Could an MBO be the best exit for you?

Congratulations to all you SME owners out there!

According to Government Statistics, 99% of all private sector businesses at the start of 2017 were SMEs, accounting for 60% of private sector employment and 51% of private sector turnover. SMEs account for 99.5% of businesses in every main industry sector.

But let’s not fall into the trap of thinking that these are all tiny businesses. The definition of a medium sized enterprise is a headcount of up to 250, a turnover of up to 50 million euros and a balance sheet value of up to 43 million euros. In my book, a business at the top end of that range doesn’t feel quite so small.

As regional corporate finance advisers, we are often asked to advise businesses at the lower end of the range, let’s say those with a turnover in the region of £5 million. You know the type – great businesses that make healthy profits and have provided their owners with a comfortable lifestyle. On paper, they look to have a high potential value and quite often, the owner believes that a large trade buyer will sail over the horizon and snap them up. But how often does that really happen?

Whilst each year, we see many success stories involving trade buyers and SMEs, it doesn’t work for everyone. Trade buyers can often say “it’s just too small for us”, “it’s not as scalable as we’d like”, “there is too much reliance on a single product or customer”, or “we are looking for second-tier management”, after looking further into an opportunity. In these circumstances, an MBO deal is often a great alternative for the shareholder.

MBOs are currently very attractive, due to large amounts of available funding at historically low rates of interest. Typically, a successful MBO needs three things: a profitable and cash generative business, a competent and complete management team and a flexible seller confident enough in the new management team to be part of the funding solution.

Let’s take it as read that you have a good business. Your critical task is to develop or find a management team with the ability and experience to run the business such that you feel able to take the risk of part funding the deal.

If you are a business owner or a management team and you think that the MBO route might be the answer for you, don’t put off thinking about it because these things take time. Talk to us, and let us give you the benefit of our experience.

When Will Auto Enrolment Contributions Increase?

The minimum contributions rates for automatic enrolment are set to increase from 6 April 2018 and again from 6 April 2019. Employers will be required to increase the amount of their contributions into their employees’ automatic enrolment pension scheme. Employees’ own contributions will also increase.

 

The table below explains:

Date effective

Employer minimum contribution Employee minimum contribution

Total minimum contribution

Currently until 5 April 2018

1%

1%

2%

6 April 2018 to 5 April 2019

2%

3% 5%
6 April 2019 onwards 3% 5%

8%*

*subject to scheme set-up

Pensions Act 2008, every employer in the UK with at least one employee must put certain staff into a pension scheme and contribute towards it.

All employers that were in business prior to 30 September 2017 had a staged approach to auto-enrolment. However, since 1 October 2017, all new businesses have had to introduce a pension scheme immediately within the minimum 2% contribution level (usually split 1% employer and 1% employee).

What should you do to prepare?

Employers must act to ensure they are prepared to implement the increases correctly to all affected employees.

Employers should review contracts and pension announcements to see if the increased contributions apply automatically to their workers and employees.  If not, then employers may need to consider changes to contracts to increase member contributions which can also trigger a minimum 60-day consultation before the change can be made.

Future rises

The contribution levels will continue to rise until the employer is paying a minimum of 3% towards the pension and the total contribution reaches at least 8% – with the employee making up the rest.

Contact us

If you need advice on understanding these increases, implementing changes or help with any of your auto enrolment needs please contact our wealth management or payroll team on 01254 679131.

PM+M Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority.

Investing in our people…

At PM+M, we recognise that the foundation of us being the best North West firm of finance professionals is our people.  We need to attract, develop and retain the very best people. To do this we work really hard to create and maintain a vibrant culture where people are motivated and empowered to develop, grow and drive change.  We know that we are at our best when our people are at theirs.

We’ve just done a full team survey via Investors in People, as part of our gold accreditation, and had some amazing feedback.  Here are some of the highlights:

100% of the team agree that PM+M is a great place to work and has a bright future

98% agree that PM+M has a plan for the future to ensure our continued success

99% feel encouraged to take initiative in their role

98% feel encouraged to achieve high performance

93% feel motivated to achieve exceptional results

94% feel appreciated for the work we do

100% recognise that we are always seeking ways to improve

Jane Parry, Managing Partner at PM+M, said: “These are amazing results and I’m really proud to be leading such a great team. Maximising potential is a fundamental part of our culture and we invest heavily in it.  It’s the foundation which allows us to help our clients achieve their goals.”

If you’re interested in joining the PM+M team get in touch.  Please email: recruitment@pmm.co.uk or contact us on 01254 679131.

Calling all business owners…

When was the last time you took time out to consider where the value lies in your business? What is creating value and where is it being diminished? This is especially important if you are thinking about selling.

It matters little what flattering numbers might have been whispered in your ear, it is unlikely that a buyer will go for it if they can’t see how to create more value or if your business just has too many inherent risks?

Important questions to ask yourself might be:

  • What does my customer base look like? Am I winning customers, if so why am I winning them? Or is my customer base no different to what it was 5 or 10 years ago? What happens if I lose my largest customer?
  • What value do my products or services create for my customers? Are there better or new products on the market that can do the job? How do they compare in price? What is my profit margin per product? What is happening in my end user markets?
  • How do you compare to your competitors? Where are you better than them? Or worse? What are they up to? Are there any new kids on the block?
  • Where does the goodwill lie in my business? Intellectual property? Know how? Customer relationships? Is it secure?
  • What would happen if I wasn’t there? Would I be missed and if so how badly?
  • Where am I in the economic cycle? Is my business growing or declining relative to the sector?

Take a good look at yourself and be honest. Would you buy your business for what you think it is worth (or what someone else is telling you it is worth)?

If you need objective, independent advice on the value of your business, then get in touch and speak with our corporate finance team on 01254 679131.

Blockchain and Bitcoin – an introduction for beginners written by a beginner

I am pretty interested in finance and economics (often useful as a professional accountant) and I have worked with enough tech companies over the years to feel vaguely competent in understanding at least the business models of most technology businesses and the markets they operate in. It has however taken quite a while to get me to the point of feeling like I understand anything at all about blockchain, bitcoin, cryptocurrencies and the whole related world which seems to have become really prominent recently.

Talking to fellow professionals and business owners I realised that it wasn’t that I was a long way behind the curve on this – it was simply that this stuff has usually been really badly explained by the specialists who are all over it and generalists like me can’t keep up. I decided to try and shed some light on this whole topic and if some tech expert finds I have misunderstood it, please just correct me!

So first of all, “blockchain” – this really is a set of data “blocks” linked together in a way quite similar to a chain. Each data block is encrypted and the way the encryption works is that part of it is linked to the previous block in the chain.  Even if you can’t read the data (because you don’t have the key to the encryption) you can tell that the data in the previous block is unchanged because the link to that previous block in your current block still works – i.e. the chain is unbroken.

These data blocks are stored on a large number of independent computers linked together in a peer to peer network (no-one computer is in charge of the network) and the common feature is that they have all agreed to run the same protocol (i.e. programme). Because the computers are all linked any change to any block would be instantly highlighted – the “chain” on one computer would no longer work and would be different from the chain on every other computer from that point on.

This is therefore a very flexible and resilient way to store data transparently – and the fact that the data is encrypted and only the people with the key know what it actually means makes the process very private as well.  A really clever way of squaring the circle.

Bitcoin is a specific blockchain. An individual Bitcoin is a particular number that meets a set of criteria. There are only around 21 million numbers which meet these criteria and so there is a restricted supply of Bitcoins. Identifying numbers which meet the criteria is a very computer processing intensive exercise – this process is known as “mining bitcoins” and there are untold thousands of computers devoting processing power to it all the time. When you read that “bitcoin mining is using more power than the entire state of Mexico”, it illustrates just how much effort is being put into this computing.

So an individual number which meets the criteria is a bitcoin and forms one of the blocks. The block is encrypted but if you have the key to the encryption then you “own” it and have the capacity to transfer the key to someone else – this transfer of the key is the transfer of value and the encryption keys are therefore the real Bitcoin currency.

The potential of blockchain however goes well beyond Bitcoin. There are other cryptocurrencies (the most prominent of which is probably Ethereum) and a whole host of other applications which people are devising for using the squared circle of transparency and privacy that blockchain offers. An interesting idea I have seen is a register of all large diamonds – you can put the details into blocks in a blockchain with the physical details unencrypted and ownership and cost details attached but encrypted. This would allow much easier verification of the ownership of valuable assets.

I think the key value of blockchain is that it allows some transactions and relationships to be conducted very quickly, without needing to take the time to build trust as has previously been needed. In lots of ways, in the world we live in now, there is already a huge degree of trust and the extra admin of using blockchain is completely unnecessary. In other cases, it can be a game changer.

And if you think I am going to tell you what the future value of Bitcoin is, think again.  I am an accountant, not a prophet!

 

Festive tax tips

Tax on the Christmas Party

As the festive season gets underway, here are a few tax pointers to watch out for on rewarding employees this Christmas.

How much can you spend on employees at the Christmas party?

Throwing a Christmas party for your employees will be treated as an income tax exempt benefit, provided the cost of the party does not exceed £150 per head.  The limit is an all or nothing exemption which means if the limit is exceeded, say at £200 per head, the full £200 will be a taxable benefit for each employee.

You can provide your employees with two or more parties throughout the year, however the costs will only fall within the exemption if both parties combined do not exceed £150 per head. If the costs do exceed the limit you can choose which party best utilises the exemption of £150 per head and a taxable benefit will arise on the others.

Ancillary costs such as paying for transport to the party or accommodation will also count towards the £150 per head test.

Can you claim the VAT back?

Any input tax paid on the cost of a Christmas party can be recovered in full if the party is exclusively for employees, even where directors attend the party. This is subject to the normal partial exemption rules.

However, if non employees attend, for example if you invite spouses of employees, input tax recovery must be restricted and only the element relating to employees can be reclaimed.  You should be aware that any VAT incurred on the cost of providing the party, and any ancillary costs, will need to be included in the total cost against which the £150 limit is tested.

If the party is just for business owners/shareholders, input tax cannot be reclaimed.

T’is the season to gift an employee…

As an employer, you can give your employees Christmas gifts without them incurring a taxable benefit if it falls within the trivial benefit exemption. For the exemption to apply, each gift must not:

  • exceed a value of £50,
  • be cash or a cash voucher,
  • be a reward of services performed, or
  • be part of a contractual obligation.

If the gift meets the conditions listed above, it will be completely tax free. However, in close companies (generally, a company is “close” if it is privately owned and controlled by five or fewer individual participators) and the gift is to a director or officer of that company the total tax exemption for trivial benefits is capped at £300 per tax year.

Any cash gifts to employees will be treated as earnings and attract income tax and national insurance through the payroll in the normal way.

What about the VAT?

Any input tax paid on the cost of gifts to both employees or clients can be recovered in full under your normal VAT recovery rules.

If the value of gifts to any one person in a 12 month period is below £50, there is no need to consider output VAT.  However, if it exceeds £50 per person, you should account for output tax on the value of the gifts.

Christmas Present Appeal 2017

Christmas is just around the corner and we’re once again appealing to you for gift donations.

This year, the PM+M team are collecting gifts for Blackburn, Burnley and Bury Children’s Services. We want to make it our biggest one yet!

If you are able to spare a little time and money, we know your donations will be greatly appreciated. For some children, this could be the only gift they receive this Christmas. Gifts can be for children of any age or gender and we have included a few guidelines below:

  • Gifts should be to the value of around £10
  • Gifts must be new
  • Please either deliver gifts unwrapped or wrapped
  • If wrapped, gifts should be clearly marked with gender and age range
  • Gifts should not contain confectionery or alcohol

Gifts can be dropped off at our any of our offices between 8:30am and 5pm. The last day for drop off is Friday 15 December.

The PM+M team would like to take this opportunity to thank you for your kindness and generosity and we do hope that as many of you as possible will join us in supporting such a worthy cause.

A reminder of our addresses is below but should you require any further information, please get in touch with our Marketing team on 01254 679131.

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Autumn Budget 2017

Jane Parry, Tax Partner, comments on today’s Autumn Budget announcements…

All in all this Budget was a bit of a damp squib as the Chancellor had no real room for manoeuvre – thanks mainly to the ongoing saga that is Brexit.

In my opinion, it actually threw up more questions than answers, which isn’t great for a Government that needs to promote a sense of stability in what are pretty turbulent times.

It’s positive that he recognised that frictionless trade is important but there’s nothing he can really do to address it right now, as everything is dependent on the outcomes of our negotiations with Europe. The challenge will be to ensure that we don’t drown in a sea of trade bureaucracy once we reach 29th March 2019.

I was pleased to hear him reassert his support for the Northern Powerhouse. However, much of the focus was on Greater Manchester but what about Lancashire and Cheshire who, just like Manchester, need long overdue investment in both connectivity and digital infrastructure? There was quite a bit of talk about cities but not much about towns.

On a more positive note, he resisted the urge to meddle in the pension tax rules which I welcomed.  I also welcome the increased investment in training and growing relevant skills for the future.  Finding skilled people is a huge challenge for many businesses and anything that helps to boost the supply of those people is good news.

For me, this Budget was missing some vital ingredients. Firstly, more effort is needed to reduce the bureaucracy faced by businesses and help them deal with the pressures that Brexit will bring in this regard.  Also, instead of just increasing the main R&D tax credit to 12%, he could have flipped how it operates so it becomes a real time payment rather than retrospective claim. That simple switch would allow thousands of companies to put investment into R&D far more quickly as they would have the cash available.

Announcements like increasing the National Living Wage by 4.4% are great in theory and should really benefit lower paid workers, but it will put additional pressure on small businesses as a significant number of SMEs probably won’t be able to pass all of that new wage burden onto their own clients or customers.

Even though we knew there were never going to be any major shocks or giveaways I came away feeling pretty deflated; it all seemed a bit gloomy, one dimensional and pessimistic. The downgrading of the OBR forecasts goes against the success and growth stories that we are seeing with our clients every single day and I fear a weak Budget and a weak Government could make businesses and the general public feel jittery and ultimately drive down confidence needlessly.

Phishing Emails and Bogus Phone calls from HMRC – BEWARE

You may think it’s your lucky day if you receive an email, text or phone call telling you that you’re due a tax rebate, or in contrast, your heart may sink if you receive a phone call saying you have outstanding taxes to pay. Either way, this is not always what it seems – a growing number of fraudsters are now targeting victims with some form of tax scam.

This currently seems particularly prevalent in the East Lancashire area, so to make sure you don’t fall for one of the many scams out there, we’re taking you through the most common.

Phone calls

Fraudsters can call up unsuspecting victims, telling them that they are due a tax rebate after being in the wrong tax code for several years.

The person on the other end of the line might ask for your bank or card details in order that you pay an administration fee in advance of receiving the rebate. Without realising the scam, the victim gives out their card details and makes the payment.

A more recent variation on the scam sees fraudsters proclaim that the victims owe tax to HMRC and need to pay this with immediate effect or be subject to prosecution.

One of our clients recently informed us that they themselves had received one of these scam phone calls, in which the person claiming to be from HMRC sounded professional, convincing and as though he was in a position of authority. It was only when our client demanded further information from the caller (such as a VAT registration number, VAT quarter end and previous VAT payment dates), that it became clear that the call was a scam.

If you receive a phone call such as this, alarm bells should ring. HMRC would never phone you for issues such as this, they would always write.

Phishing Emails

We have seen many fraudulent emails purporting to be HMRC, telling you that you need to click a link and enter bank account details to receive your refund.

By clicking on the link, you’ll often go to a page that looks like a genuine HMRC page. This is a copycat website. The page will then ask you to input your personal information such as your debit or credit card details.

The email can also include attachments which could contain malware designed to steal personal or financial information. You should check any email that claims to be from HMRC for spelling and grammatical mistakes, and generic greetings like ‘Dear Customer’.

HMRC’s own website clearly states that:

HMRC will never send notifications of a tax rebate/refund by email, or ask you to disclose personal or payment information by email.

Generally, HMRC would only send you emails regarding support, or deadline reminders and alerts.

Be cautious if the email insists on immediate and urgent action, or says you only have a few days to do something – this is a tell-tale sign of a scam email.

Texts

Be wary of texts claiming to be from HMRC that say you’re due a tax rebate. The text will claim you just need to click the link provided to receive it. The link takes you to a fake website that looks like an HMRC page.

It will usually say that you have a deadline to claim your tax rebate and use urgent language to try to get you to click the link.

What HMRC say

HMRC say they will never use texts or emails to:

  • tell you about a tax rebate or penalty;
  • ask you about specific facts about your tax return and financial status; or
  • ask for personal or payment information.

If you think that you have been the victim of such scams and require further advice, please contact the PM+M team on 01254 679131.

HMRC tightens the net on offshore tax avoidance

Put simply, HMRC and other tax authorities worldwide are getting tougher on individuals, trustees and companies not paying the right amounts of tax. They are increasing their focus on tax compliance both onshore and offshore in a bid to ensure all tax payers are paying the right amount of tax.

HMRC has more data sharing facilities than ever before and data is already flowing into the UK from sources such as the US FATCA arrangement, Crown dependencies and overseas territories arrangement. The introduction of the common reporting standard from September 2017 means data will also be flowing in from over 50 countries already signed up to the exchange of information agreement. In addition, HMRC can now collect and handle large amounts of data via their computer system ‘Connect’ which as the name suggest, connects with lots of external sources of information such as the land registry, banks and other financial institutions, the DVLA and many more. All this global and national transparency means HMRC has access to more data than ever before and is using this to ensure taxpayer compliance in all areas.
UK taxpayers with offshore interests will soon be subject to new reporting obligations with severe penalties if they fail to comply. To assist taxpayers in understanding their obligations and to offer a way to correct past irregularities HMRC introduced the Worldwide Disclosure Facility – WDF.

It opened on 5 September 2016 and runs until 30 September 2018.  It has been introduced to enable taxpayers to disclose UK tax liabilities that relate wholly or partly to an offshore issue. That is, income arising outside the UK, assets situated or held outside the UK, activities carried on wholly or mainly outside the UK or funds connected to a UK liability transferred outside the UK.

Changing rules over recent years, particularly in relation to residence and domicile could now mean that even if you have taken advice in the past, this may now not be correct. As a first step, taxpayers with complex international tax affairs should review their position and, if need be, ask for a health check to be undertaken. If a disclosure is then required the WDF can be used.
To encourage and drive tax compliance this facility will offer taxpayers a final chance to clear up issues from the past and avoid the highest rate of penalties that HMRC can impose.

A key part of the WDF is known as the Requirement to Correct – RTC

The RTC requires taxpayers to disclose any outstanding UK tax related to offshore matters up to 5th April 2017. Taxpayers will have until the end of September 2018 to do this and if they do so, tax interest and penalties will be paid under the current rules. If this deadline is not met, additional penalties known as Failure to Correct penalties will be added to the settlement which will be a minimum of 100% of the outstanding tax. There will also be an asset based penalty for serious cases of 10% of the value of the asset on top of other penalties.

There are also separate further penalties which can be applied for offshore tax depending on the jurisdiction of the asset. This could be up to a further 200% of the tax not paid and depends on the jurisdiction of the territory.

Penalties generally under the disclosure agreements will be less severe if the disclosure is unprompted by HMRC and there has been no deliberate attempt to conceal the tax.
The message is therefore clear, if you believe you may have a requirement to disclose a previously undeclared source of income, either in the UK, overseas or both, you should use the current disclosure facilities available to ensure a better financial outcome and you should do it now. The penalties for being found out if you do not will be severe.

If you would like to discuss any related issues or need further advice or guidance please get in touch with Julie Walsh on Julie.walsh@pmm.co.uk or 01254 679131