Winter 2009 Newsletter

Losses

The Pre Budget Report increased the scope for companies to carry back trading losses. Even though losses are best avoided, in some cases, such as through research and development claims, a cash profit can be turned into a paper loss for tax purposes and previously paid corporation tax recovered (see Winter 2007 Newsletter for more details on research and development claims). The previous rule allowing losses to be carried back one year has been extended to three years, however the maximum loss that can be carried back, to years two and three, is a total of £50,000.

Pre Year End Tax Planning Point

As part of the basic service provided to our clients, we hold a pre-year end tax planning meeting. One of the purposes of this meeting has always, in part, been to set dividends to ensure that the maximum tax benefits are gained for our clients. Due to a change in stamp duty, it is now even easier to move shares, especially between husband and wife, to optimise our clients position. Share transfers with a value of £1,000 or less, are now exempt from stamp duty and stock transfer forms on such transactions no longer need to be presented to HM Revenue & Customs for stamping.

The value of the consideration is based on the actual value paid for the shares and not the deemed market value, so even quite large percentage holdings can fall within this exemption, if no or less than market value is paid. Where market value exceeds £1,000 then capital gains implications can be mitigated by the use of Entrepreneurs Relief.

Periodic review of share ownership is essential if the tax efficiency of a business is to be maintained and it is for this reason that we maintain a dialogue with our clients as to the changing nature of their business.

On Mergers

In these challenging times it can be tempting to seek solice and hoped for shared costs in the form of a merger. A cautionary note however. Half of all mergers fail to deliver the expected improved turnover and reduced costs. This can be for a number of reasons, all of which should be considered as part of any merger process.

Inconsistent goals 
Often its is said that there is no such thing as amerger only a take over. When businesses join the parties need to identify what it is about each business they value and what requires change. In this way the proven successful traits of each business are adopted rather than a synthesis of a good and a bad policy.

Poor planning
Even when there is goal congruence the actual merger can be badly implemented. Of course there is the important mechanics of the deal involving tax planning and legal agreements, but more fundamentally the business needs to know how it will operate after the merger agreement has been signed.

Failure to implement necessary post merger changes 
Even where a plan has been created the plan needs to be driven through effectively and on a timely basis. If after merger there are still two operating and reporting regimes then the benefits of the merger are likely to be lost.

The third point leads onto the important issue of winning staff support for the merger. This is critical when it comes to key staff. This is where involving key staff in the future of any business is essential. Without the right incentive package for staff, any time of change, may it be merger or business sale, can lead to an exodus of key staff. Silbury are very experienced in both advising on mergers and ways of motivating and retaining key staff, through such means as share options, please contact us should you wish to discuss any such maters in more detail.

Cashflows

Even in times of growth, forecasting future business cash flows is an important tool for managing a business. Whether volatility in trade is caused by contraction or growth, a business owner needs to be able to forecast cashflows, so that proactive measures can be taken to ensure the business has the cash it needs to trade successfully.

A cashflow forecast is created out of information that the business routinely records to maintain its profit and loss account and balance sheet. The balance sheet provides the starting point for any forecast, as it shows the businesses current assets and liabilities. From these opening values, expected income and expenditure items, from the profit and loss account, can be projected forward and their impact on cash,  debtors and creditors recorded. This will provide, an estimated cash at bank position, over time.

Remember to account for large one off payments such as quarterly VAT and capital purchases. No doubt many of you already prepare cashflow forecasts but for those who do not, we strongly urge that you get into the habit.

Insolvency & The Owner Manager

Introduction
In these difficult times businesses will fail. For the owner manager this does not have to be the end of the line. Provided the business owner's personal position is reviewed and where possible adjusted before the insolvency process is initiated, the entrepreneur should be able to live to fight another day. The key to achieving this is pre-formal insolvency preparation.

Dividends
For small businesses, remuneration by dividend is still the most common route. The usual pattern is that of interim dividends or drawings which are then ratified by reference to management or year end accounts. There lies the problem. Frequently businesses do not tie in their interim dividends to properly produced financial information and as a consequence dividends can continue to be drawn even after the company has slipped into the red. A liquidator will look to directors to repay such dividends which have not been drawn out of distributable reserves. In many cases directors have not given any thought to the nature of the payment that they have drawn from a company. There is often the ability to categorise the payments as wages and account accordingly for tax before the liquidator is called in.

Guarantees
Frequently directors are required to provide guarantees whether in a trade or banking context. This will inevitably be called in on a liquidation. An early review of these commitments will determine the impact on the guarantor. This is clearly relevant to the director's decision as to when to liquidate. In some cases further short term funding by the guarantor may improve the long term position under the guarantee, while causing no detriment to creditors. It is also worth obtaining an opinion as to the enforceability of, in particular, trade guarantees which are often capable of challenge.

Directors Loan Accounts
When director's loan accounts are overdrawn these clearly constitute an asset of an insolvent company. The liquidator will take immediate steps following appointment to call these debts in. Frequently the director's loan accounts are however inaccurate and do not fully reflect the position between the director and the Company. It is however far more difficult to argue that they should be adjusted post appointment of the liquidator. A little bit of preparation and reconciliation in conjunction with your accountancy advisor can avoid unnecessary and costly actions by the liquidator.

The message is take advice at the earliest opportunity from a qualified insolvency professional.