Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance HM Revenue & Customs, VAT & PAYE

Does the Government understand UK SMEs’ problems?

UK SMEs are many and variedA recent fiery opinion piece in the London Evening Standard by Rohan Silva accused the Government of failing to help and therefore destroying UK SMEs.
While most of his ire was directed at the Chancellor, Philip Hammond, due to the 2017 increase in business rates, Silva also alleges: “Poorly implemented plans to make tax digital are costing companies thousands of pounds to become compliant. Big increases in the amount firms have to pay towards pension contributions are making it more expensive to employ people.”
According to the Federation of Small Business (FSB), the business rate increase means the average small company in London now has to find £33,000 a year simply to cover its rates bill. That’s on top of paying rent, NI contributions, corporation tax and running costs. Significant increases in the minimum wage haven’t helped many SMEs either although unlike the other burdens it has benefited employees.
It has become increasingly and depressingly clear that there is a lack of subtlety and nuance in many Government policies that affect UK SMEs.

What are the UK SMEs’ other main problems?

SMEs are said to be “the backbone” of the UK economy but a big problem is that there is no “one size fits all” solution to the pressures they face.
The start-up SME is very different from the established small business, a retail SME with a physical premises is very different from an online retailer yet there is very little recognition of this.
A newly-published British Chambers of Commerce (BCC) survey of 1,000 firms, many of them SMEs, found that almost 60% believe the tax regime is unfair on businesses like their own. The poll saw 67% of respondents say the taxman does not apply rules fairly across all sizes of business.
It quotes Suren Thiru, head of economics at the BCC, who argues that HMRC (HM Revenue and Customs) sees “smaller businesses as low hanging fruit and as a consequence they feel under the constant threat of being called out for getting things wrong in a tax system that has grown ever more complex.”
According to R3, the trade body of the insolvency profession, the Chancellor’s recent proposal to make HMRC a preferential creditor in insolvency is only likely to make the situation worse, by adding to the risk that banks and finance providers won’t lend without personal security and suppliers will be less willing to provide credit terms in the future.

Other issues raised by UK SMEs

One issue is that there is insufficient weight given to those businesses outside of London, with an uneven spread of investment that favours the capitol.
Bibby Financial Services’ confidence tracker found that there was patchy awareness among SMEs about local initiatives with just 54% local firms aware of the Midlands Engine and 36% of Northern SMEs believing that there is too much focus on the Northern Powerhouse at the expense of other Northern cities.
Then there is the difficulty SMEs have in accessing and negotiating Public sector contracts, not to mention the hurdles and perceived lack of help they face when accessing export markets. A 2019 survey by techUK of 101 SMEs across the technology sector, found that just 15% of respondents think that the government has an adequate understanding of the role SMEs could play in public sector provision.
To end on a more positive note I should mention one initiative which is beginning to show some success in supporting SMEs and that is the Prompt Payment Code. This follows the recent change that now allows the Small Business Commissioner, Paul Uppal, to investigate cases and to name and shame those large business offenders who continue the practice of late payment.
 

Categories
Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General

Autumn 2018 Budget offered some cheer for SMEs and the High Street

Budget - pulling rabbits out of hatsThere were few surprises in yesterday’s budget given that much of it had been leaked in advance although it did allow the Chancellor to make a joke about no new rabbits being pulled from hats.
Much of the budget was aimed at addressing the concerns of SMEs on the High Street with a promise to cut business rates by a third for those retailers in England with a rateable value of £51,000 or less. This offers an annual saving of “up to £8,000 for up to 90% of all independent shops, pubs, restaurants and cafes”, which should please the FSB (Federation of Small Businesses), which had asked that any relief be applied to “hospitality and service businesses, not just retailers”.
However, the Chancellor also stressed that the High Street had changed forever and that therefore there would be £675m of co-funding to create a “Future High Streets Fund” to support councils to draw up plans for the transformation of their High Streets, such as perhaps including converting empty shops into homes to increase town centre footfall.
SMEs and especially those in rural areas will also welcome the confirmation of a 30% growth in infrastructure spending (both on roads and IT) amounting to £30 billion, which included the £420 million already announced for pothole repairs.
Although the BCC (British Chambers of Commerce) wanted to abolish the apprenticeship scheme, SMEs did at least get some relief on their contributions which was reduced from 10% to 5%.
In a bid to stimulate stalled business investment in capital such as in plant & machinery, the Annual Investment Allowance is to be increased from £200,000 to £1m for two years from 1 January 2019.
The Chancellor announced that the UK would introduce its own tax on large digital companies, the likes of Amazon, with a global revenue of at least £500 Million a year.  He stressed that it would not be a tax on sales but on the in-country earnings of these companies expected to be at a rate of 2% and applied from April 2020.
The question is whether it will actually be introduced given that there will first be consultations and, given the time frame, how much help it will be to those SMEs already struggling because of the online competition?
Fuel duty rates were frozen for the 9th successive year, which will be welcomed by the Freight industry as well as others that rely heavily on vehicle use.
Entrepreneurs’ Relief was also tweaked with a number of measures including an increase in the minimum period throughout which the qualifying conditions for relief must be met to be extended from 12 months to 24 months.
While subject to further consultation before it is introduced on 1 April 2020, the maximum recoverable R&D tax credit in any tax year is to be restricted to three times the company’s total PAYE and NIC liabilities.
From April 2019, the PAYE tax-free personal allowance threshold increases quite significantly from £11,850 to £12,500 and the 40% higher rate tax threshold from £46,350 to £50,000.
The VAT registration threshold was frozen for the next two years at £85,000.

The budget also covered insolvency & tax avoidance by directors

And, slipped in with virtually no reaction from anyone so far is a change to the status of HMRC, which will now become a preferred creditor in insolvencies. Given that I have already reported on HMRC’s use of increasingly aggressive tactics including an increase in asset seizure from small businesses it will be interesting to see what difference this makes to HMRC tactics. This would overturn the 2002 Enterprise Act which removed HMRC as a preferred creditor but we have yet to see the detail.
Directors and others involved in tax avoidance, evasion or ‘phoenixism’ are to be made jointly and separately liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency

And some fallout from Carillion

In the wake of the Carillion and other high profile business failures involving PFIs (Private Finance Initiatives) there will be no more such arrangements. PFIs will be abolished.
Finally, the national living wage is to increase by 4.9%, from £7.83 to £8.21, something that will bring little comfort to SMEs.
Of course, all of the above comes with the large caveat, that depending on the outcome of the Brexit negotiations there may have to be a second budget in the spring.
 

Categories
Banks, Lenders & Investors Finance General Rescue, Restructuring & Recovery Turnaround

Why Stakeholders’ co-operation is vital to successful business restructuring

Restructuring needs supportRestructuring a business can involve significant changes that can have an impact on all its stakeholders.
Usually, restructuring is associated with both financial restructuring and reorganising operations because a business is no longer viable. It may be that it is experiencing cash flow problems and heading for or deemed to be insolvent.
The wise business will act as early as possible once problems are identified and may call in a restructuring and turnaround adviser who will conduct a deep and thorough review covering its processes, products or services, its accounts and forecasts and its business model before suggesting a strategy that will allow it to continue trading and recover its position.
This may involve closing loss-making product or service lines, outsourcing some processes, renegotiating terms with suppliers, possibly reducing the workforce or the hours worked and, in some instances, changing the business model. The financial restructuring may involve rescheduling debts and in extreme cases using a formal process like a CVA (Company Voluntary Arrangement).

Who are the stakeholders in business restructuring?

Stakeholders are people and organisations whose interests are affected by the restructuring, or those who can influence them.
They therefore include a wide community including banks, creditors, credit insurers, directors, employees, owners (shareholders), landlords, new investors, suppliers, unions, and arguably customers. In some instances, the government, public and press might also be regarded as stakeholders, as is the case when the company is a large employer or a critical service provider.
For a restructuring to be successful the response and support of these people and organisations is likely to be critical to both approval of proposals and future success.
Directors need to speak with a united voice and be transparent with everyone if they are to get the trust of stakeholders for their proposals. They also need to find a balance between humility, taking responsibility for past failings, while at the same time providing leadership and direction for the proposed changes. If the company is facing insolvency as directors also need to subordinate their own self interests in favour of those of creditors and the company.
Rescheduling debts normally needs the approval of each and every creditor although a minority of dissenting or ransom creditors can be bound by using a CVA.
More important is to ensure ongoing supplies and support will be necessary. This support includes employees who might be poached or look for alternative employment, suppliers who might be wary of extending further credit, trade insurers, asset-based lenders who finance critical equipment, even customers who can take their business elsewhere.
The support of employees should not be taken for granted. While they may be fearful of losing their jobs and may be asked to accept some alterations to their remuneration, hours of work or the work they do, negotiating this can be fraught with complications since you will not want to demotivate them in the process. Notwithstanding the potential loss of morale and survivors’ guilt felt by those who keep their jobs when others are made redundant, employment legislation needs to be observed if costly tribunals are to be avoided. This is where employees’ union(s) or representatives can be useful and should be brought into the discussions as early as possible. Employees’ co-operation and support can make all the difference to success or failure.
The critical argument that should enlist the support of all stakeholders is that it is in their interests to support the business through the process of restructuring, however uncomfortable it might be in the short term.
The justification is likely to be survival, recovery and eventual growth of the business for the benefit of everyone in the medium and long term.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

The emphasis in turnaround should be on saving a struggling SME

turnaround advisors are like rescue dogsIt is surely preferable to try to turn around and restructure a business than allow it to fail, with the consequent financial and human cost to the business, to employees and to creditors.
This has been acknowledged by both the European Commission (EC) and the UK Government, both of which produced proposals last year that included a 90-day moratorium staying creditors’ action and extending the duty of essential suppliers to continue supplying the troubled business.
In both cases, the aim was to re-balance insolvency proceedings towards turnaround and rescue, while acknowledging the interests of creditors.
Yet, according to the findings of an independent review commissioned by the Financial Conduct Authority (FCA) into the behaviour of the Global Restructuring Group (GRG), the treatment of SME clients referred to GRG by its owner, Royal Bank of Scotland (RBS) hardly followed best turnaround practice.
The FCA’s interim report published at the end of October this year highlighted a number of GRG failures.

Turnaround should be a clear and detailed process for achieving a viable business

The review found that in its training material GRG had clearly recognised the need for careful assessment of a business’ viability based on a wide-ranging investigation, followed by immediate recovery action where it was deemed unviable.
If it had been judged potentially viable, GRG should support a turnaround plan, that was considered, documented and as far as practicable addressed the SME’s underlying issues.
However, in practice, the review found “frequent failures to pay appropriate attention to turnaround considerations.”
These included not carrying out adequate viability assessments and failing to implement and document viable and sustainable turnaround options for the medium and longer term, instead focusing on short term measures such as rescheduling the credit facilities on revised terms.
Nor, said the report, did GRG make adequate use of the broad range of turnaround tools or consider the impact of RBS’ actions in pressing for payment and withdrawing working capital facilities.
In short, GRG’s commercial objectives were prioritised at the expense of turnaround objectives, placing a disproportionate weight on pricing and debt reduction rather than the SME’s longer-term viability.
Some RBS SME transfers to GRG were too late for turnaround assistance, more than one in ten of those sampled were transferred directly to the GRG recoveries unit.
The inescapable conclusion was that RBS’ and GRG’s commercial considerations took priority over any serious efforts at turnaround.
The report, however did not address who should help everyone, the bank as well as the struggling SME it was dealing with. Most banks’ or their insolvency advisers’ review of a struggling SME owner’s ‘turnaround’ plans are likely to include that they are not viable. The underlying causal factors are rarely addressed with proposals for fundamental change in the SME’s plans. And forecasting such plans is something very few have done. Specialist turnaround help is needed as very few bankers, insolvency practitioners and SME managers have ever actually managed a business with the objective of turning it round.
The primary objective of the turnaround advisor and the turnaround process must be, and generally is, to help a struggling business to survive. This normally means initiating fundamental change to achieve a viable business model that can survive in the future, not just get through its immediate crisis.
This is achieved by a careful, detailed and systematic review of every aspect of the business to identify those aspects that are viable, and those that are not and to then come up with a workable plan that will not only save the business but will encourage creditor support, increasing the chances that, if patient, they will in time get their money back.