Comment Autumn 2008 How to beat the credit crunch You will probably have read all sorts of articles being published in the press on “How to beat the Credit Crunch”. Largely these will be dealing with individuals who are over stretched with credit card borrowings and mortgage pressures. BUT WHAT ABOUT YOUR BUSINESS? My first key point is Be Aware! the “recession” and you need to Many of you will be asking, “what should I be aware of?” This will depend on the nature of your business. If you sell directly to the general public in, for example, a retail shop or restaurant, it is likely that you will have had a drop off in turnover. If you sell directly to other businesses you will need to consider whether the trade that you are in is going to be susceptible to a general down-turn in the economic cycle and what that will mean to you. You will also probably find that some of your customers will be a little slower in paying you. This is not something that you should just “take in your stride”. Other businesses will be struggling with Index How to beat the credit crunch 1 Correcting VAT errors 2 Corporate Finance update 3 Pension options at retirement 4 Buying a property for your children 5 Claiming tax back on commercial buildings 6 Death and taxes 6 Investing in a sales downturn 7 Critchleys update 8 get on top of the position of your slow-paying customers very sharply. Is their business likely to be forced to close or go into liquidation? If so, you need to protect your position by reducing your credit terms to them, ensuring that your retention of title clauses are adequate etc. You also need to think what you will do if you lose that particular part of your own turnover. You may have to delay price increases and reduce your margins. That will also affect your profitability. Can you afford to give any above-inflation linked pay rises to your staff or, more importantly, yourself? Looking at your business’ own funding, you should be aware that banks are less likely to increase your overdraft facilities, and may even seek to reduce it. If your business has been one that makes just enough profit to satisfy you, but is not strong overall, the bank could become quite restrictive in what they lend to you, as they will have fears for their security (e.g. your house may be reducing in value as opposed to the borrowing on it), and the cost of borrowing. If so, when you come to renew your bank loan you may find yourself put under significant pressure. Renewing your bank overdraft will no longer be a straightforward part of your business cycle and it would be beneficial “Who needs Barbados? Plus the great thing about holidaying in our own garden is that we can still afford to keep our own garden.” for you to prepare profit forecasts and cash forecasts based upon reasonable provable assumptions to take with you when you go to see the bank so that, if they seek to be restrictive, you can argue your corner more strongly. If, at any stage, matters are beginning to become a real problem, you must take advice immediately. Specialist advice is essential if a business is to be saved and the earlier that a patient consults the doctor, the easier it is for the medical team to save the patient and reduce radical surgery. Over the years I have advised many businesses, but far too many come to take specialist advice too late. Those that come early enough have a chance of survival and I am pleased to say that there are many people in employment today who would not have been if their employers had not sought early advice. For businesses the key advice is Be Aware! and when you see something negatively affecting your business, make a positive reaction to it and take specialist advice. continued on page 3 Looking to the future 1 Correcting VAT errors Tax is rarely simple. One exception used to be what do you do if you found a genuine error on a VAT return you’d previously submitted? The answer was, disclose it in writing if the tax involved exceeded £2,000. You were thereby protected from any penalties. Life is about to get more complicated, as a result of two new regimes. quarter ending 31 July 2008, or 31 August 2008, it cannot adjust its return if the error exceeds £2,000. It can only adjust periods beginning after 1 July 2008. Looking forward, the real benefit of this relaxation will be to simplify reclaims of VAT previously overpaid. This is because any errors involving under-paid tax, on VAT The first change is generally returns due to be filed on or after welcome, but may become less so 1 April 2009, are within a new when a second change comes into penalty regime. A key change will effect. Previously, as mentioned be that errors Voluntarily Disclosed above, if a taxpayer discovers VAT will no longer be automatically errors aggregating more than free from penalty. There will be no £2,000, they must make a separate penalty where the taxpayer makes written disclosure. Otherwise, they a mistake despite taking reasonable can simply adjust the next VAT return. care. Otherwise, HMRC will penalise the taxpayer based upon their From return periods starting on or after 1 July 2008, the figure of £2,000 assessment of culpability - up to 30% has increased to at least £10,000, and for a careless error, up to 100 per cent for deliberate and concealed for the largest taxpayers the figure inaccuracies. could be £50,000. For taxpayers declaring between £1 million and £5 The maximum penalty can be million in box 6 of their VAT returns, reduced if the person discloses the the figure will be 1% of the (correct) inaccuracy or understatement. The box 6 figure for the return being degree of reduction allowed will adjusted. depend upon whether the disclosure How this will work is as follows: A business that, on say, 3 July 2008, finds a VAT error relating to a previous period, can make an adjustment on its September 2008 return (assuming quarterly returns-its July 2008 return if it submits monthly returns) provided that:• the adjustment is no more than £10,000; or • the adjustment is no more than £50,000, and less than 1% of the Box 6 figure (on the July or September return, as appropriate). Clearly, if the above business was due to submit a VAT return for the is prompted or unprompted, and the quality of the disclosure. A full, unprompted disclosure of a careless error could reduce the penalty to nil. HMRC have indicated that correcting an error via a VAT return would not meet the definition of a full unprompted disclosure of the error. Unless the error could not have been avoided with reasonable care, therefore, adjusting an error via a VAT return will carry a minimum 15% penalty. Penalties for careless inaccuracy could be suspended for up to 2 years. The intention is that HMRC Looking to the future “I bet you did that on purpose!” can impose conditions, e.g. requiring a taxpayer to improve systems or record-keeping. No penalty will be payable if the conditions imposed are fully met within the time allowed. Conclusion The rules for adjusting errors via VAT returns, particularly in relation to tax previously overpaid, are welcome. In relation to the new penalty regime, it is likely that case law will eventually evolve to provide clarity over the correct level of penalties for given behaviours. In the meantime, a key issue will be the extent to which HMRC are, from the outset, consistent, reasonable, and pragmatic in setting penalties. More immediately, there is a narrow window of opportunity to make disclosures that should automatically be penalty free. And any adjustments aggregating less than £10,000 might simply be made on VAT returns. If you think you may be affected by this, and for more advice on intelligent VAT planning, please contact Steve Chamberlain on 01865 261100 or email [email protected] 2 Corporate Finance update Critchleys complete H.M. Air Cooling sale Critchleys’ Corporate Finance team acted as lead advisers to the shareholders of H.M. Air Cooling Limited on the sale of the company to Four Seasons Control Limited, an air conditioning installation and maintenance group. H.M. Air Cooling Limited, based in High Wycombe, specialises in the design, installation, service and maintenance of air conditioning systems as well as associated building services such as control systems and smoke control, with considerable experience in the retail and office sectors. David Cooper of H.M. Air Cooling comments, “Critchleys were recommended to us by our bank and after speaking to several other companies we were confident that Critchleys was the right choice for us. They put together a very good information pack about the company despite receiving only a minimal amount of input from ourselves. Critchleys found us a buyer that suited the long term future of the company, negotiated the price and terms on our behalf and then helped us through the financial and legal due diligence process, providing advice, figures backup and the momentum to get the deal through. We found Critchleys professional, helpful and friendly throughout each stage of the process and would highly recommend them.” Katy Bruce of Critchleys’ Corporate Finance team added, “I am so pleased to achieve this excellent result particularly given the present tough economic climate. H.M. Air has proven itself to be a robust company with regards to both high quality, innovative solutions and financial performance and will be a valuable asset to the Four Seasons Group”. We have put together a series of briefing documents • • • • Management Buy-outs Selling a business The business plan Valuation You can download these from our website www.critchleys.co.uk/corporate If you are interested in raising funding or pursuing a management buy-out/buy-in, please contact Keith White or Justin Ray on 01865 261100 ...continued from page 1 FOR INDIVIDUALS… If you are a regular reader of Comment you will have seen articles by me encouraging people not to take excessive credit and seek to enjoy themselves on future earnings as opposed to living within their means. This is probably not the time to preach that sermon again except to say “Reduce your Expenditure”. You do not NEED a foreign holiday each year. If your credit cards are beginning to peak you should just spend your time at home keeping costs to the minimum. Re-mortgaging is not as easy as it used to be but there are still deals available for those with reasonable equity in their property. If you are beginning to come under pressure, shop around early, but be careful about being locked in for too long to any mortgage deal with a high interest rate. The dearth of mortgages is more for those who are in the “sub-prime category” not people with reasonable equity and reasonable earnings. For individuals, the way to beat the credit crunch is by cutting your expenditure now, not when your credit cards begin to become “maxed out”. You should be thinking ahead and not spending next year’s income now. If you think you may be affected by this, and for immediate intelligent advice contact Anthony Harris on 01865 261100 or email [email protected] Corporate Finance promotions The team are delighted to announce the promotion of Katy Bruce to Assistant Director and Katie Fletcher to Corporate Finance Executive. Justin Ray, Corporate Finance Partner comments, “Despite the prospect of an economic slowdown we are still seeing a lot of activity and therefore need to increase the size of the team. These are well-deserved promotions as we continue to expand our presence in the Corporate Finance market”. Looking to the future 3 Pension options at retirement Having accumulated wealth inside a pension arrangement, a time will come when benefits can be drawn. Pension benefits can be drawn from age 50. However, from 6 April 2010, the minimum age will rise to 55. At the point of drawing benefits, most arrangements will provide the option to draw a tax-free capital sum. Legislation allows for 25% of the fund value to be withdrawn as a tax-free cash sum, although some older schemes may provide more or less than this. It is important to make sure that your scheme is reviewed ahead of drawing benefits to ensure you understand the taxfree cash entitlement and any ways in which it might be improved. Most people take the tax-free cash option because this provides them with control of the capital, and the option to re-invest for a more taxefficient income. which in the majority of cases is guaranteed. Options exist to provide for inflation protection and a pension for a surviving spouse on the death of the member, although including these options will reduce the starting income significantly. One of the main disadvantages of purchasing an annuity is its inflexibility. Once in place, the options cannot be changed. With income provided under Unsecured Pension, you retain control of the pension fund. Income payments are simply withdrawn from the fund. The fund remains invested which means that the capital should grow over time, which should mean more income in the future. In addition to having the flexibility to change the income level as necessary, the death benefits are also more flexible. On death, the fund can be passed on to a spouse or other family member. After tax-free cash, the remainder of the fund must be used to generate an income, which will be taxable as “earned income”. The amount of tax payable will depend upon your other taxable income sources. There are essentially two ways in which income can be provided. • Annuity purchase • Income withdrawals (Unsecured Pension) This allows for a continuing income to a spouse, or the return of the value of the fund, less a 35% tax charge. The potential downside with Unsecured Pension is that the fund value could be eroded, or even depleted completely, if investment strategies go wrong, and/or income is withdrawn at a very high level. Unlike annuity purchase, there is a need to monitor continually and review the Unsecured Pension arrangement. An annuity presents the risk that you might die too soon and not enjoy the full benefit of the fund. Unsecured Pension presents the risk that you might live too long and run out of money. New types of annuity are being introduced called “third way” annuities which seek to find some middle ground between the existing options. With increasing life expectancy, worries about inflation, even more options, including enhanced annuities for smokers and people with shortened life expectancy, and volatile investment markets, there has never been a greater need for high quality advice on dealing with pension arrangements. If you have any questions on anything relating to your pension options at retirement or any other aspect of financial planning, you can call Brian Foster on 01865 261100 or email [email protected] Annuity purchase involves giving the capital to an insurance company in exchange for a lifetime income, Looking to the future 4 Buying a property for your children In recent years it has become even more popular for parents to buy property for their children, perhaps as an alternative to renting university accommodation or just to help them buy their first property amid rising prices. So, if you’re thinking of helping your child onto the property ladder, what sort of issues should you be considering? The main question is likely to be whether you should own the house yourself or put it into your child’s name. You may want to own the house yourself if you intend to keep the proceeds when it is eventually sold or perhaps if your child is not very financially responsible. However for tax purposes it will often be better if the child is the owner. If you give a house to your son or daughter then, for the purposes of inheritance tax (IHT), the value will drop out of your estate after seven years. Inheritance tax is charged at 40% on the value of your estate over £312,000 so a gift of a property to a child could result in big tax savings for the beneficiaries of your estate. If you make a profit on the house the gain is liable for Capital Gains Tax (CGT) at 18%. However if your child owns the house and it is his or her main residence then any gains arising could be tax-free. If the house is let then Income Tax is charged on the rents after expenses. “Go. Enjoy. It’s all yours. Especially the washing machine!” Your children may pay Income Tax at a lower rate than you (they may not pay it at all if they are students) so it might make sense for any rental income arising to be taxed on them, as the owners, and not on you. There can be complications if you buy a house for your child and subsequently live there yourself. This can negate the IHT planning and may even give rise to an income tax charge. This area is complex and advice should be sought if it applies. Despite the tax advantages you may not want to give a house to your child outright. In these circumstances it might be Looking to the future appropriate to consider using a trust. Putting a house in trust for your children enables you to keep control of the asset whilst still allowing your children to benefit from it and it should help to preserve some of the IHT and CGT advantages. You can include all of your children as beneficiaries so that the house (and the proceeds if it is sold) is available to all of them without them having to own it jointly between them. Critchleys can advise further on all matters relating to property, tax and trusts. For further details please contact Lucy Lloyd on 01865 261100 or email [email protected] 5 Claiming tax back on commercial buildings As the Westgate redevelopment starts right opposite our Oxford office, the thought of tax allowances for commercial buildings is constantly in our minds. And the timing of this development ties in with changes to the tax system. We could always claim allowances for the part of a building cost that included lifts, escalators, heating, airconditioning, sanitary fixtures, hot water systems and special electrical systems for equipment that couldn’t just run on mains electricity. From April 2008, the Capital Allowance rules on what counts as plant and machinery have changed. It will make a lot of difference to the amount of tax you can claim back on expenditure on commercial buildings — whether retail, office or industrial. Certain items, though, didn’t qualify, even though you might have expected they would. The new rules mean that these items will qualify from April 2008. They include: cold water systems and plumbing, all the electrical systems of a building and its lighting systems as well. What counts as plant? When you buy a commercial building there will be integral equipment in the building. It has always been possible to claim Capital Allowances (which is the special tax depreciation regime) on such equipment which is part of a building. But the rules have changed so that there are more things you can claim for. “Death and taxes” To quote the oft quoted Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes”. Whilst most of us can expect to pay tax during our lifetime, if not happily at least with resignation, it can be a bitter pill to discover just how much Inheritance Tax the remaining family members have to hand over to the Treasury once we are dead. Currently, each person is allowed to have assets worth £312,000 (the nil rate band) before a deceased person’s estate has to pay Inheritance Tax. Once this threshold is breached, 40% tax is payable on the excess. Therefore, on an estate valued at (say) £400,000, the Inheritance Tax Actually, that could add up to quite a lot on many buildings. Establishing the value The problem will be getting the figures. If you buy a building for your business, how much of the cost is made up of all of this integral equipment? If it is a new building it is possible that the information can be provided by the builders — and you would do best to try to make sure you get that information if you can. But what happens if it’s a secondhand building? Then we’ll often have to do some sort of apportionment calculation. In fact, normally when there is a sale of a commercial building there is an election that the buyer and seller can make to agree between them how much of the price represents integral equipment. After all, if the buyer gets tax relief for buying it, the seller will usually get taxed for selling it. But that election doesn’t seem to apply to the “new” items of equipment that previously didn’t qualify. For more information or advice, speak first to your usual Critchleys contact, or contact Gerry Jackson on 01865 261100 or email [email protected] payable is currently £35,200. Now wouldn’t you rather that this money went to the people that you want to benefit from what you’ve achieved and accumulated over your lifetime instead of the Treasury? It is not necessary to have a lot of assets before the nil rate band is breached. You could have fairly modest investments, but have a house worth quite a substantial sum, particularly in areas like Oxfordshire. Since your house is included in your estate for Inheritance Tax purposes you could pay more tax than you thought likely. “Tomb built. Camels sympathetically re-homed. I keep thinking I’ve forgotten to do something...” At Critchleys, we have dedicated staff who can help you plan and arrange your affairs so as to minimise as much as possible the Inheritance Tax that could be payable on your estate. If you would like to talk to someone about this, please contact Janice Parker on 01865 261100 or e-mail [email protected] Looking to the future 6 Investing in a sales downturn Frank Webster from Finders Keepers explains why you should still consider investing in property. Another month, another chorus of property sales negativity. Year-onyear statistics for June include falls in average price (6.3%), mortgages sold (67%) and completions (50%). However, while many residential rental property investors will hold tight and flex vigilance on spending – sometimes to the detriment of letting their property or keeping existing tenants happy – a minority of investors sense opportunity. One reason is that, as the sales market undergoes another cyclical downturn, we are being wooed by vendors and developers keen to access our clients. Yet while they may want to sell, they will not accept drastic reductions. Our view is that properties catering for families, niche one bedroom apartments, houses for multipleoccupancy (HMOs), and flats above commercial premises, all continue to provide a good return or yield. Smart investors do not judge the whole residential market by lenders’ reluctance to lend to new investors and on new builds – or, indeed, by the reduced number of mortgage products. Another reason for sensing opportunity is that the Oxfordshire market is as robust and inflationproof as you can get. It has fortunately avoided the oversupply of city/town centre new builds with unrealistic guaranteed yields, “get rich quick” property seminars and investment clubs. Hence the predictable buy-to-let horror stories in the broadsheets tend to be from Liverpool, London, and Manchester rather than Oxford or Abingdon. Of course, financing has changed. Previously, one could secure a buyto-let mortgage with a 15% deposit; now most lenders demand between 20%-30%. Investors with a smaller deposit have to choose between a more expensive rate or larger arrangement fee. Lenders are trying to eliminate higher-risk customers. Oxford market. Through a trusted contact, we secured a 15% discount. Our furnishing division Decorum has worked its magic and it goes to market soon. Ultimately, investing in a sales downturn requires contrarian thinking, a sufficient cash deposit and thorough planning. The sales market is gridlocked as buyers hesitate, fearing further falls. Investors have to decide when to strike, knowing that the bottom of the market will not be neatly telegraphed until after the fact. For over 35 years Finders Keepers has successfully purchased hundreds of properties for landlords. Our advice remains: use a professional who will compare property rents and valuations; define the target market; understand the furnishing and renovation investment required to maximise rental income; develop best-case, median and worst-case income forecasts; and be clever about accessing people who need to sell. However, lenders will help investors with higher deposits, or who can demonstrate an understanding of the market or who have a good track record. Finders Keepers Investment & Acquisition helps both first-time and experienced investors minimise the risk through proven expertise, accurate valuations, deep knowledge of the local market and relationships with those developers wanting a deal, together with our links to specialist, willing lenders. Recently we acquired a two bedroom North Oxford apartment for a client. We have bought two For further details, contact Frank properties for her before, her view is Webster on [email protected] long-term and she understands the or 01865-302308 Looking to the future 7 Tax professional’s exam success Critchleys’ tax professional Lucy Lloyd was awarded the STEP Taxation of Trusts and Estates Student of the Year (May paper) award for achieving the highest marks in the paper. Critchleys is proud of its strong commitment to training and professional development. Dai David, Senior Partner comments, “I’m delighted to see Lucy enjoying welldeserved success after all her hard work. The professional standards and commitment of our people are key to Critchleys’ future growth and development. Highly trained, expert staff enable us to offer the best possible service to our clients”. Events 2008: what’s coming up 24th September — Economic Outlook: Life after the credit crunch 7.30am – 9.30am Williams Formula 1 Critchleys are hosting a joint seminar with Darbys and Royal Bank of Scotland. We are delighted to have secured Stephen Boyle, RBS’s Chief Economist, as guest speaker who will be talking on the global impact of economic forces on business in the UK. Corporate Finance surgeries In association with Brook Street des Roches, Critchleys’ Corporate Finance team are running a series of free monthly surgeries at BSDR’s offices at Milton Park. The surgeries will take place on the last Thursday of every month from 10.00am to 4.00pm - the next one will be on 30th October. 2nd December, PLaN Nick Caldwell from Oxford Architects will be speaking on architecture and what he thinks makes a good building. For further details please contact Robert Pinheiro on 01865 261144 or email [email protected] Copyright ©2008 Authorised and regulated by the Financial Services Authority. Content is for information only. No action should be taken without seeking professional advice. Critchleys’ marketing Critchleys takes on promotion the Brecon Beacons challenge We have also promoted Fran Kidd to Database Marketing Executive. Fran will continue to work closely with Robert Pinheiro in driving Critchleys’ marketing forward as well as taking responsibility for all web marketing and database activity. Robert Pinheiro, Marketing Manager, comments, “With Fran on board we have a very good mix of marketing skills; we’re both looking forward to using them to help develop and grow the business. Fran’s input and commitment will ensure that Critchleys makes intelligent use of technology in relation to its marketing activities”. Fran adds, “Over the last twelve months I’ve learnt a great deal and am looking forward to the challenges ahead as the Firm develops and we continue to embrace new technologies to drive the marketing function forward”. Critchleys’ tax team Team Critchleys comprising Andrew Moulsdale, Fran Kidd, Anne Taylor, Natasha Reddy, Martin Wright and Robert Pinheiro took on the Brecon Beacons challenge to raise money for The British Heart Foundation. On June 21st the dedicated team took to the Beacons covering Fan Fawr, Corn Du and Pen y Fan, the highest point in southern Britain. Over 40 teams competed with Team Critchleys coming fourteenth completing the challenge in just over 6hrs. Robert commented, “It was tough going, but thanks to the training we all put in beforehand and the support we all gave each other we got through it and are delighted with the amount we raised for The British Heart Foundation”. The personal tax and trust team’s focus will include Capital Gains Tax and Inheritance Tax planning and be headed up by Janice Parker. Critchleys has just internally restructured its tax team forming two specialist advisory teams in addition to the compliance team. The corporate and business tax team’s focus will include company restructuring, remuneration planning and share schemes and be headed up by Gerry Jackson. Gerry Jackson comments, “For many years, our tax specialists have been providing detailed advice to clients, but often this advisory work has been lowprofile. What we are doing is raising the profile of advisory work to give it the importance that it deserves”. Oxford t. 01865 261100 Abingdon t. 01235 553333 [email protected] www.critchleys.co.uk 8