Business

Information Commissioner’s Office (ICO)

2 min read

Thousands of small-business owners and landlords say they are confused by Information Commissioners Office (ICO) letters demanding a fee to ensure the protection of their customers’ and tenants’ personal information.

The Information Commissioner’s Office (ICO) upholds information rights in the public interest, promoting openness by public bodies and data privacy for individuals. ICO is an executive non-departmental public body, sponsored by the Department for Digital, Culture, Media and Sport. The organisation covers the following:

  • Data Protection Act
  • Freedom of Information Act
  • Privacy and Electronic Communications Regulations (PECR)
  • Environmental Information Regulations
  • INSPIRE Regulations
  • The re-use of Public Sector Information Regulations

Data protection fee

Recently, the Information Commissioners Office (ICO) has launched a campaign to remind small companies and SME’s of their legal responsibility to pay a data protection fee. For most small companies the charge is £40 or £60 a year. The move marks the start of an extensive programme to make sure the Data Protection Fee is paid by all those who need to pay it, unless they are exempt. 

They apply to companies that store personal information which can be used to identify someone which is stored electronically such as a computer, camera or smartphone such as clients’ names addresses and telephone numbers for work purposes. It is likely you’ll need to pay and there is a fine up to £4,000 for not registering.

Fee Checker

If you have received a letter from the ICO, it is a useful reminder that you need to either pay your fee or let the ICO know you are exempt, so they can update their records. Alternatively, you can quickly and easily find out if your organisation needs to pay the fee by using ico.org.uk/fee-checker, unless your business is exempt fill out the form at https://ico.org.uk/no-fee

For companies unsure if they are exempt, there is a helpline number: 0303 123 1113.

The charge will also apply to a wide range of landlords, institutions, including schools and solicitors, but not the police or anyone who stores information for judicial reasons.

CCTV

It is likely an annual fee payment is due for businesses holding personal information, for business purposes on any electronic device, including using CCTV for crime prevention purposes.

Be aware of scams

The ICO is warning companies to be aware of scams relating to payment of the data protection fee. Businesses that receive a letter, text message, email or telephone call from ICO representatives and want to check that it’s genuine please search ‘ICO fee’ using your usual search engine. Follow the top results to website links which begin with https://ico.org.uk, and this will bring you to the official website.

Staying compliant

Stay up to date with resources on GDPR and compliance for small businesses by visiting ico.org.uk/hub for more information.

We can help you with all aspects of business compliance. Please contact us for further advice and assistance.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice. Each comment posted by third party readers/subscribers of our website on topics is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for advice.

Directors and Furlough

1 min read

HM Revenue & Customs have updated their guidance on the Coronavirus Job Retention scheme on 4 April 2020.

The new guidance confirms directors are able to be furloughed and where this decision is made it should be formally recorded in the company’s record and the director notified in writing.

With regards to what a furloughed director is able to do for the company the guidance states:

“Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”

You can read the full updated guidance on the GOV.Uk website.

https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

Supporting businesses impacted by COVID-19

3 min read

In an interconnected global economy, the new coronavirus (also known as COVID-19) is affecting UK businesses and their operations. It has resulted in restrictions on travel and public gatherings, as well as supply chain disruptions and market uncertainty. We share some practical steps you can take to help manage the impact of COVID-19 on your business.

This page is updated regularly to give the latest news and resources for business owners. We’ve pooled together all our experts’ advice and sources of support together in one place. This should make it easier for you to find useful information and to know what your next steps are at this challenging time.

Keep up to date with the latest developments and advice        

You can read the latest guidance and advice to businesses on the GOV.UK website. The CBI have also published detailed guidance on their website.

Have a plan

In case all or some of your workforce have to self isolate put together a plan as to how you will manage this process now.  Here are a few practical things to consider:

  1. How will you communicate to your customers what is happening
  2. Can you divert your phone system
  3. How will the workforce communicate with each other if working from home
  4. Do you have up to date contact details for all your workforce
  5. If staff would need to connect to a computer network remotely check they can do this now
  6. Is it possible to split departments and segregate from one another to reduce the risk that everyone in a single department is affected  

Keep your staff informed

Firstly, keep everyone updated as to what you are doing to reduce the risk of exposure in the workplace.  Ensure everyone knows what they should do in the event that they do experience symptoms.

To avoid uncertainty you should also communicate to your staff the company sickness policy and how this would apply in different circumstances.

Financial support for businesses

The Government announced in the Budget a number of measures they are introducing to support businesses that are affected by COVID-19.

These include:

  • a statutory sick pay relief package for SMEs
  • a Business Rate Relief for small businesses and pubs
  • small business grant funding of £3,000 for all business in receipt of Small Business Rates Relief (SBRR) and Rural Rates Relief
  • the Coronavirus Business Interruption Loan Scheme to support long-term viable businesses who may need to respond to cash-flow pressures by seeking additional finance
  • the HMRC Time To Pay Scheme

Full details can be found on the GOV.UK website

Struggling to pay your tax because of COVID-19

If you are having difficulty or believe you will have difficulty paying your taxes on time HM Revenue & Customs have set up a new Coronavirus helpline.

Where possible you should call HMRC before the tax liability falls due to discuss a payment plan.  If you do not contact HMRC and don’t settle your liabilities on time you may incur a penalty.  HMRC Coronavirus Helpline – Telephone: 0800 015 9559

Sick pay for Self-Employed

For the self employed who find themselves out of work or have to self isolate, it is now simple to make a claim for Universal Credit or Contributory Employment and Support Allowance. https://www.gov.uk/employment-support-allowance

Coronavirus Business Interruption Loan Scheme

For the Business Interruption Loan schemes contact your bank as they will be the lenders that administer the loans. You can find out more information on the British Business Bank website. https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/

Government launches coronavirus business support finder tool

The Government have launched a new tool to help businesses quickly and easily identify what support is available to them during the COVID-19 pandemic.

You can find the tool at: https://www.gov.uk/business-coronavirus-support-finder

The Future Fund

HM Treasury have published details of a new scheme called the Future Fund.  This new scheme, which is set to go live in May, is aimed at start-up high growth businesses which rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme.  The Government will issue convertible loans of between £125,000 and £5,000,000, which need to be matched by private investment.

The scheme, when launched, will be run in partnership with the British Business Bank.

Full terms of the loans and eligibility can be found at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/880119/Convertible_Loan_Key_Terms_-__Final_Version_.pdf

Self-Employment Income Support Scheme (SEISS) Going Live

HMRC have announced that the scheme will be open on 13 May with the first claims being paid into bank accounts on 25 May or within six working days of making a claim if later.

HMRC have already started to contact individuals that they believe may be entitled to claim.    

It is possible to check your eligibility by using HMRC’s online checker.  You will need your Unique Tax Reference (UTR) Number and National Insurance Number.  Once you have checked your eligibility you will be given a date as to when you should make your claim.

Those who are eligible will be able to claim a taxable grant worth 80% of their average trading profits up to a maximum of £7,500 (equivalent to three months’ profits), paid in a single instalment.

Full details of the scheme can be found here.

Should I buy an electric car?

3 min read

With no new petrol and diesel cars and vans to be sold in the UK after 2030, and with hybrid sales banned from 2035, there is now more momentum than ever around getting drivers into cleaner vehicles.

With almost 456,000 zero-emission Battery Electric Vehicles on UK roads (RAC), if you are thinking of making a change to your car, you now have more choice than you would have last time you went car shopping.

The growth of electric cars

Most of the car manufacturers are prioritising a move towards electric cars. They have either an electric or hybrid version available in their range of cars for sale. If you are considering an electric car we give you guidance below.

Consider an electric car if…

✔ You drive less than 150 miles per day
✔ You have a garage or driveway
✔ You’re a company car driver
✔ You drive in central London
✔ You want to do your bit for the environment

Electric cars aren’t so good for…

✘ Regular journeys of several hundred miles
✘ Daily on-street charging
✘ Cheap purchase prices
✘ Towing

Government subsidies available

New zero-emission electric car still qualifies for a £3,500 grant from the government. New and used electric car owners also benefit from a grant towards a home charger, which can recharge batteries up to three times faster than a three-pin plug.

New zero-emission electric cars costing less than £32,000 qualify for a £1,500 grant from the government. New and used electric car owners also benefit from a grant towards a home charger, which can recharge batteries up to three times faster than a three-pin plug. 

The Office for Low Emission Vehicles provides a grant of up to £350 for most charge points for electric and plug-in hybrid cars, reducing the cost of some units to little more than £200. 

Tax on electric company cars

The benefit in kind rates for company cars has meant that the popularity of company cars has dwindled over the last two decades. This could be about to change now that reduced rates are being introduced for 100% electric cars from 6th April 2020 meaning that the benefit in kind charge is negligible. 

For all fully electric cars on sale, the BiK rate is just 2% during the 2022/23 tax year at which it will remain during 2023/24 and 2024/25 (see table below). This compares to 37% at the opposite end of the emissions scale.

In 2019/20 the annual taxable benefit in kind on 100% electric cars was based on 16% of the list price For electric cars registered from 6th April 2020, the benefit in kind is 0% of the list price for 2020/21, 1% for 2021/22 and 2% for 2022/23. 

CO2 (g/km) Electric range (miles) 2020-21 rate (%) 2021-22 rate (%) 2022-23 rate (%)
1-50 >130 0 1 2
1-50 70-129 3 4 5
1-50 40-69 6 7 8
1-50 30-39 10 11 12
1-50 <30 12 13 14

Source ICAEW

  • The employer will be due to pay class1 A NIC which is set at 15.05% of the benefit in kind (this is tax deductible).
  • The employer can also claim tax relief for the costs of insurance and maintenance.
  • In addition to the above, the employer can also provide charging facilities at the company premises free of charge which will be a tax free benefit for employees.

Capital Allowances

A further attractive tax relief for the employer is that, if a new and unused car is purchased rather than leased, they can offset the entire cost of an electric vehicle is tax deductible in the year of purchase. There is clawback of relief for any proceeds received when the car is sold. 

HMRC has shared a handy tool calculator to work out the estimated cost of the vehicle to both the employer and the employee.

Business Mileage Payments

If charging facilities are not available at their workplace an employees can be paid a tax free mileage rate of 4p per mile.

Salary Sacrifice

Given the beneficial benefit in kind rates for electric cars, some employees may benefit from agreeing to a salary sacrifice on order to facilitate the provision of an electric company car.  

How we can help

If you would like help with deciding whether to buy an electric car, the team at Loucas can assist you. Do contact us if you would like any further help or advice in this area.

For more advice, read our article on Buy, HP or lease.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Capital Gains Tax

2 min read

Previously, disposals of UK residential properties are reported and any capital gains tax (CGT) calculated through your Self-assessment Tax Return.  The tax is therefore due for payment on the 31st January following the tax year of disposal.

What is changing?

This will all change for disposals of UK residential property after 6th April 2020 (the date of disposal is normally deemed to be the date of exchange). For these disposals, they must be reported to HM Revenue and Customs and the Capital Gains Tax paid within 30 days of the date of completion via the Capital Gains Tax on UK residential property service.

There is an exemption for the disposals where there is no tax to pay. Typically, these include properties that are covered by the main residence exemption; gains within the individual’s capital gains exemption or where there are losses from earlier capital disposals that reduce the gain below the exemption.

It is therefore vital to start collating information to compute the gain as soon as a disposal is anticipated.  In some cases, a disposal may require professional valuations to be obtained.

CGT liability

There are penalties for late filing of the information and payment of the Capital Gains Tax which follow the same rules as for self-assessment.

For those that do not normally file a Self-assessment Tax Return, there would be no need to do so in respect of the disposal. For those that do, they will need to disclose the gain on the Self-assessment Return as well.

When filing through the Capital Gains Tax in UK residential property service the tax payable is, in many cases, likely to be an estimated as it is not known the total income will be for the year or there may be later capital disposals the at affect the amount payable. The tax is therefore treated as a payment on account of the final liability which will be finalised either as an amendment via new service or disclosure of the final position on a self-assessment Tax Return.

The new rules apply to individuals, personal representatives and trustees.

How we can help

We are always on hand to answer any questions you may have about Capital Gains Tax. We can advise as to the best course of action in your own particular circumstances, so please do contact us.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

 

HMRC delays the introduction of off-payroll rules to the private sector

3 min read

The reforms will shift the responsibility for assessing employment status to the organisations employing individuals. The rules would have applied to contractors working for medium and large organisations in the private sector, and were due to come into effect on 6 April.

Steve Barclay, Chief Secretary to the Treasury, stressed that the introduction of the rules has simply been delayed, rather than cancelled. The rules will now take effect on 6 April 2021. 

In a statement, HMRC said: ‘This is part of additional support for businesses and individuals to deal with the economic impacts of COVID-19. 

‘This means that the different rules that exist for inside and outside the public sector will continue to apply until 6 April 2021.’ 

The off-payroll rules have applied to the public sector since 2017 and, following a review of the proposed changes earlier in the year, were to be amended to include intermediaries supplying personal services in the private sector.

Commenting on the delay, Andy Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), said: ‘The government has done the sensible thing by delaying the changes to IR35 in the private sector.

‘This is a sensible step to limit the damage to self-employed businesses in this grave and unprecedented situation, but we also urge the government to do more. It must create an emergency Income Protection Fund to keep the UK’s crucial self-employed businesses afloat.’

The ‘Intermediaries Regulations’

The Intermediaries Regulations, also known as IR35, apply to individuals who provide their personal services via an ‘intermediary’. An intermediary may be another individual, a partnership, an unincorporated association or a company; however, the most common structure is a worker providing their services via their own company – known as ‘personal service companies’ (PSCs). 

The rules are specifically designed to prevent the avoidance of tax and national insurance contributions (NICs) by those using PSCs and partnerships. The rules do not stop individuals selling their services through either their own PSC or a partnership. However, they do seek to remove any possible tax advantages from doing so. Instead of allowing contractors to extract taxable profits as dividends, thereby avoiding income tax and NICs, they would need to be paid as if the payment is a salary.

The IR35 rules apply to individuals who would be classed as employees, rather than self-employed, if they supplied their services as an individual rather than through their PSC.

HMRC has made a tool known as the ‘check employment status for tax’ (CEST) tool. This is available for organisations that need to determine who IR35 applies to. https://www.gov.uk/guidance/check-employment-status-for-tax

Changes to private sector contractors

In 2017, HMRC introduced new off-payroll rules to the public sector, which saw some contractors’ net income cut significantly. The rules shifted the responsibility for IR35 compliance from the individual contractor to a public body or recruitment agency. It is intended that similar rules are applied to the private sector.

The effect of these rules will be:

  • the medium or large business (the end user) will asses the status of the PSC. They will then inform the contractor (and agency paying the PSC if applicable) or their determination and reasoning. The PSC/Agency has a right to appeal the decision.
  • If the PSC is deemed to be within IR35, the medium or large business (or an agency paying the PSC) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual
  • generally, the entity that pays the PSC for the services must deduct Pay as You Earn (PAYE) and employee NICs as if the deemed payment is a salary paid to an employee
  • the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment, but also employer NICs on the deemed payment 
  • the net amount received by the PSC can be passed on to the individual without the company deducting any further PAYE and NICs.

Going forward

Chancellor Rishi Sunak has promised that penalties for IR35 breaches will not be ‘heavy handed’ during the first year of the implementation of off-payroll rules to the private sector. Mr Sunak said that there will be a soft-landing penalty period where HMRC will allow organisations to adjust to new measures.

Commenting on IR35, Mr Sunak said:

‘We are shortly to publish a review of how it should be implemented with some tweaks and improvements to ensure that the transition is as seamless as possible. ‘I can also tell you that I have spent time with HMRC to ensure that they are not going to be at all heavy handed for the first year to give time to adjust as well, which is an appropriate thing to do.

‘What IR35 does is change the balance, so instead of people making the assumptions about how they should be taxed, we put the onus on the company to make that assessment for them.’

How we can help

We are always on hand to answer any questions you may have about off-payroll working. We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.

Business Asset Disposal relief (Previously known as Entrepreneur’s Relief)

2 min read

Business Asset Disposal Relief, is available for those in business, which may reduce the tax rate on the first £1 million of qualifying lifetime gains to 10%.

This is targeted at working directors and employees who own at least 5% of the ordinary share capital of the company and the owners of unincorporated businesses.

BADR is available to individuals on the disposal after two complete qualifying years of:

  • all or part of a trading business carried on alone or in partnership
  • the assets of a trading business after cessation
  • shares in the individual’s ‘personal’ trading company
  • assets owned by the individual used by the individual’s personal trading company or trading partnership where the disposal is associated with a qualifying disposal of shares or partnership interest.

New 5% rules for company shareholders

To qualify for BADR, the company needs to be an individual’s personal company where the individual must:

  • be a company employee or office holder
  • hold at least 5% of the company’s ordinary share capital and
  • be able to exercise at least 5% of the voting rights.

For disposals on or after 29 October 2018, they must also satisfy one of the following tests:

  • a distribution test – an individual is entitled to at least 5% of the company’s profit available for distribution to equity holders and 5% of the assets available for distribution to equity holders in a winding up; or
  • a proceeds test – an individual is entitled to at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.

Thought should be given to the structure of your company at the outset to ensure that the tax benefits of Business Asset Disposal Relief are not lost.

Investors’ Relief (IR)

If you do not meet the criteria for Business Asset Disposal Relief (BADR) you may still be able to take advantage of the ow 10% rate of tax through IR.

IR is available to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

•        shares must be newly issued and subscribed for by the individual for new consideration

•        be in an unlisted trading company, or an unlisted holding company of a trading group

•        have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016

•        have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

Talk to us about your BADR planning

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you. 

If you would like to discuss any of the issues raised in this guide please call 01622 758257 or contact us.

Selling a business

8 min read

Selling a business is often the culmination of years of work. It can be a difficult, emotional and time-consuming task. It is not something that many managers or owners do more than once. You have to get it right first time. This briefing outlines:

The advice you will need.

  • Grooming the business for sale.
  • The sale process.
  • Negotiation tips.

1. The decision to sell

1.1 Plan ahead.

  • Think about the possible sale of your business several years before you intend to start the sale process. Good planning will help you maximise the value you get.
  • Consider other ways of exiting from the business. You may be unable to find a buyer, so you should look at options such as a management buy-out or passing the business on to a family member.

1.2 Be clear about your reasons for selling.

  • Common reasons include making as much money as possible, protecting your financial future, moving to something new, retirement or ill health.
  • You may feel the business and staff have better prospects under a new owner.

1.3 Write down your specific objectives.

These might include:

  • Sell by a given date.
  • Sell at a target price, or at least at a fixed reserve price.
  • Receive immediate payment in cash of at least a certain amount.
  • Continue (or not) to be involved in the running of the business.
  • Secure the jobs of your employees.
  • Minimise personal tax liabilities — early tax planning and advice is essential.

1.4 Pick the right time.

  • Consider the economic cycle.
  • Sell before your market declines.
  • Consider any forthcoming tax changes.

For those who sell a business out of choice, rather than a necessity, a common mistake is to sell too early. Spend the necessary time building up stability and profitability (see 3).

2. Getting the right advice

Choose advisers who specialise in selling businesses.

2.1 Good advisers can fill many roles

such as:

  • Boosting your credibility and making negotiations go smoothly.
  • Providing a realistic business valuation.
  • Approaching potential buyers without revealing your identity.
  • Widening the list of possible buyers.
  • Allowing you to run the business while they concentrate on selling it.

2.2 Consider using a combination of advisers to cover all aspects of selling.

  • A corporate finance adviser can help groom the business (see 3), identify buyers, and write the Sales Memorandum (see 4).
  • A non-executive director can offer objective advice and support.
  • A corporate lawyer can draft and negotiate the Sale Agreement.
  • A tax accountant (or lawyer) can minimise your tax liabilities.
  • Specialists can accurately value assets.

2.3 Agree a clear fee structure.

There are three main ways of charging fees:

  • An hourly rate. Obtain an estimate of how many hours’ work is required. Agree an upper or a review limit, and the timing of interim fee statements.
  • A fixed rate for a certain piece of work (eg drawing up the Sales Memorandum).
  • A contingency fee dependent upon success and the eventual sale price.

2.4 Divide responsibilities between advisers.

  • The instruction and fee basis for each adviser should be clear and in writing.
  • Avoid overlapping responsibilities, but seek second opinions on important issues.
  • Agree the lines of communication and make sure each party knows its responsibilities for dealing with enquiries. Take care to define who is doing what and coordinate the process.

Get key items of advice confirmed in writing.

3. Grooming the business

Showing the business in the best light is a crucial factor in gaining the best possible price.

3.1 Create a good financial record.

  • Concentrate on short-term results.
  • Try to show a stable financial pattern through the year. Delay or bring forward major purchases to help achieve this.
  • Be realistic when using depreciation figures or the timing of income in your accounts. Provisions for bad debt and old stock should also be realistic.
  • Sell under-used equipment and property.
  • Improve your working capital position by good stock management and tighter credit control.

3.2 Make sure management information systems are working smoothly.

  • Buyers will want information quickly.
  • You need to show that the business is under control.
  • Ensure the information is accurate. A buyer’s confidence will be undermined by errors.

3.3 Present the assets in good condition.

  • Premises and equipment should look well maintained.
  • Stock should be neat and orderly.

3.4 Make the business less risky from the buyer’s point of view.

  • Turn informal deals with suppliers and customers into formal contracts.
  • Establish sensible incentive schemes to encourage key employees to remain with the business.
  • Reduce dependence on a few large customers or a single source of supply.
  • Tie up any loose ends. If your tenancy agreement is due to expire soon, make sure the landlord will agree a new one, preferably in writing.

There are many ways to make a business shine, so it is always worth discussing with your adviser or non-executive directors.

4. Sales Memorandum

The Sales Memorandum is the initial marketing document sent to interested parties. It is written jointly by the management and your corporate adviser. It should:

4.1 Make the business sound attractive.

4.2 Be a source of hard information for buyers.

4.3 Show that the business can be improved.

  • This is particularly important when the buyer plans to be a hands-on manager.

Keep detailed confidential information out of a Sales Memorandum. This can be shown later to serious buyers.

5. Marketing the business

Marketing your business falls into six stages.

5.1 Find potential buyers

such as,

  • Competitors, suppliers or customers.
  • New market entrants, including foreign companies.
  • Your own management (a buyout) or another management team (a buyin).
  • Financial investment companies.

5.2 List possible buyers.

  • This should involve no more than 30 names, divided into an A and a B list.

Only use the B list if the A list does not produce results.

5.3 Approach the possible buyers to see if they are interested.

  • Keep your own business anonymous by using an adviser.
  • It is usual to approach a business through its adviser (eg the auditor), unless you have a better contact. The adviser can direct you to the appropriate person.

If the business is run by an owner-manager, approach the individual directly.

5.4 Ask your legal adviser to draw up a short confidentiality agreement for interested buyers to sign before any discussions commence.

5.5 Send out the Sales Memorandum with:

  • An outline of the sale timetable.
  • Details of where and when you would like to meet buyers.
  • A request for opening offers.

5.6 After receiving offers, draw up a shortlist of buyers.

  • Reject buyers without the finance to make the purchase.

The process of meeting buyers can be disruptive to managing and running your business. Balance the access you give buyers with maintaining confidentiality and productivity.

6. Weighing up the offers

There are many ways of paying for and taking over a business. You will need to weigh up what is on offer. The most important things to consider are:

6.1 Can the buyer really pay for the business?

  • However good an offer may sound, unless it is properly financed, it is worthless.
  • Buyers must have the right approvals (eg from the board or from shareholders).

6.2 What form will payment take?

  • Cash payment up front is the safest option but may also be the least tax efficient.
  • If deferred cash payment is offered, establish whether it is guaranteed. It may be in the form of earn-outs which are linked to future sales or profits.

In a situation where payments are reliant on the future performance of the business, make sure you retain some form of management control to enable performance targets to be met. Otherwise, you may receive less than you are entitled to.

  • A share swap is only comparable to a cash payment if the shares you receive are in a quoted company. Make sure to check the tax implications.

Shares in an unquoted company may be hard to value and difficult to sell.

6.3 What will your responsibilities and liabilities be?

  • You may be asked — or required — to remain involved in the business. But remember you will no longer be in control — consider whether you may find this difficult and frustrating.
  • You will probably be tied to warranties and indemnities for a year or more.

6.4 How will the business be run in future?

  • What expansion or sales plans does the buyer have?
  • Will any parts of the business be sold off?
  • How will the deal affect employees?
  • Will anyone be made redundant?

6.5 How long will completion of the sale take?

  • Industry and accounting due diligence must be completed. This may include an accountant’s report.

The accountant’s remit will be to verify the key management information and to identify potential problems for the buyer.

Legal due diligence may take up more time — sometimes for several months.

7. Choosing a buyer

You should now finalise sale terms.

7.1 Be sure you fully understand everything you are signing for, eg any warranties or indemnities you will have to provide.

7.2 Play off one party against another so that they raise their offers.

  • Be prepared to bluff. The buyers will negotiate, but are unlikely to pull out.

7.3 Choose the buyer you want to sell to.

  • Discuss the deal only with this candidate.
  • Do not try to negotiate better terms at this stage, as this would destroy any trust that is developing between you and the buyer. A good working relationship is important.

Your goal now is to complete the deal without any hiccups.

7.4 Quickly agree Heads of Terms with the buyer.

This is a signed agreement setting out the deal’s chief points.  Parts may be legally binding. For example:

  • An exclusivity period during which the seller cannot negotiate with anyone else.
  • Payment of the buyer’s (or your) costs.

7.5 Tell other potential buyers that you have signed a Heads of Terms with the buyer.

  • Keep at least one other buyer interested, as a back-up.

8. Completing the deal

The buyer’s offer will be subject to further due diligence and to the detailed sale agreement. Provided that this due diligence is trouble free, and neither party has any surprises up its sleeve, the sale should now be relatively safe.

8.1 The further due diligence usually involves the buyer’s accountants and lawyers.

  • The accountants will want to look at every aspect of the finances of the business.
  • The lawyers will want to check that your business has full legal ownership of all key assets (eg property deeds and licensing contracts). They will also want to look at the legal relationships with customers, suppliers and employees.

Many legal issues are covered by warranties and indemnities that you, as a vendor, will almost certainly be asked to sign. Read these carefully — they can be far reaching.

8.2 Certain members of your staff (e.g. Finance Director or Company Secretary) may have to be involved early on in the due diligence process.

  • Be mindful of the feelings of your employees, especially when communicating your plans, as you may lose key members of staff if they fear their jobs are in jeopardy. Under EU rules, businesses with more than 50 employees have to notify and discuss, with their employees, any changes likely to affect their jobs. Penalties for non-compliance can be severe.
  • Carefully consider who you tell and when you tell them.

8.3 Finalise the sale and purchase agreement.

Getting your price

Once you have received opening offers, start the bargaining process.

  1. Set a price.
  • Decide what price you are likely to get.
  • Reject buyers who are significantly below this level.

2. Coax the remaining buyers into closer contact, keeping them well informed.

  • Offer them access to selected members of your team.
  • Distribute positive business data, before the buyers ask for it.
  • Be ready to counter negativity.
  • Be open and transparent.

3. Spur buyers into action. Ask for final offer

  • Tell them how much to raise their offers.
  • Consistently emphasise the future business opportunities.
  • Make it clear that other buyers are also seriously interested in the business.

Setting and holding out for a high price usually pays off. Potential buyers will gain an impression of genuine self-confidence.

Further Information

As a firm, we are able to provide a wide range of services tailored to your particular industry.  We believe by staying up to date with not only current but changing legislation and industry news we are better placed to help our clients and their businesses succeed. 

If you would like to discuss any of the topics in this update or how Loucas can assist you please do not hesitate to contact us.

The information contained in this publication has been prepared for general guidance and is not intended as advice.  Whilst every care is taken to ensure the accuracy of the information, no responsibility can be accepted by Loucas for any loss resulting from acting or refraining from acting as a result of any material in this publication.  The information in this publication is not designed as a substitute for seeking professional advice.

Investors’ Relief (IR)

1 min read

If you do not meet the criteria for Business Asset Disposal Relief (BADR) you may still be able to take advantage of the ow 10% rate of tax through IR.

Business Asset Disposal Relief (BADR) has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

How we can help

We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.

The construction industry and VAT: analysing the changes

6 min read

The VAT domestic reverse charge for building and construction services comes into effect from 1 October 2019. Given the scale of the changes, it would be appropriate for businesses to plan for the reverse charge now.

The reverse charge: an overview

The reverse charge represents part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud. As part of this type of fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. Construction is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.

The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future, the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.

The reverse charge is a business-to-business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end-user’.

Broadly then, the reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the subcontractor supplying the services. The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via CIS and not to:

  • zero-rated supplies;
  • services supplied to ‘end-users’ or ‘intermediary suppliers’.

Under the scheme a VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 October 2019:

  • should account for the output VAT on supplies received through its VAT return
  • does not pay the output VAT to its supplier on supplies received from them
  • can reclaim the VAT on supplies received as input tax, subject to normal VAT rules.

The supplier should issue a VAT invoice, indicating the supplies are subject to the reverse charge. An end-user should notify its end-user status, so the supplier can charge VAT in the usual way.

Example

Safe as Houses Ltd is a VAT-registered contractor. It uses Brickyard Bill, who is also VAT-registered. Brickyard Bill tells Safe as Houses that the reverse charge applies.

Safe as Houses does not pay VAT to Brickyard Bill. It accounts for the VAT on its own VAT return, entering it as both output and input tax. It enters the value of the purchase from Brickyard Bill as part of its inputs. It does not include the value in its outputs.

Their VAT returns will look like this:

  • Brickyard Bill puts the value of the sales in box 6 of the VAT return, but no output tax in box 1
  • Safe as Houses uses box 1 to declare the output tax on the services from Brickyard Bill to which the charge applies. It doesn’t include the value of the transaction as an output in box 6. It reclaims the input tax on reverse charge purchases in box 4 and includes the value of purchases in box 7.

Consequences for businesses

Details of the charge have changed since it was first announced. Originally, the charge was to apply to ‘labour-only’ supplies. Now however, the charge applies to construction services, including materials. With the domestic reverse charge, the value of reverse charge supplies will not count towards the VAT registration threshold of the recipient business.

For many construction businesses, the change is likely to have far-reaching consequences. Processes will need to be in place to ensure VAT accounting systems are compliant with the unusual requirements of the reverse charge. The rules require a number of verification checks to ascertain VAT status of customers, CIS registration (in some circumstances) and end-user or intermediary supplier status.

Given that output VAT currently provides many businesses with a positive cashflow advantage, the impact on cashflow and liquidity will also need appraisal. Changing to a monthly VAT return cycle to accelerate payments due from HMRC may be of benefit. The VAT Flat Rate Scheme (FRS) may no longer be of benefit, and reverse charge transactions cannot be dealt with through the Cash Accounting Scheme.

Specified services

Construction services covered by the reverse charge are those falling within the category of ‘construction operations’ for the CIS, and include the construction, alteration, repair, extension, demolition or dismantling of buildings or structures, including offshore installations.

Works forming part of the land are also included, such as walls; pipe and power lines. So too are preparatory services such as site clearance and scaffold erection; the installation of systems of heating and lighting; and painting and decorating. The reverse charge includes goods, where supplied with specified services.

Supplies excluded from the charge, where these are supplied on their own, include the services of architects, surveyors and some consultants; and the manufacture of building or engineering components, materials or plant.

Services with reverse charge and excluded elements

Where excluded services are supplied with services subject to the reverse charge the whole supply is subject to the reverse charge. As it can be difficult to determine in some situations whether the reverse charge applies, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties may be treated as reverse charge supplies, if both parties agree.

Where there is any doubt, HMRC recommends reverse charging, if the recipient is VAT-registered and payments are subject to the CIS.

Considering end users

The domestic reverse charge applies to VAT-registered businesses throughout the CIS supply chain, but is designed not to apply to ‘end-users’ or ‘intermediary suppliers’. ’End-users’ are VAT-registered businesses receiving supplies of specified services which are not sold on as construction services.

Examples could be a construction firm selling an interest in land as a newly built office, or a large retail business having trading premises built for its own use. Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end-users. Examples could be landlords and tenants, or recharges of building and construction services within a group of companies.

Businesses will need to know when they are dealing with an end-user or intermediary supplier, so they can invoice appropriately. The end-user or intermediary supplier should inform the supplier of their status so that VAT can be charged as normal. If the end-user does not provide confirmation of status, the supplier should issue a reverse charge invoice.

Businesses dealing frequently with end users may wish to include a statement, in business terms and conditions, to the effect that it is assumed that the customer is an end-user, unless they indicate otherwise.

Effective invoicing

To invoice correctly under the new rules, suppliers should mark the invoice to the effect that the domestic reverse charge applies, and that the customer must account for VAT. The amount of VAT due under the charge should be clearly stated on the invoice. It should not be included in the amount shown as total VAT charged.

The rules require that when the customer is liable for VAT, an invoice should include the reference ‘reverse charge’. Any of these are acceptable:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC.

Where invoices are created with an IT system that cannot show the amount to be accounted for, HMRC refers suppliers to VAT Notice 735, ‘Domestic reverse charge procedure’ bit.ly/2OsGJWK.

HMRC’s policy

HMRC has issued technical guidance bit.ly/2WHQ5R2.

There will be a ‘light touch’ approach to genuine mistakes and penalties for six months from October where businesses are aiming to comply and act in good faith. Businesses knowingly claiming end-user status when the reverse charge should have applied, however, will be liable for the tax due and may be liable for penalties.

How will the changes affect you

The new rules will have a significant effect on VAT compliance and cash flow. Key questions to consider include:

  • is the reverse charge likely to apply to supplies to and from other VAT-registered contractors and subcontractors you deal with?
  • how will your accounting systems calculate and report reverse charge supplies?
  • how will you check on an ongoing basis that supplies and purchases are treated correctly?
  • will your cashflow suffer if you no longer hold output tax, and would changing to monthly VAT returns help?
  • if you use the VAT Flat Rate Scheme, how will the charge impact you?

Overall, the change may mean that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. Under the rules, for example, some subcontractors, with VAT to reclaim on inputs but no VAT to charge on outputs, will regularly receive VAT refunds.

A regular repayment position could trigger a VAT inspection. For these reasons, we would recommend taking stock of VAT and CIS compliance across the board.

How we can help

In this blog, we have only been able to touch on some of the key issues. Please contact us for an in-depth discussion on the matter.

Extra resources

DISCLAIMER: This blog is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.