FD PARTNERSHIP NEWSLETTERS
November 2010
Welcome to the 10th edition of FD Partnership, our newsletter for accounting and finance professionals.
The election is now a distant memory but the radical actions of the coalition are very much current - a dose of bitter medicine, but given the alternative we had little choice. All we seek now from David Cameron is a spoonful of sugar!
Since our last edition the accountancy practice market has remained busy which is a double edged sword for the profession – many have simply had enough but many more are looking to enter practice or expand. It's become harder to run a practice but for those who believe they can crack the secret the rewards can be alluring.
On the company formation front we're continuing to raise the bar in terms of service and what we can offer. We've seen a steady return of customers who have tried the bucket shops and aren't impressed – nowadays there's less room for error and a business environment that is harsher and less forgiving.
The big question for now is how the VAT rise will impact smaller independent retailers who don't want to be the first ones to raise prices. As an accountant what would you advise your client?
We’ve rewritten the rules on
COMPANY FORMATION
£0
FREE CH Fees
FREE Hard Copy Certificate
FREE Memo & Arts
FREE Paper Register (except paperless formation)
FREE 1st Class Postage
FREE Advice
FREE Name Checking
The whole thing is FREE!
FREE formation / FREE banking*
when you open an account with Barclays or HSBC
Now you can form a company FREE of charge and still enjoy our legendary high service standards. Within 24 hours of ordering your company the bank will contact you and your new account will be open within 48 hours (subject to status). To find out more visit
www.formationsdirect.com/limited-company-with-bank-account
*Terms and conditions apply. See website for details.
Service upgrades
1 We’re pleased to announce that from the end of October you’ll be able to form a company with own officers over the phone as well as by submitting it in writing. This service will be FREE and to ensure that all details are correct we will email or fax them back to you for confirmation.
2 We will also be scrapping the charge for coverprints so that you can have your firm’s details on the Company’s Articles FREE of charge, allowing you to impress clients and advertise your firm at no extra cost. This will be introduced towards the end of October.
Structure of HMRC
It is our understanding that staff at HMRC have been told that the structure of the department will be considerably different in 2014 compared to what it is now. The over-riding message is that in line with the whole of the Civil Service the number employed will be reduced, most likely by a considerable number.
For accountants there are 2 major issues:-
Service – We have enough problems now with delays in capturing Tax Returns, issuing repayments and dealing with general correspondence. If staff numbers are slashed by say 25% to 40% the position can only get worse, unless internal procedures etc are changed. Our advice is to keep the pressure on HMRC and where appropriate complain. We are also noticing that other areas of HMRC such as Debt Management, VAT administration and NIC are under severe pressure without cuts and it is difficult to see how things will improve in the future.
Compliance – HMRC's approach to enquiry work changed radically on 6th April 2008 and the new regime regarding penalties, information powers and assessing time limits is well and truly with us. In particular the methodology of determining a penalty is now likely to show an overall increase as there are set minimum levels dependant on client behaviour. We feel if staff numbers decrease then the remaining HMRC staff will be under intense pressure to bring in at least the same amount of extra tax ie meeting the government’s mantra of more for less. It is therefore essential you seek expert advice on all types of enquiry work and as ever our team of ex HMRC investigators are ready to answer your queries.
Principal Private Residence
How proactive are you in advising clients to nominate which is their principal private residence under S222(5) TCGA 92? We would be willing to wager a considerable sum that most of you if you were being honest would answer
“not very”. Don’t worry - that is not meant as a criticism, as our ex HMRC staff say very few nominations are made at all.
Our advice is for you to consider the position with a bit more thought. Firstly you could leave yourself open to a negligence claim if a nomination is not made within the 2 year time limit and HMRC disagree with your late nomination.
Hopefully that position will not arise but there are considerable benefits in forward planning when clients have more than 1 property. The level of exemption is the time spent as the principal private residence plus the last 3 years of ownership. The issue here is limiting the amount of capital gains tax and if a client owns a let property with a potentially large gain it could be very advantageous if he lived in the property, as the exempt period is as above. There is nothing in the current legislation specifying a minimum period of residence and HMRC will look every case on its merits.
There are always periods when let properties are empty and with judicial planning and organisation it is very possible to nominate different properties as the principal private residence and so gain the period of residence but more importantly the last 3 years as an exempt period.
If you would like more advice on this subject please contact us on 0800 2800 322.
VAT Flat Rate Scheme
Do you ever consider advising clients to opt for this scheme or indeed opt out? Not only do accountants need to be proactive but they need to tell their clients what they are recommending and why. Surely this is free advertising and will help you retain your current client base and possibly get referrals.
Basically anyone can opt for this scheme but common sense says there must be a business benefit, either financial or from a record keeping point of view. Some basic facts:-
• In the first year the estimated VAT taxable turnover cannot exceed £150,000 excluding VAT.
• In the first year the estimated total business income including VAT cannot exceed £187,000.
• After the first year you can remain in the scheme provided your total business income including VAT does not exceed £225,000.
• There is a list of trades on the HMRC website giving the various percentages each trade needs to pay.
Each client’s individual affairs will be different but the pros and cons can be generalised:-
Pros
? Fewer records are needed particularly an analysis of purchases
? You get a 1% discount in the first year
? If a fair amount of expenditure is not standard rated eg wages then there is likely to be a financial benefit
? You have some certainty and you are less likely to make an error that could give rise to a VAT inspection
Cons
? If you regularly claim a repayment
? If you have a majority of standard rate expenditure
? If you have a lot of zero rate or exempt sales
We have ex VAT Assurance officers as part of out team and are more than happy to discuss VAT issues in general and the Flat Rate Scheme in particular.
Diary of a Practice Sale
Most practitioners only sell a practice once in their lifetime so understandably they are not familiar with the process. The following narrative is intended to give a basic insight into the sale process using an example that is not uncommon and will give you a feel for the issues that would be encountered in most sales. Whilst the names are fictitious the facts are based on real cases that we have acted as brokers for.
James Dodds is 53 years old and has been running his own practice for 18 years having bought it with his redundancy money when he left a Big Four company during restructuring. Braithwaite & Windsor had been established in 1968 and was an established part of the street scene in a prosperous market town only 45 minutes drive from a major population centre and close to James’s home.
The firm was stable but stagnant when James took it over with the intention of using it as a springboard to build a modern practice that was highly dependent on IT with overheads kept to a minimum by careful use of outsourcing and subcontractors. In those 18 years it grew organically to a turnover of £750,000 from £225,000 and client list of 425 from 170, the smallest being run of the mill tax returns and the largest itself turning over £4m per annum.
Two years ago James suffered serious injuries in a golfing accident and after 4 months off work he was advised by his doctor that he was unlikely to make a full recovery unless he reduced his workload to no more than 3 hours a day, something which was clearly not possible as the principle of a busy and growing practice, but nonetheless a decision that James was quite happy to procrastinate over. It soon became clear to staff that James wasn’t coping and they approached his wife to discuss a resolution that would keep James’s pride and self respect intact, whilst protecting the value of the practice.
Mrs Dodds made the initial call after seeing our details in the classified section of a leading accountancy magazine. She had called 3 advertisers in total but chose us because a consultant himself answered the call and his knowledgeable but sensitive replies to her questions inspired her with confidence. She explained to us the delicate nature of the situation and we suggested to her that we send her husband a letter that appeared to be a general mailshot. The letter was carefully crafted and duly sent to his house at the suggestion of his wife so she could be on hand when he received it. Mrs Dodds reckoned that he wouldn’t stop to ask why it had come to the house and not the practice.
The letter was received on a Saturday, away from the pressures of the office, and allowing the couple to discuss it at leisure over the weekend. James knew that he had to throw in the towel and the nature of the letter was the catalyst for the all important phone call that he made first thing on Monday morning with his wife at his side. They wanted a sale as soon as practicable but were not willing to “give the practice away”, nor did they wish to meet more than one interested party if possible. Quite a tall order, but nothing that our experts can’t handle.
Our experienced consultant explained to James that finding a suitable buyer would be fairly easy given the nature and location of the practice and the strong reputation that it enjoyed within a 30 miles radius. As it happened we had 7 prospective buyers on our books that were keen to buy in James’s area.
We asked James to complete a seller’s questionnaire so that we could gain a better understanding of the practice and be able to screen buyers so that a shortlist could be drawn up. Mrs Dodds actively involved herself in helping James complete the forms and also requested to meet the prospective purchaser together with her husband, which he was happy to acquiesce to. We suggested that members of staff were advised that the practice was being marketed since they all had concerns about James’s health and the tensions that it was causing.
Three weeks later we received all the information necessary to proceed, including a signed contract to act on James’s behalf. After a number of telephone calls to discuss strategy it was agreed that the asking price would be at a multiple of 1.05 x gross recurring fees and that James would be on hand to meet clients and help the buyer settle in for 3 afternoons per week for a period of 6 months, thereafter 2 afternoons a week for 3 months and then 1 afternoon a week for a further 3 months.
Mrs Dodds and the practice manager both felt it would be a workable arrangement, and James was quite pleased to be receiving 1.05 x GRF for what was essentially a forced sale , although the buyer would have the benefit of the owner remaining to assist. Payment would be 50% on completion and 50% after 12 months, with no clawback after this time.
We spent another 3 days screening our buyer’s list to whittle the list down to a single buyer, and an informal meeting was arranged the following weekend to see if the chemistry was good, a simple but crucial aspect to any deal. The meeting at James’s golf club went well and 2 days later the prospective buyer visited Braithwaite & Windsor to get an initial feel of the practice modus operandi and was then presented with a more detailed client profile and fee list.
The buyer went back the next week to perform more due diligence on the practice books and 4 days later reported back to us. She was generally enthusiastic but flagged up concern at the slowing rate of growth in the previous 12 months, even allowing for James’s accident, as well as the loss of a large client who was taken over by a multinational. The prospective buyer wasn’t backing out but felt that they were unwilling to pay the requested multiple.
We suggested that both sides take time out to pause for breath and reflect on developments thus far and that we would call them both in 24 hours. If necessary we would travel down south to meet them both around the table and resolve the impasse.
Next day at the close of business we discussed the multiple with both parties in separate phone calls. We explained to the buyer that this was a rare opportunity to pick up a prominent local firm with little obvious competition and retain the seller for 12 months at no extra cost. Given the concerns voiced we suggested lowering the offer to 1 x GRF, which she duly did. We spoke to James and his wife explaining that this lady purchaser was a safe pair of hands with an excellent CV and references, who they both got along with very well and whom the practice manager said he would be happy to work under. On that basis, and given the necessity to sell quickly, we felt that dropping by 5% was more than reasonable. They readily agreed but on condition that James only stayed for 8 months for 2 afternoons a week.
We conveyed this to the buyer who willingly accepted the amended terms and we proceeded to draft the contract which was sent to each party for approval. Mrs Dodds remarked that people would probably still approach James to sort their financial affairs and both parties agreed that if James brought any new business he would receive a commission of 50%.
No major issues arose post sale, and James eased himself into semi-retirement within the terms of the agreement.
A moving experience…
We've done it! We are pleased to report that our move went smoothly and the new premises have proved to be fertile ground for innovation and business development.
Our practice brokerage division is preparing seminars to reach out to buyers and sellers towards the end of the year. If you are interested please ring Isaac on 0800 2800 321 to pre-register, but hurry because we're restricting numbers in order to allow optimal interaction with delegates so they can get the maximum out if it.
We have also rolled out the local agencies for business brokerage, with several firms across the coming aboard and enjoying the extra exposure it gives their practice. To find out more ring Tony on 0800 2800 321.
FD Kensington brokers Haines Watts and Lee Associates deal
Kensington Accountancy Brokers are pleased to announce their role as introducer of Lee Associates to the Haines Watts network.
Kensington has risen rapidly in recent years to become a leading player in the accountancy practice brokerage market. Founder and director Norman Younger explains than "when it comes to selling an accountancy practice we spotted a gap in the market". Kensington has successfully exploited this opening and is developing several initiatives to leverage it yet further.
“We are very happy with our growth to date, which has been achieved in the face of an awful economic environment, and we are continuing to build the pipeline of new business into 2011 and beyond," explains Kensington's manager Isaac Ginsbury.
Q&A
Since the new Companies Act came into being we've been asked lots of questions but here are the two most common ones:-
Q .Why is the number of shares taken by the subscriber not shown on the Memorandum & Articles?
A. Because the legislation doesn't mention it and therefore Companies House will not accept these details if they are present
Q. How does one describe the ordinary share capital on form SH01 when issuing new shares that have full rights?
A. Ordinary share entitled to vote, receive dividends and distributions under all circumstances
For Sale - Offers Invited
We no longer have a liveried vehicle advertising our tax advice services but we still have the numberplate, which we’re selling.
If you want to put in a bid for
X11 TAX
ring the tax department on 0800 2800 322
or email [email protected]