
• Normal commercial terms

Short Life Asset elections
Year Value of equipment in
main pool?
1 82
2 67
3 55
4 45
5 36
6 29
7 23
8 18
• A short life asset election de-pools the asset (not cars)
• Beneficial where life expectancy less than 8 years –
consider depreciation period

Intangible assets – amortisation tax relief
• Since July 2015 – no tax relief on the acquisition of goodwill
• No impact on goodwill acquired prior to that date
• Goodwill and “customer related intangibles”
• Details relating to customers or potential customers
• An unregistered trademark
• Other intangibles still qualify for tax relief – licences, registered IP
etc.
• FRS 102 impact –
• Requires recognition of separate identifiable intangibles so ‘goodwill’
expected to be low value
• Maximum amortisation period of 10 years but must consider residual
value

• Some investment treated as revenue expense:
• Training
• R&D
• New apprenticeship scheme (£3bn funding scheme)
• R&D is a revenue cost
• FRS 102 & IAS 38 (old SSAP 13)
• Revenue and capital costs may generate tax losses
Revenue investment

• Apprenticeship Levy from April 2017
• 0.5% charge on salaries and wages - £15,000 allowance
(effectively no charge unless total wage bill > £3m)
• Digital Apprenticeship Service Account (digital training
vouchers) – registration from January 2017
• Review training provision:
• Make use of apprenticeship training as paying for it?
• Make other training to apprenticeship training within scheme?
• Reduce other training?
Apprenticeships

R&D Tax Credits
• SME – for every £1 of qualifying R&D expenditure, an
additional £1.30 is allowed in its corporation tax
computation as a ‘super deduction’
• Total relief equal to 230% of the actual expenditure
• For every £1 spent – 46 pence of tax saved!
• Repayable credit for loss making companies – 14.5% of
‘surrenderable loss’
• Autumn Statement – more to come?

R&D examples of claims made
• Computer software (new algorithms)
• Manufacturing
• Medical equipment
• Creation of new plant varieties
• Animal feeds – consideration of animal diets
• Audio visual (video conferencing)

R&D opportunities throughout the supply chain
• Developing new techniques in raw materials processes
• Improving, re-engineering or adapting existing products’
quality, life or marketability
• Devising technology or processes to improve efficiencies
and minimize costs
• Using new technologies and techniques to improve
packaging options
• Pushing boundaries with regards the use and application
of the product

• Company can use a trade loss against profits of the
same year
• Can be carried back against profits of the previous 12
months
• Group relieved against profits of that year; or
• Carried forward against profits of the same trade
Trade losses – current position

• Losses incurred from April 2017
• Applies to both standalone companies and group
companies
• Allows carried forward losses to be used against other
income and gains – significantly increased flexibility
• For taxable profits in excess of £5 million, restrict to 50%
the amount of profits that can be offset through losses
carried forward
• Draft legislation - December 2016
Trade losses – new rules

Losses – illustration
Existing New
Year 1 Year 2 Year 2
£ £ £
Rental Profit 300,000 300,000 300,000
Trading Profit 0 50,000 50,000
Loss c/y profit -300,000 -50,000 -200,000
Taxable profit 0 300,000 150,000
Corporation Tax 0 60,000 30,000
Trading loss 500,000 200,000 200,000
Used vs Trade - year 1 -300,000 -50,000 -200,000
Loss carried forward 200,000 150,000 0

• Deferred tax – more loss flexibility
• Losses less valuable in future with tax rate falling
• Need to separate losses pre and post 2017
• Timing of expenditure/projects
• Group structuring – loss planning options
• Payment for surrender of group relief?
Losses – new rules

• Small companies now being affected by these changes
• Financial instruments– tax/saving upfront or disregard
and pay tax under ‘old’ rules?
• Volatility in tax payments possible under FRS 102 so
disregard for certainty may be desirable
• Interest free loans – discount on recognition may be
taxable - make loans commercial?
• HMRC scrutinising transitional adjustments
FRS 102

Thank you
Ian Pring, Tax Consultant

Pensions and investments
Richard Wright, Chartered Financial Planner

fcfp.co.uk
.
Agenda
• Active Cash Management
• Alternative Investments
• Pension Update

fcfp.co.uk
A case of a picture painting a thousand words!
Active Cash Management
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Bank of England Base Rate

fcfp.co.uk
Why are cash rates so uncompetitive?
• Major UK banks have access to cheap liquidity via B of E
• Majority of banks have now recapitalised post financial
crisis
• Demand for borrowing has been weak since the financial
crisis although showing signs of pick up in last 12 months
• So bad that some high street banks have warned they may
have to charge business clients for holding cash

fcfp.co.uk
How can you achieve a greater return?
• Shop around for higher rates
• Consider splitting notice periods
• Continually monitor rates and take action to move when
rates drop
A Cash Management Service enables you to access higher
rates and takes away the time cost of doing the work in
house

fcfp.co.uk
Solution
Time to Maturity Rate Offered Investment Amount Annual Return Net of Tax
Bank 1 Instant Access 0.90% £500,000 £4,500 £3,600
Bank 2 30 Days Notice 1.00% £500,000 £5,000 £4,000
Bank 3 100 Days Notice 1.25% £500,000 £6,250 £5,000
Bank 4 1 Year Fixed 1.40% £500,000 £7,000 £5,600
Total £2,000,000 £22,750 £18,200
Less Fees £7,200
Net Return £11,000
Current Returns 0.10% £2,000,000 £2,000 £1,600
Uplift £9,400

fcfp.co.uk
Why might they be attractive?
• Enable a company to retain trading status for Business Property
Relief
• Greater potential for higher returns than cash
• Diversify the company’s asset base
What about the risks?
• Investment risk exists and permanent capital loss is possible
• Investments are in unquoted companies
• Liquidity could be an issue
• Might take 2 years to qualify for BPR relief
Alternative Investments (BPR Qualifying)

fcfp.co.uk
Retaining BPR Status
No action Taken Planning with BPR
Business Value £5m £5m
Capital reserves £2m £0 (invested in BPR trades)
BPR Qualifying
Amount
£3m £5m
IHT Liability £800,000 (40% of £2m) £0
Capital reserves in this instance are an ‘excepted asset’ and would
be included in a deceased shareholders estate

fcfp.co.uk
Targeting greater returns than cash
Leasing – targets 1.5 to 2.5% p.a. after all fees
Secured lending - financing TV show production - targets
2-4% p.a. after fees
Lending to SMEs – targets 3-7% p.a. after fees
Diversifying your asset base

fcfp.co.uk
A few reminders
• Lifetime Allowance reduced to £1m on 6 April 2016
• Think about your ongoing contributions and projected growth – could
this tip you over the LTA?
• Don’t forget preserved final salary schemes count towards the total
• 3 forms of Protection still available – do you need to consider these?
• Annual Allowance restrictions for higher earners
• Tapering in place potentially reducing Annual Allowance for those
earning in excess of £110,000 and definitely for those earning
£150,000 or more
• Carry forward of previous 3 tax years unused allowances can be
useful – check your position now as limited time opportunity
Pension Update

fcfp.co.uk
• Death Benefit Flexibility
• Can now pass on your pension fund free of IHT (in most cases)
• Maximum advantage can potentially only be gained by ensuring
right death benefit nominations are set up on your plan
• Flexible Access Drawdown
• More or less decimated the annuity market
• Drawing down from your own fund great for flexibility but carries
uncertainty
• Well crafted investment strategy and robust forecasting required to
prevent fund eroding before you do
• Are your pension plans fit for purpose?
• We are finding many existing plans don’t have access to new
flexibilities and can’t provide for tax efficient distribution of death
benefits.
Pension Update

fcfp.co.uk
And finally………
Andy Haldane, Bank of England Economist says property
is better than pension…………….
Why let the facts get in the way of a good story?

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.
The Financial Conduct Authority doesn’t regulate tax planning.
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

Thank you
Richard Wright, Chartered Financial Planner

Funding and transactions
Paul Crocker, Corporate Finance Partner

Programme
• The Impact of Brexit
• Funding Update
• Demystifying MBOs and FAMBOs and why
they can be competitive to a trade acquisition

• ‘Nothing’ directly so far!
• BUT, the indirect impact of the Referendum result has
already been significant in several major ways:
• A circa 17% movement in exchange rates with the Euro
and $
• A reduction in Base Rate (1st in 7 years)
The Impact of Brexit
• Increase in Inflation (remember that?!)

UK exchange rate
Sterling V US Dollar
• Lowest level for 30 years – Trump impact?
• Assists exports, but little change in them to start with
• Forward purchasing contracts running out
• Variable impact on different sectors
The Impact of Brexit – Exchange rates

The Impact of Brexit – Base rate

• “BOE to cut interest rates to lowest level in 322-year history”
• Not really necessary? Or has it been very effective?
• The hunt for yield is on!
• Great for borrowers
• Assuming a 2% margin, illustrative fixed rates are as follows:
The Impact of Brexit – Base rate
1 yr – 2.70% 5 yr – 3.09% 10 yr – 3.30%

Impact of Brexit – projected Bank Rates

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Consumerpriceindex(%)change
Release date
Consumer Price Index
Consumer Price Index

• Erodes savings, personally and corporately – but also the
‘cost’ of debt
• More Inflation-linked contracts?
• RPI, CPI and now RPIJ etc, but what about your
‘Corporate Prices Index’? What is the relevant indicator
for you?
• Wage inflation pressure as unemployment hits 4.8%,
National Living wage impact, auto-enrolment, business
rates increase, fuel costs, imports…
• Inflation is likely to rise ‘significantly’
The Impact of Brexit – Inflation

• Inflation/Interest rates/Exchange rates – all linked
• Misleading ‘indications’
• Negotiations are unlikely to result in easier EU trade
conditions in the short term!
• Will the real impact only start to dawn on people in 2017?
The Impact of Brexit – summary

• Existing trading entity transactions have completed
• Property and Infrastructure transactions postponed
• Activity has significantly returned recently
• Increased interest from overseas purchasers
• More new transactions now being started
• Will the hunt for yield underpin the market?
The Impact of Brexit – on transactions

• Debt and Equity available, hunting for a home
• Rates at very low rates – even long term
• Different sector impact – e.g. property
• Equity starting to become more cautious?
• 362 Lending Institutions and 150 new applications
with the FCA
• PKF Capitalise
Funding Update

• Management Buy-Out
• Family And Management Buy-Out
• Great opportunity to create personal wealth
• Funding available
Demystifying MBOs and FAMBOs

Management:
Finance Director – Andy
Sales Director – Beverley
Commercial Director – Charlie
IT Manager - Dave
Trade Co
50%
50%
Mr Smith Mrs Smith
Price - £5m

New Co
25% 25% 25% 25%
A B C D
100%
Trade Co
£5m
Mr and Mrs
Smith

• How does Newco pay £5m to Mr and Mrs Smith?
• The shareholders (A, B, C and D) put in £5m
– highly unlikely!
• On the basis that Newco owns >50% of Trade Co, NewCo
uses the business and assets of TradeCo to raise finance
• Some cash is paid on Completion, and the balance is paid to
Mr and Mrs Smith later
• A combination of the above.

Raising the Finance
Fixed assets £’000
Land and Buildings 2,000
Plant and machinery 500
2,500
Current Assets
Stock 850
Debtors 4,500
Cash 500
5,850
Current Liabilities
Trade Creditors 3,000
Other Creditors 500
Accruals and prepayments 250
3,750
Net current assets 2,100
Net assets 4,600
Source £’000
Mortgage @ 70%
Asset Finance @ 30%
1,400
150
Invoice discounting @ 70% 3,150
Cash 500
Cash available 5,200

FAMBO
In older companies a diverse shareholder base may have arisen over the years
Eddie
Trade Co
2.5%
24%
Auntie
Doris
Brother
Ted
Trust of
Charles David
Friend of Eddie
George
Hattie
Imogen
James son of Andy
6%
5.4% 15%
10%
2%
2.5%
2.5%
7.6%
Only David (Chief Exec) and James (FC) work in the business with no
shares held by the MD, FD, SD etc
No Shareholders Agreement in place

FAMBO – Option 1
8%
New Co
25% 25% 25% 9% FD
SD
8%
James Eddie David MD
Trade Co
76.5% A
B
C
D

Why MBOs can be competitive to a Trade offer
• Confidentiality maintained
• Less Warranties and Indemnities
• Enables de-risking with the possibility of some ongoing
investment
• May allow for some continued involvement
• Allows for non-financial considerations

Summary
• Brexit – no direct impact so far……but it WILL be significant
• Funding still available at very low rates….even long term
• MBOs can be a great solution to diverse shareholder and
Management aspirations…
....which might mean that your acquisition approach is not
viewed as strongly

Summary
In the last 18 months we have had the following
‘unexpected’ events:
• Tory Election win
• Brexit vote
• Cameron resigning
• May as the new PM
• Trump
Looking ahead, France, Germany, Italy, Greek events…
Will we actually leave the EU?

Summary
JAM tomorrow?
Plan for the unexpected and
………REVISIT YOUR STRATEGY!

Thank you
Paul Crocker, Corporate Finance Partner

Any questions?
Duncan Leslie, Audit Partner Nov 2016

Finance in the South West
Exeter – Wednesday 22 February 2017, Exeter Racecourse
Finance Director Updates
• Taunton – 13 June 2017 (tbc), Somerset County Cricket Club
• Exeter – 15 June 2017, Exeter Racecourse
• Bournemouth – 21 June 2017, AFC Bournemouth
• Bodmin – 28 June 2017, Lanhydrock Hotel & Golf Club
• Plymouth – 29 June 2017, Plymouth Science Park
Upcoming events

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Plymouth - Essential 6-monthly Finance Directors' Update – Nov/Dec 2016

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