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

Finance Directors’ UpdateTaunton

Chairman’s welcomeNick Farrant, Corporate Partner Nov 2016

pkf-francisclark.co.uk

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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

Programme

Brexit and Autumn Statement Update – John Endacott

Current Issues in Financial Reporting – Stephanie Henshaw

VAT Update – Richard Staunton

BREAK

Tax Update – John Endacott

Pensions and Investments – Ian Townsend

Transactions and Funding – Andrew Killick

LUNCH


Brexit update & Autumn Statement briefing

John Endacott, Head of Tax


• 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


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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

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21

-20

0

20

40

60

80

100

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 John Endacott, Partner & Head of Tax

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 2,149Change in net debt 5,230Net 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

Richard Staunton, VAT Director

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 – CJEU – highest court, has the final say

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 Decision2 years 4 years 5 years


.

Brexit – likely impactBiggest 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 transfer2. Not a TOGC, have to fund extra VAT temporarily, costs an additional £5,000

SDLT3. Not a TOGC, will not be able to reclaim VAT £100K, costs an additional £5,000

SDLT4. 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 years2. Opt to tax the property, do not charge VAT on the rent, clawback of £80,000 over

the next 8 years3. Opt to tax the property, charge VAT on the rent, no clawback4. Do not opt to tax the property, charge VAT on the rent (storage), no clawback

Scenario 2 – Surplus property rental


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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


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Uniforms

• French Connection case

• Gift Rules – Over £50 need to account for output VAT


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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


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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 amount paid


And finally …..

Thank you

Richard Staunton, VAT Director

Corporation tax update


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

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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


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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?

1 822 673 554 455 366 297 238 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 NewYear 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 0 300,000 150,000Corporation 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


Financial Planning UpdateSpeaker Month/YearPensions and investments

Ian Townsend, 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

8/1/2

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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 RBS and Nat West 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

Case Study• £2m currently held on instant access at 0.1%• All held with one institution• Only £500,000 needed on instant access • Remaining can be split as follows:

• £500,000 – 30 days notice• £500,000 – 100 days notice• £500,000 – 1 year fixed

Desire is to achieve better rate after fees and spread across minimum of 4 institutions


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 cashLeasing – 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

Financial Planning UpdateSpeaker Month/YearThank youIan Townsend, Chartered Financial Planner

Funding and transactions

Andrew Killick, 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


Sep-1

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Dec-11

Mar-1

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Jun-1

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Consumer Price Index

Release date

Con

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rice

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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 – AndySales Director – BeverleyCommercial Director – CharlieIT 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 £’000Land and Buildings 2,000Plant and machinery 500

2,500Current AssetsStock 850Debtors 4,500Cash 500

5,850Current LiabilitiesTrade Creditors 3,000Other Creditors 500Accruals and prepayments 250

3,750Net current assets 2,100Net assets 4,600

Source £’000Mortgage @ 70%Asset Finance @ 30%

1,400150

Invoice discounting @ 70% 3,150Cash 500

Cash available 5,200


FAMBOIn 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

GeorgeHattieImogenJames 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

SD8%

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

Andrew Killick, Corporate Finance Partner

Any questions?Nick Farrant, Corporate 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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Taunton - Essential 6-monthly Finance Directors' Update – Nov/Dec 2016

Business

Transcript of Taunton - Essential 6-monthly Finance Directors' Update – Nov/Dec 2016