Autumn 2010 Newsletter

Buying & Selling Business

We have advised clients on a wide range of transactions and have built up a team of experts that provides practical advice to tight deadlines. Our skill is to manage the process - for a sale, this is
achieving the sale in your timescale and the after-tax proceeds you wanted; for a purchase, this is achieving protection of existing assets and managing the risk of a bad or failed purchase.

Below are a number of issues arising out of recent transactions to illustrate our approach:

  1. Preparing for sale. This should start as early as possible and, certainly, long before a potential buyer has been found. We encourage all of our clients to start this process as part of our annual pre year-end tax planning meeting and then to develop the discussions from this point.
  2. Timing. In our experience, it is often the simplest tax planning which is the most effective. Delaying the date of sale by one month enabled us to save our client £200,000 of capital gains tax.
  3. Capital gains tax. We are frequently instructed to advise on a transaction on the basis that our client expects to pay capital gains tax at an effective rate of 10%. Our starting point is always to confirm full entitlement to entrepreneurs’ relief on the first £5m of gains. The devil is in the detail and we do not assume entitlement without verifying the facts.
  4. Deferred consideration. The seller is taxed on the estimated value of deferred consideration as part of the proceeds of sale. Sometimes, it is appropriate to consider the use of loan notes for part of the consideration as a means to defer the payment of capital gains tax. Sometimes, we advise against this, if there is commercial risk to not receiving in full the value promised.
  5. Due diligence. The first few hours of our engagement can represent an excellent investment. In one purchase, we identified significant undisclosed weaknesses in the target company, at a very early stage in the negotiations. Our client decided to withdraw from the purchase and thereby saved professional fees and time. Once initial due diligence has demonstrated the validity of the purchase in principle, we then tailor further enquiry so as to identify and minimise the risks of the purchase.

R&D Are you claiming relief?

You may be one of the many companies that are not taking advantage of Research and Development (R&D) relief. Even if you already receive the benefit, you should review your claims and accounting policies to ensure that you are not missing out on potential relief. Wages may represent one of the major costs and early consideration is recommended to ensure that the appropriate proportion is claimed, because contemporaneous evidence is best.

In essence, expenditure incurred is eligible for corporation tax relief on 175% of the expenditure. For example, your company incurs expenditure of £50,000 on R&D in the year ending 31 March 2011. If the marginal rate of corporation tax on your company is 21%, then you may claim tax relief of £18,375 (£50,000 x 175% x 21%). The relief is worth an additional £7875 tax relief to your company – an HM Revenue & Customs’ handout that should not be missed.

There is, however, a significant amount of detail, which is not reproduced here, but on which we would advise. Some of the key criteria are as follows:

  • The expenditure must not, currently, be less than
    £10,000 for a 12 month period.
  • Your company must qualify as a ‘small or
    medium-sized enterprise’.
  • Research and development means activities treated
    as such under UK generally accepted accounting

The amount of detail within the legislation should not cause you to forfeit claiming the relief. We will assist you in setting the appropriate accounting policies and procedures to identify and collate the qualifying expenditure and then to finalise and submit claims for relief.

Marketing in a Recession

For large and small companies alike, a recession is not the time to cut marketing spend, but it is the time to refocus and hone it. Here are 6 areas for consideration:

  1. How well do you know your customers? Research your existing customers. Find out why they buy from you and promote this to others. What else would they like you to provide, what do they think of your customer service, quality, delivery performance and value for money? Ensure that you are in contact with your customers frequently and that they know that you are aware of their needs. There may be more business waiting to be found.
  2. Focus close to home. During tough economic periods, horizons shrink. Our first thought is to ensure that our home base is secure and this applies to business too. Companies support local suppliers and may use this in their buying decision. Ensure that your marketing is focused locally first.
  3. Pricing. Everyone is looking for the best deal. Avoid cutting prices but be flexible. Move quantity breaks, run promotions, bundle products together. Always get something in return for lowering the price, otherwise you are just reducing your margin.
  4. Use new channels to market. Developing an effective e-marketing plan can take your products to a completely new market quickly and cost effectively. Developing distribution partnerships will allow you to free up working capital from stock.
  5. Marketing spend. Maintain your marketing and advertising spend if you can. Your competition may be cutting back and your investment will be more effective in a less cluttered market place.
  6. Support your key staff. Businesses are special, because of the people in them. Ensure that you keep your key staff secure and motivated. Let them know what your plans are, that they are appreciated and are the core of the business.

Do you really want to pay more tax?

The Government has stated its intention to raise increased amounts of tax revenue from tax enquiries – “in the difficult economic circumstances it is more important than ever we help and support customers fulfil their obligations while relentlessly pursuing hose who bend or break the rules”. ‘Support’ includes helping taxpayers understand if they have paid too little tax. As a result, the number of tax enquiries will increase and, hence, your risk of being selected for enquiry is higher.

If you have suffered a tax investigation in the past, you will be aware as to just how unpleasant an experience it can be. If you have not, you can only imagine.

What was previously called an investigation is now euphemistically called an enquiry. Be assured that the name may have changed, but the substance of the experience has not improved.

Enquiries are of 2 types – a full enquiry in which all records are requested, or an aspect enquiry in which specific areas of ‘concern’ are the focus. A full enquiry would last typically 18 months plus and an aspect enquiry 6 weeks. Anecdotally, we are aware that aspect enquiries are changing and that it is not uncommon for these to last 18 months plus; in other words, the extent and scope of an aspect enquiry is widening. HM Revenue & Customs has also added a more informal string to its bow in the form of an intervention, known as a compliance check, that often includes a visit of several officers to your site.

In practical terms, this change in attitude by the taxman requires a change to how you should protect yourself. For many years, accountants have offered insurance for enquiries and the traditional offering was for full enquiries. Insurance is also available now for aspect enquiries and interventions. We are offering full cover for only an additional £10, which is great value for money.