The new world of converging standards

1st January 2015 will see the introduction of new accounting standards in the UK (FRS 101, FRS 102 and FRS 103), which may well change the way your professional adviser deals with your company figures. Jono Wilson of Mansfield-based accountants Barnett & Turner explains what the new rules mean. We’ve been talking about new accounting standards for a number of years and some accountancy firms have already chosen to adopt them for their clients. By the beginning of 2015, it will no longer be optional. Everyone will need to comply.

Put simply, figures are going to be calculated in different ways to reflect the increased drive towards standardisation in accounting practice around the world. You may see the impact on both your profit and loss account and your balance sheet. In turn, this might change the view taken of your business by both your bank and HMRC as well as credit reference agencies.

At the time the switch is made, there will be a need for two sets of figures. Your accountant will review the books in the light of current UK GAAP rules, but also produce a set of accounts which complies with the new regime. This will allow year-on-year comparison between two points – say, 31st December 2014 and 31st December 2015.

If the banks see a reduction in the net assets, there’s a danger they may argue you’ve broken a covenant when in fact under the old rules you were fully compliant. If your accountant feels this is likely to be an issue, it may be necessary to sit down and talk the numbers through – explaining the way in which the accounting procedures have changed and reassuring your bank that there’s been no material change to your position.

It’s even possible that a company which has been solvent under the old standards might technically become insolvent under the new rules. This situation could arise if your profits are hit by the rebuttable 20-year maximum amortisation period for goodwill becoming five years or indeed the changes to how deferred tax is calculated.

The revision to the figures could, for example, then lead HMRC to argue that dividend payments are technically illegal. In larger businesses, changes will mean the revaluation of investment property being reflected in the P&L reserve, leading to ring fenced profit which is non-distributable.

If this all sounds a little worrying, remember that there’s an upside too. If your business is operating across different market places, we’re now getting closer than ever to ‘convergence’ in accounting practices. This means that consolidation of accounts is potentially going to become a lot easier.

Your accountants will be anticipating the changes and will be well equipped to advise you on their implications, although as a rule of thumb, the smaller your business, the less likely you are to see a major impact.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Even when you act global, you can think local.

If you’re an international business, you might imagine you need to employ a large, global accountancy practice. There are, however, other options, writes Jonathan Wilson of Barnett & Turner. One of the Big Four accountancy firms may seem like an obvious port of call if you’re running a sizeable business internationally. Surely, so the argument goes, you’ll need a firm which has a presence across the different jurisdictions in which you operate?

Actually, there’s an alternative solution which can prove to be just as effective and, in many cases, can suit you better. In a nutshell, you find a firm which is part of an association, such as HCWA. You get a more affordable partner who can provide a more personal service. They’ll have good local knowledge and an understanding of the specific regulatory regime in the country they’re based, AND they’ll also have global reach through the sister firms to which they’re affiliated.

As an illustration, through our connections with HCWA and their international liaison officer, we have been able to advise on the setting up of overseas trading subsidiaries with support from local firms in Europe, being fully briefed of the local tax regime to avoid nasty surprises. We were confident of their ability to deliver effectively and were pleased to be able to provide our client with an elegant solution: two independent firms with a high service ethos, both of whom can work happily alongside each other within the same association.

So when you’re choosing a professional adviser, remember that they don’t necessarily need offices around the world to be effective at managing your accounts. You may do better to find a local firm you trust and see if they’re part of an international association providing national and international connections at local rates.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Changes To Taxation Of Pensions On Death

Hot on the heels of the relaxation of the rules on pension drawdown earlier this year, the Chancellor announced at Party conference that he intends to abolish the 55% tax charged in certain circumstances on the balance of undrawn pension funds at death. This creates further flexibility in pension planning which should now be given greater priority in your financial plan. At present a pension fund can only be passed down tax free on death if the individual has not drawn anything from it, including the tax free sum, and is aged under 75 on death, otherwise there is a 55% tax charge on the fund. This has prompted some individuals to draw down the maximum amount available each year during their lifetime on the basis it only suffers a maximum 45% income tax charge. There are however restrictions on how much can be drawn out of the fund each year during an individual’s lifetime, but these restrictions are set to be removed from April 2015.

Now that the 55% tax charge is due to be abolished from April 2015 it will prompt those drawing a pension to reconsider the amount they draw, safe in the knowledge that what they leave behind will not suffer a tax charge on their death and can be passed down. Under these new rules if the death occurs before the age of 75 then the undrawn fund can be withdrawn in full by the beneficiaries tax free but a death after 75 results in an income tax charge on the beneficiaries as they draw it down.

If the fund is not fully drawn down by the beneficiaries in their lifetime then it can pass down to the next generation on their death, thereby creating a situation where pension planning today can be beneficial for a number of generations. These are clearly quite progressive changes and will offer much more scope on pension planning in the years to come. It will also remove one of the biggest criticisms of pension schemes, the restricted access to the fund which currently exists.

Exciting times ahead!!

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Property ownership: a talking point for husbands and wives

The way in which you share ownership of property with your spouse can have big financial implications, writes Tracy Henson of accountants Barnett & Turner. When a husband and wife buy a house together, they are usually ‘joint tenants’, which means they have equal rights to the property. In the event that one of them dies, the home will automatically pass to the other partner, but it’s only possible to sell or remortgage with the other’s consent. A good analogy is to think of the property as a bowl of soup. It’s not possible to cut it in half.

If you’d prefer your property to be more like a cake which can be sliced in various directions, then it’s essential that your legal status is as ‘tenants in common’. This allows for different shares of the property to be owned by the two partners.

Imagine a scenario, for instance, in which you own a second home and rent it out. If your spouse is working and is a higher-rate taxpayer, but you earn a lot less, it makes sense for you to receive the rent as income. That way, you’ll end up paying a lower marginal rate of tax and help to protect your child benefit at the same time, as you could avoid your partner heading over the £50k threshold established by the government.

It’s worth bearing in mind though that HMRC will, by default, consider you to be joint tenants, so you need to make your status clear and legally watertight. It’s usually a simple matter, if both of you agree. You just need to arrange to make a declaration of trust stating the way in which the shares are owned. Alternatively, one partner can issue a notice of severance. The co-owner simply has to acknowledge receipt. Either method then also requires a form to be sent to the Land Registry.

Most of the time, I would advise my clients that the minority shareholder in the property should retain at least a nominal 1% stake. Remember that you’re not just splitting ownership of the income, but also the underlying ownership of the house or apartment, which calls for a great deal of trust. If a husband, say, has all the earned income in the household, while the wife receives the proceeds from property, this may be good news from the perspective of income tax liability, but may not be an ideal scenario in relation to Capital Gains Tax and inheritance tax. So talk through the options with your accountant before making any fundamental decisions.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Own a second home? The taxman may be ringing the doorbell.

Don’t assume that the Revenue won’t investigate you for the profit on your rented property, writes Jonathan Wilson, Partner at Barnett & Turner. A new campaign is under way and it’s time to take action. According to HMRC, landlords may owe more than £500m in unpaid tax from the profit they make on renting out homes. Although there are 1.4m people who let property in the UK, half a million of them aren’t even registered with the taxman. It’s figures like these which have led to the creation of the Let Property campaign, in which the Revenue may investigate as many as 900,000 property owners renting out homes in the UK and overseas.

Although the news may come as a shock if you’re currently a landlord of a second home or investment property, it’s worth thinking calmly and seeing the initiative as an opportunity to perhaps get your affairs in order.

You can make a voluntary disclosure to HMRC about any undeclared income by phoning the Let Property campaign helpline on 03000 514 479. Tell the Revenue that you want to fill out a notification form and they’ll then give you three months to calculate and pay what you owe.

Many categories of individual landlord can benefit. It doesn’t matter whether you have a single property or more than one. You can be living abroad and renting out a property in the UK or doing the reverse. Specialist landlords – dealing in student or workforce rentals – can take advantage of the scheme, as can someone renting out their main home for more than £4,250 a year.

It’s important to stress, however, that Let Property is not designed to be used by companies or trusts renting out residential property or anyone letting commercial property.

If you have any queries, it’s well worth discussing your position with your accountant who can deal with HMRC on your behalf.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Opening up in the UK: a guide for overseas businesses

With the right professional advice, you can feel much more confident about setting up a business in the UK, argues David Wilson of Barnett & Turner: Imagine you are setting up a business in an overseas territory. You may be establishing the venture to undertake a specific contract, or you may just be dipping your toes into new territorial waters. Either way, would you want to go to all the expense and hassle of trying to recruit a finance team overseas, when you don’t know anything about the local labour market or culture? Similarly, without the knowledge of the local legal, accounting and tax regulatory framework, setting up a business in an overseas location can be a daunting task.

The challenges are, of course, also true in reverse. An overseas business setting up in the UK will find itself confronted by the same issues. Professional advisers need to work closely together to provide the guidance needed at the beginning of the venture, including the selection of the most appropriate structure for the business, from both a legal and tax perspective.

Lawyers can assist with, among other things, company formation, appointment of directors and the issuing of shares, as well as commercial contracts for client and subcontractor agreements, company secretarial issues, annual returns and banking agreements. You can then turn to your accountants for advice and support on other matters.

If your business has employees, you will require assistance with UK employment legislation, contracts of employment for UK staff and taxation of inbound or outbound employees. There’s also the question of corporate benefits, which might be anything from medical and dental care through to maternity/paternity leave, death in service, salary exchange and pension auto-enrolment.

The lack of a local finance function can often be a challenge. An outsourced accounting and payroll provider takes away the hassle of bookkeeping, calculating and paying suppliers, employees and payroll taxes. They can also help with the submission of VAT Returns and the paying of any VAT due, the preparation of management accounts and the filing the year-end financial statements in accordance with UK standards.

With the advent of cloud-based bookkeeping and payroll software, your overseas head office can have access to live data that is maintained by the outsourced provider.

Outsourcing allows the directors and owners to concentrate on their ‘core’ function, while growing the business and customer relationships in the UK. It can also mean that less investment is required in IT and software to support the finance function and allow limited resources such as office space to be used for core activities. Outsourcing also gives you peace of mind on staffing issues such as training, sickness and holidays.

Taxation advice will also be important. As an overseas owner, you’ll need to understand your reporting obligations in the UK. Any employees you bring over to the UK, or subcontractors you engage to carry out work over here, will have UK tax reporting obligations. Your parent company will need advice on how to repatriate any profits made in the UK, while specialist input may be required when dealing in VAT, as well as Import/export.

One final thought to bear in mind is that although the UK company on its own may be considered ‘small’ for audit purposes, an audit may be required of a UK subsidiary of a medium or large-scale overseas group.

With the right support and advice in place at the outset, the challenges of establishing a UK business shouldn’t be insurmountable. So make sure you speak to your professional advisers at the earliest possible stage.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Business planning tips you can tap into

Jo Tye of my own firm, Nottinghamshire-based accountants and tax advisers, Barnett & Turner offers her five top recommendations for businesses looking to capitalise on the economic upturn. As we’ve moved out of recession over the past year or two and new opportunities are now presenting themselves for many businesses, it’s a good time to take stock of how your company is shaping up. Here are some suggestions for issues you might want to address, although it’s often good to seek out the advice of your accountants and discuss your plans together:

Rate your business as it is today

An obvious starting point is to examine the strength of your balance sheet and your level of profitability.

Look at your client relationships

Are your clients ‘blue chip’ in terms of their calibre? What’s the depth of your relationship with them? Another critical point is to consider whether they are providing you with a recurring income, or whether you’re often forced to seek out new customers.

Examine your supplier relationships too

It’s worth thinking about how far you’re able to control the supply and price of any goods or services you need to conduct your business. It may not always be possible to pass price increases on to your customers.

Manage your cash flow

What is your situation in relation to cash flow and working capital? Do you have sufficient headroom? It’s very difficult to make long-term decisions if you’re struggling on a daily basis to manage cash. Make sure you don’t have too much of it tied up in debtors and stock.

Write that business plan

This is about looking ahead and thinking about where you want to be and when. Are you hoping to exit? To pave the way for a successor? Or simply to grow the business over the coming five years? This is the time to get anything unnecessary off the balance sheet and ensure that your ownership structure is appropriate to your aims. While you might be able to produce a plan yourself based on, say, your turnover, gross profit margin, net profitability and the amount of money you hold in the bank, anything more complex will need the involvement of your professional adviser.

The real skill of running a business is dealing with these issues over a sustained period – challenging yourself, where necessary, as the journey unfolds. So do schedule regular meetings with your accountant to check on progress. In the meantime, a few hours of thinking time now could prove invaluable in the years ahead.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Ringing the changes in the world of audit

The more independent your auditor, the better the service you get. This week I have a guest article from, Detlev Anderson, a partner in accountancy firm Ryecroft Glenton, who offers his perspective on an important issue for clients. Many businesses and charities value long-term relationships with auditors, seeing them as trusted and knowledgeable advisers, who are able to comment on a wide range of business topics. These professionals are also in a unique position to provide independent assurance to stakeholders.

If a firm has been working with you for ten, or even twenty years, why would you necessarily want to change? Surely their understanding and experience will be invaluable? It is, however, important to remember that this very familiarity can actually be a potential problem. After all, it might possibly threaten the auditor’s independence. In short, the relationship can get too ‘cosy’.

One solution, which you often see in major public interest entities, is the periodic replacement of audit partners. Another is the regular tendering of audit services. (We are currently seeing a spate of major PLCs effectively swapping their current Big Four auditor for another.)

These larger businesses generally have strong internal controls and are often less reliant on their audit firm to provide additional business advice, whereas smaller organisations (which usually have less stringent corporate governance requirements) may well be more dependent on their audit partner. So is it possible to maintain auditor independence without throwing the baby out with the bathwater?

In my view, the answer is yes.

Directors, trustees or governors are right to value the advice and experience of their auditors, but must also satisfy themselves as to their independence and integrity. They can do this by ensuring their auditors employ at least some of the following safeguards:

• quality assurance reviews carried out by another partner within the firm to review areas of the audit file which might have been ‘coloured’ by the other work done by the firm;
• membership of an organisation such as HCWA, which exists in part to provide member firms with training and quality assurance reviews of a sample of their work;
• use of different teams of staff, e.g. one preparing a tax computation and another carrying out the audit;
• the timely training of all partners and staff; and
• the use of regularly updated audit programmes to ensure full compliance with changing statutes and regulations.

In an environment such as a charity, it’s particularly important for trustees (who are unpaid volunteers) to be clear that the auditors are independent. Look for evidence of clear, structured procedures when it comes to reporting. Not every trustee must see the audit planning document, but they should have the opportunity to read it. Generally there is a benefit for the audit findings report to be circulated to the whole board, rather than just the Audit Committee.

Once you have addressed some of these questions and have received appropriate assurances, you can then enjoy the benefits of using trusted and knowledgeable advisers, without being concerned that their advice is not completely objective.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

There’s great value to a proper valuation

Although valuation isn’t always an exact science, writes Barnett & Turner’s Jono Wilson, it can be an essential part of your long-term business planning. In my experience, clients can have any number of reasons to look for a valuation of their business. Sometimes it can be a personal matter – they’re going through a divorce, for instance, and need help with litigation. On the other hand, they may be thinking about changing the ownership or structure. We may, of course, need to value a business after death. And then there’s perhaps the most obvious reason of all: a valuation with a view to a sale and exit from the business.

It’s possible for a valuation to be conducted on an open-market basis, but you also get valuations for fair value and fiscal valuations too. It’s also important to consider the very particular issues presented by quite different types of business.

It’s actually quite usual for businesses to be valued in a number of different ways and it may well depend on the type of business we’re talking about. If I were valuing, say, the business of an Independent Financial Adviser or looking at an accountancy practice, I’d be calculating a multiple of recurring fees. With something like a pub or nightclub, on the other hand, it’s different. There, you’d be looking at the annual turnover and applying a multiple, while also taking into account whether the client had a freehold or leasehold.

As well as trade-specific bases, there are various other options. The most common is multiples of profit, but there is also dividend yield or a calculation based on net assets. No single valuation approach will fit all businesses and the rationale for valuing a business is not always the same. Each valuation presents different factors that need to be taken into account.

Ultimately, of course, a business is only worth what someone is prepared to pay for it. Sometimes, a business might be wholly dependent on the expertise or hard work of one person and actually there’s little intrinsic value once that person is taken out of the equation. With larger businesses, there might be brand value in a name – although that can be difficult to quantify – or perhaps a stream of revenue from intellectual property.

One thing I always stress to my clients is that it’s really worth investing in the due diligence that goes with a proper valuation. If you’re planning on using the figures to pave the way for an exit strategy in, say, five years time, they need to be as accurate as you can make them.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Key Person Insurance

A player hits the floor and they’re not faking. Is your business ready for the consequences? Jono Wilson of Barnett & Turner explores the world of key person insurance. With the new football season under way, we’re bound to be treated to some spectacular dives from players claiming injury. Amazingly, most will manage to dust themselves down and be back in action within a few minutes after their temporary histrionics.

But sometimes the player isn’t faking. Career-changing injuries really do happen. Players can find themselves out of action for six months or a whole season.

The same is true in any business, of course. That’s why it’s worth thinking about whether you’re prepared for a situation in which one of your key members of staff is seriously injured or signed off sick with a long-term illness.

Key person insurance is designed to compensate your business for financial loss if an important employee dies or becomes critically ill. Of course, at a moral and ethical level, all your staff are equally important, but some may be fee-earners, providers of loan finance or have some specialist knowledge that the company needs in order to survive.

Imagine if a partner died or became too ill to work, for instance. The insurance policy might provide the money to buy out his or her share of the business, allowing the other partners to retain control. In the event of the partner’s death, the full value of his or her share would be paid to their beneficiaries.

Thinking about the next level down within the business, a policy for an identified key individual will pay out the estimated financial loss to your company. Here are a couple of the common pay-out options available in this particular insurance market:

Multiple of salary – a straightforward calculation, but does it reflect the true value of the individual to your business?

Proportion of profits – taking into account annual salary, annual profit and the amount of time it would take to replace a key individual.

It’s also worth thinking about personal guarantors of a business loan. In the event of their death – or a serious illness – the lenders might be in a position to call in a loan, so insurance can be a useful way of providing peace of mind to both you and the guarantor’s family. You may also want to consider insuring against the loss of a key shareholder, although this is a particularly technical area, so it’s important to consult your accountant or financial adviser.

Terms of the policy can vary, but are normally based on five years’ cover. There isn’t any specific legislation that covers this type of insurance, but it’s worth bearing in mind that if the premiums qualify for tax relief, any benefits will be treated as a trading receipt. If the key person has a shareholding of 5% or more, tax relief is unlikely to be granted on the premium, as the policy is partly for the assured person’s own benefit.

The best advice is always to talk to your accountant before committing to any particular type of insurance cover.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk