How to create a winning exit strategy
In business, nothing quite beats that warm inner feeling that business owners experience when everything is going swimmingly and the money continues to roll in as expected, day in day out, week in week out and month in month out ... with no surprises upon approving and signing off the year end accounts.
They confidently, and perhaps smugly, review another successful year of trading and look forward to a repeat performance in the subsequent year.
From your aspect it’s a satisfied client and a “nice” bill paid promptly.
Ongoing upgrades
Many SME owners have already made the majority of their investment into their business some years previously and with the exception of ongoing upgrades and maintenance of buildings and plant there are few, if any, demands for a substantial cash injection over and above anything that can be met comfortably out of retained profits.
Sometimes the business owner reflects upon the current value of a lifetime's work, usually in their own mind or perhaps because they have received an unsolicited approach in the post from a business transfer agent seeking to drum up business.
The thought of selling up is usually a fleeting one which is soon brushed aside by the notion of losing a steady and reliable income.
Entrepreneurs
There are typically two sorts of entrepreneurs and where they are on the scale will likely determine their approach to selling.
First, there is the serial entrepreneur who may be starting-up or buying and reselling businesses every few years, typically after turning around a problem company or consolidating.
Secondly, comprising the majority of successful businesses, are those founded or built up by an individual over a period of decades and are the main focus of their owners’ lives. Within this category are people with two divergent needs.
Most common is the business owner who will be selling with a view to retiring, there being no "next deal" nor any participation in the labour force or wealth creation, but there is also the one who has enjoyed their time at the helm but is too young to retire and fancies doing something less demanding, what we now refer to as a lifestyle business.
Crux of the problem
Here's the crux of the problem that is responsible for so much lost sleep.
When is it time to hit the big red button and bale out, whatever one’s ongoing income requirements?
Let me be clear on one point here. I am not discussing a case of "calling the top of the market", where there is a frenzy of consolidation taking place at eye watering multiples. Such scenarios are often quite simply almost always "no brainers".
The heart of this discussion is through the lens of making sure the business owner has not left it too late to extract maximum value out of their business.
But what is meant by too late?
Let's start from the aforementioned premise that we are dealing an SME built up and developed over 25 years by its owners without any outsiders in the boardroom. It is turning over £3m per annum and yielding a net profit before tax of £0.7m with a balance sheet worth a net figure of £2.35m.
Very nice indeed but as with everything else nowadays the world is changing quickly and the old certainties have never been less certain in a shorter timeframe. Like their competitors this business has to run hard just to stay still and survive, let alone find ways to innovate and adapt in order to continue thriving.
So what is this business actually worth on the open market?
Balance sheet
Assuming a healthy exit multiple of 4.5x it would fetch a very handsome £3.15m for its owners which is in excess of the balance sheet.
But that would mean an instant end to the income of £0.7m per annum so our business owner will be sucking hard on his or her teeth and reckoning that it's probably worth waiting another 2 or 3 years THEN banking the £3.15m.
After all, what sort of return will £3.15m generate? A pedestrian 1.5 per cent on deposit or a heart-stopping racy but riskier 10 per cent if reinvested in another venture. Either way a far cry from the current 29.8 per cent return on capital employed being enjoyed.
Surely a fair assessment?
However, how certain is the business owner that the coming years will see profits maintained in the face of external headwinds? Brexit, Political earthquake at Westminster, Tariff Wars, Sector disrupter.
I am sure you can think of more scenarios to keep you awake at night. Not forgetting that our business owner is in their early 60s and not quite got the same drive and energy as in former years to keep thing running at full pelt, let alone grow earnings.
Okay, so perhaps these doomsday scenarios won't happen.
But in a few short years he or she will be heading for 70 and health tends to worsen with age, not improve as it would with a good Scotch.
Industry circles
So let's take a compromise view and hang on for 2 more years then and see how things look, while making tentative enquiries to business brokers and keeping a closer ear to the ground in industry circles.
Let's say in the intervening two years the steady rise in profits splutters, even just slightly and profits come in at £0.68m and £0.595m respectively . Nothing major has occurred on the macro economic front, just the loss of a couple of good contracts and the failure to replace them.
Well, the owner's lifestyle certainly won't have felt the dips but prospective buyers will certainly have taken notice.
We get to market 24 months later and the offers are coming in for what is a fundamentally sound business but the multiples offered are dropping to 3.75x 3 years average earnings - £2.47m . Not too bad because we've had the benefit of the two years' worth of earnings in the interim.
Fair enough, so let's tweak our scenario. The storm clouds have gathered on the economic front as well and profits come in the next year at £0.425m. Oh dear.
Trend of profitablity
Now the trend of profitability is heading south in an established pattern and best offer is coming is at 3x the average of the past 3 years net earnings - £1.7m. OK, so our resilient business owner looks back and sees that he or she has still come away with more overall - £3.4m instead of £3.15m.
Now let's chuck in a wildcard. The owner’s health has suffered as a result of the stress of falling profits and market uncertainty.
As the deal stretches out and it becomes clearer that the seller is getting much keener to "do the deal and be done with" , the due diligence will throw up all sorts of "issues".
And eventually our seller will be taking a multiple of 2.5x net profits, which, by the time it comes round to signing the contract have, fallen yet again to £0.295m and the average profit over three years has now dipped to £0.438m .
The proceeds from the sale are now £1.095 . The total over three years is now £2.665m against £3.15m but what if there is no buyer?
Remember – buyers face the same storm clouds and may have battened down their own hatches.
Far fetched
Far fetched? Not in my experience but why not ask your clients what they think?
Nobody knows what the future holds and often if pays to keep going but eventually there comes a point where that no longer holds true.
So, the take home here is to understand that just when you don't need it to happen, events can and do move against businesses to create the perfect storm. Many buyers out there specialise on sniffing out such opportunities and pouncing just at the right time. Our SME owner may no longer be “in the money” and possibly no longer “in the game”.
So perhaps when it comes to "calling the top of the market" sellers need to look much closer to home. That’s where sound advice from a trusted outsider, such as an accountant comes into its own.
Planning the exit for a business is always going to be more of an art than a science, with a hefty dose of good fortune but it pays to have the conversation with clients sooner rather than later, even if simply to get it on the radar for a future conversation, because you don’t want to be “too late”.
The table below uses the figures in this article and the yellow background is where the seller will reinvest at 10 per cent, the red being proceeds put on deposit at 1.5 per cent.
| Multiple | Proceeds | Income | Income | Income | Total | |||
| Sale time: | Of sale | Year 1 | Year 2 | Year 3 | ||||
| Now | 4.5 | 3.15 | 0.047 | 0.048 | 0.049 | 3.294 | ||
| 0.315 | 0.347 | 0.381 | 4.193 | |||||
| End Year 2 | 3.75 | 2.468 | 0.680 | 0.595 | 0.056 | 3.799 | ||
| 0.680 | 0.595 | 0.374 | 4.117 | |||||
| End Year 3 | a) | 3 | 1.7 | 0.680 | 0.595 | 0.425 | 3.400 | |
| b) | 2.5 | 1.095 | 0.680 | 0.595 | 0.295 | 2.665 | ||
How accountants can help to smooth out a business sale
When a client announces that they are selling their business, many accountants feel pressed to get the accounts up to date quickly or perhaps feel the need to prepare management accounts and projections ASAP.
There's nothing wrong with that as such... but therein also lies the problem.
They can be so focused on these jobs that they fail to grasp how important their role has finally become.
No longer are they compliance clerks who churn out annual accounts and prepare the tax return... now is their chance to shine as the lead actor!
Tales of woe
Confused? Let me share some tales of woe with you - problems that could have been avoided or at least dealt with better had the company’s accountant taken a more proactive role in the run up to their client putting themselves up for sale.
Remember that usually the accountant is the first to know of their client’s intentions, but sometimes can be one of the last. This tells you all you need to know about their client relationship!
Interested buyers who are serious and keen to do deals walk away in the following common scenarios, which with advance planning by the accountant could be nipped in the bud or mitigated. In other words, you need to be first at the party before your client approaches a business broker. You need to be the first professional responder once the idea of selling is floated.
Lucrative earnings opportunity
Not only is it a matter of giving your client the best service you can, you are also missing out on a lucrative earnings opportunity, one which your client will really appreciate, unlike your annual accounts bill. Here are five scenarios that illustrate what to look out for...
- Excess stock – the buyer noted the very high stock figure, amounting to four months worth of sales. As a competitor she knew that there was no way this level of stockholding was necessary. It made her have serious doubts over the efficiency of the operation and she walked away, but not before making a derisory offer. Word spread quickly and other likely buyers all gave the firm a wide berth.
- Obsolete stock – the seller just couldn’t bring themselves to make the necessary stock write-downs over a period of 20 years and needless to say the accountant just accepted whatever they were told. Crunch time came during due diligence by a buyer, who subsequently slashed what had been a good offer.
- Debt collection – the balance sheet was showing six months of sales tied up in debtors. The buyer asked if we were selling a bank or a manufacturer! Upon closer inspection it transpired that 75 per cent of the debtors were not recoverable. The buyers said they would sit it out until the seller went bust and mop up the customers themselves.
- Margin variations – this is probably the most common problem. In the year prior to selling, out of the blue the gross margin improves noticeably. Amazing isn’t it? No amount of explaining will persuade a buyer that something funny hasn’t gone on.
- Excess margins – everybody makes 43 per cent gross margin but your client is consistently making 51 per cent . Buyers scratch their heads and when advised that the firm’s director has been sourcing very keenly and is a crack negotiator, they start to wonder how they will manage once your client retires and the buying wizard has performed her last act. Once again interest slowly evaporates.
These five scenarios, and others besides, should be on the radar of the accountant.
And when you have the discussion about exiting, you need to get in your car and head straight down to your client’s operation, get a feel for it and look at it closely just like a buyer would.
Let your clients benefit from your professional expertise and experience in dealing with a variety of businesses.
Work hand in hand with them to groom the business for sale and extol the virtues of the exercise.
How cheap clients create absolute chaos in your accounting firm
Honestly, it doesn't matter what kind of business you're running, if you have clients who pay you low value, it creates chaos both from a mindset perspective, and from an operational perspective ... but we'll get to that in a second.
Why do cheap clients create absolute chaos? There are a couple reasons. In fact, there are a lot of reasons, but I'm going to look at the main ones.
First, let’s define what a cheap client is...
I had a conversation with a firm owner and she had 52 clients. They were paying such low fees, it was incredible. I was shocked. She was intelligent, quick and very entrepreneurial. But she was selling herself short for $100 per hour and less than $1,500 for complex tax returns.
My clients they charge $1,500 MINIMUM. Actually, it's rare that I speak to my clients and they charge at that level. I won't allow it.
Usually, for project work they charge $8-$15,000, depending on what they offer, depending on the specific transformation they offer to the client.
I digress.
This lady was offering like $50-$100 per accounting client, 52 clients. Man… managing 52 clients obviously isn't easy. You can put systems in, but to what extent could you evolve your systems if they're paying you $50?
Let alone finding, recruiting and training the right people to operate it. To what extent can you get the most quality staff if they're paying you $50?
There are two types of accounting businesses. One that's built with a TONNE of clients making X revenue. For example, 52 clients charging $50 per hour. Or – type two - 10 clients or five clients charging $3,000 per month.
Same amount total revenue, different number of clients and therefore different systems. One business is in Absolute Chaos. The other is running smoothly.
- The Number One Reason Cheap Clients Create Chaos Is Because You Lack The Financial & Time Resources To Put In Good Systems
Systems run businesses, people run systems.
Read that line again…
Without good systems in place, finding good people is impossible The person may be a brilliant employee… but how can the operate without a system to operate by.
So, what happens?
YOU – the owner - end up doing all this work, you're the owner, you're supposed to be working on your business, not in your business, and you find yourself doing lots of client work trying to make your staff do client work, and you can't really invest in the systems you need, right?
Now, you need more staff to take the work off your hands. But, to pay for the staff, you need more clients to bring in more revenue to justify employing new people. So you get more staff, you get more cheap clients.
That just becomes a chaos firm. I call it The Chaos Cycle.
- The second outcome to having those low-quality staff is the mindset.
When I was talking to this lady, she had 52 clients, all paying around $50 - $100.
She didn't understand that there are other types of clients.
I remember five years ago where I started my finance advisory firm, and I was charging 8K minimum because the service I was providing warranted me charging that amount. But you see, she was selling accounting, selling bookkeeping, selling tax. These are commodities.
…And as a result, your value is based on the price. Your value is based on the commodity that you provide instead of the transformation that you provide. Focusing on client transformation and results is what increases the value of a client. Or said differently,
Focusing you accounting package on client transformation and results is what increases YOUR value to the client and thus, your pricing.
So, here's a mindset issue attached to low value clients.
You forget or you never find out that there are businesses out there that need other types of services from commercially and financially savvy entrepreneurs… and they are willing to pay for it.
Every time I speak to an accountant, and I share that my clients are actively charging $3,000 per month or $5,000 - $25,000 per project I get the same response…
"Wow, people really charge that?"
The lady we are discussing was shocked at the lower end. I didn’t even tell her about the 5K per client.
There are people out there that need this set of skills. And, when you work at this level, you can provide and systemize fairly easily.
- I lied… there is a MUCH BIGGER ISSUE GOING ON HERE…
All you accountants, you clever, clever, beautiful accountants out there are probably highly skilled.
You probably been feed the belief that multi-tasking is a good idea. You go out there, you get clients, you get maxed out and then you bring on the staff, they get maxed out.
Then you keep going like that maxed out, maxed out. I've got a tonne of clients who were maxed out when I met them.
This is the kicker guys, they sell different things to different people under different processes.
So now, you are not actually running one business, you're running multiple businesses within your accountancy firm. It's ludicrous.
It will literally burn you out.
I had a call with an accountant the other day, she works until till 1:00 AM for Standard.
When growing your business hurts you, man that's a problem.
Let and me tell you something. It's weird. It's so weird, it took me couple of years to get this concept right, but when they are low value clients, they want more. When they're pinching pennies and they're thinking, "Well, you know that guy down the road is 100 or 90 a month, you're 200. You're a bit on the expensive side."
When they're pinching pennies like that, they're trying to extract as many things as possible, not value, things.
When someone hands you $5,000 to transform something, maybe you do tax resolution, maybe to strategize profitable finance systems. Maybe you do financial modelling. Maybe you're virtual CFO, maybe you do some commercial thinking…
When people hand you 5K for that kind of solution, they want the outcome. They don't care if you click your finger and it takes two seconds. They just want you to get the result that you promised. Nothing else matters, but the chaos clients, or cheap clients, man they are a nightmare.
So imagine having 52 of them. Imagine having 100 of them. Personally, I would find a low bridge and jump off… (I jest!)
The Solution Is Easier Than You Think
So here's a solution. Here's how you change it - positioning.
You do not position yourself as a commodity.
You move to positioning yourself as a transformation provider for one specific thing.
I've got a book here called The One Thing and it's so powerful.
It talks about just doing one thing. Unfortunately, accounting firms are more like supermarkets these days.
Look, I'm an accountant, I'm qualified. I understand accounting very well. It's been a while since I've done it, but I understand it very well and I see accounting firms who have more services than I knew existed.
Focus on ONE thing, ONE transformation. Get good at that one thing and you will be known for that ONE thing.
So where do you start?
You start by designing your core advisory/consulting offer...
I'll be returning to this subject soon!
High number of accountants are unhappy in their jobs
Accountants can be a pretty unhappy bunch, it would seem. About one in five think about quitting every week according to some pretty enlightening research.
CABA, the ICAEW's wellbeing charity, surveyed 251 members, finding that 8 per cent think about calling it a day every day; 14 per cent consider leaving up to four times a week ... and so on. Among 35-44 year olds, 34 per cent consider quitting at least once a week.
The profession led various sectors in the dissatisfaction stakes too. Manufacturing was in second place. Overall, about 15 per cent of accountants were unhappy with their careers.
Work life balance
CABA's research also showed that ICAEW members were struggling to achieve a work-life balance, with over half regularly working late and 22 per cent staying back every day. Nearly half took work home, while over a third regularly worked on days off (compared to 19 per cent across all sectors).
Not surprising then that about 21 per cent of accountants missed at least one personal or family event a week.
Kelly Feehan, CABA services director, says: ‘Chartered accountancy is a competitive sector, with firms striving to attract and keep the best talent.
Shockwave through the profession
"The fact that so many employees are feeling discontent in their roles should send a shockwave through the profession – put simply, employers need to act or lose their best staff.
"Replacing talent takes time, effort and is costly, so employers should consider some other fixes instead of assuming employees can be replaced like for like."
She adds: "Moving wellbeing up the corporate agenda could help facilitate this – the fact people are crying, checking emails when sick and regularly thinking about quitting shows something has got to change.
Change cultures
"Wellbeing and work-life blend will be a real priority as more millennials move into the workplace, so employers need to change cultures now to prepare themselves for the workforce of the future.
"In today’s always-on world there’s no separation between work and home – we can work wherever, whenever, which blurs the boundaries between our personal and professional lives.
"Whilst this is handy in replying to urgent emails on the commute, it also puts pressure on employees to stay connected to work, even in their downtime, as few of us can ignore multiple notifications buzzing away.
"Whilst we don’t work as many hours as previous generations have, we don’t have the disconnect they did – making us mentally fatigued, which is no doubt linked to reduced productivity levels.
"If employers want a happy, healthy workforce they need to take notice of these findings and put measures in place to help staff regain control of their equilibrium, as this will lead to a more engaged, productive team."
Quite.
Route 101 to accounting enlightenment
One of the highlights of my eventful first year producing content for Accounting Insight News was a day spent at ACCA's London Embankment HQ with Richard Sergeant.
Richard, MD of Bristol-based personal and business development group Principle Point, is a well-respected figure in the UK sphere of accountancy, marketing and software.
He’s a knowledgeable observer of the profession’s habits, practices and idiosyncrasies, which makes him eminently qualified to run his Accountant 101 course.
Insightful dive into the industry
I thoroughly enjoyed his insightful dive into the industry - as did my fellow attendees who were drawn from toe-in-the-water accounting tech start-ups and well-established groups like Thomson Reuters.
Accountant 101 is basically an overview of accountants and the accountancy market for knowledge-hungry vendors who are new to the sector.
It’s also aimed at folk who are curious about accountants as a channel; or for those already in the market, but who want to give staff a knowledge boost.
Role of technology
Here are some Accountant 101 topics:
- What an accountant actually does, what services they provide, for whom and why.
- Why all firms are the same, but completely different!
- The role of technology within a practice, and what they use with clients.
- The challenges firms face.
- Why compliance is unlikely to die, and the role of advisory.
- Business is complex!
Richard runs the course with enthusiasm and humour, always ensuring there’s plenty of opportunity for attendee participation. It all makes for a lively day that goes in a flash.
“I'm just confirming dates now. But I'm looking to run courses in Feb, March and April to coincide with the run up to Accountex," Richard tells me.
Better understanding
“One of the main draws is to help encourage better understanding of the lives and work of accountants, so you can have better and more productive conversations
“I'd like to believe that this is an ideal way to make sure that all Accountex exhibitors can make the most of their Accountex opportunity.”
Richard is offering a discount of 33 per cent to Accountex exhibitors who sign up for Accountant 101. That would be make the fee £195. Get the lowdown HERE.
Money well spent, if you ask me.
FRC stats illuminate the accounting profession
I thought I'd share this informative article by Kevin Reed, a freelance journalist and consultant at practice advisers Foulger Underwood
There is little fanfare around the Financial Reporting Council’s ‘state of the accounting profession’ annual stats. This is, perhaps, because they show movement in accountancy – whether the number of students or ratio of the big firms’ audit to non-audit fees – as somewhat ‘glacial’.
However, the lack of reporting of the Key Facts and Trends in the Accountancy Profession’s statistics means that interesting and important indicators of the profession can be overlooked.
And for practitioners, understanding the direction of travel of the market beyond anecdotal evidence must be useful. You are numbers people, after all.
There’s a lot of ground to cover, so I’ll undertake this project in a series of articles. Firstly, let’s look at the institutes.
Studying the stats
The ACCA has grown 17.6% in member numbers between 2013 and 2017 in the UK*, compared with 5% growth for the ICAEW. However, the ICAEW still has many more UK and ROI members, at 126,560 compared to the ACCA’s 94,622.
But while the ACCA’s overall numbers have skipped up, it has negative growth (-3.7%) in UK students over that period, while the ICAEW has upped student numbers by 35% between 2013 and 2017.
Globally, the ACCA has by far the upper hand. It has 414,562 students worldwide, compared to the ICAEW’s 27,866. Notably, CIMA has increased students worldwide by 4% to 127,241 during that period.
Attaining membership
There has been much work on both the ICAEW and ACCA qualifications during recent years, but it’s interesting to note that the ICAEW has seen a decline in students attaining membership in the last two years – down 2.7% in 2016/17. The ACCA has increased its number by 5% in the last year. While difficult to create a link between quality of students vs. quality of training and qualification, it’s an interesting set of numbers nonetheless.
And where do these students and members work? While the UK is, anecdotally, a big stomping ground for the ACCA in smaller practices, globally more than 60% of its members are in industry and commerce – just 21% in practice.
Practice v Commerce = Students v Members
In contrast, more than three-quarters of ICAEW students are in practice, which falls off to under 25% following qualification. Though we know that the big accountancy firms see qualifieds move into industry, there’s clearly an opportunity for smaller practices to consider how to attract them following their studies.
The ICAEW’s female member numbers have stayed stubbornly low – at 28%, compared to 46% for the ACCA. So, if looking at the gender balance in your practice then – based on those factors - there will likely be more ACCA members on the jobs market, than from the ICAEW.
The ICAEW has improved its proportion of female students – to 43% in 2017 from 39% in 2013, which will have gone towards the small improvement in female member numbers.
Age gap
The ACCA has a younger member/student distribution than the ICAEW – more than a quarter are under 34 and a further 25% are under 44. Only 38% of ICAEW members and students are under 44.
However, there is another important aspect when it comes to time: how long has the student been studying? Worldwide, more than a fifth of ACCA students have been studying more than five years, compared to 5% of those with the ICAEW. Does this mean ACCA students aren’t as good as the ICAEW’s? Again, caution must be taken in what to read from these figures. We don’t know the background or circumstances of these students, and the FRC itself notes that there is “no common basis” to determine the length of time between registering as a student and achieving the requirements for membership.
Turning to technicians
Finally, let’s take a look at the ‘technician’ qualification offered by the Association of Accounting Technicians – a qualification that can provide a route into the other accounting organisations. These numbers have dipped across the board.
Growth in member numbers for the UK and ROI was -5.2% between 2014 and 2017. Student numbers fell 9.3% during that period.
Under-25s represent the majority of AAT students, at 35%, while more than 30% are in the 25-34 age bracket.
Conclusion
At a time of unprecedented technological and client-focused change upon the accounting profession, understanding where the next generation of accountants is coming from, how long they take to study, and which bodies are producing them, is vital.
Does audit experience matter for your practice? Or time spent in commerce? Do you think younger students and institute members are more important than experience?
And, finally, do you need qualified accountants? Are you better hiring people with broader or more 'people'-focused abilities? A topic for a future blog of mine, for sure.
These considerations, among others, will determine the profile of potential candidates for your practice.
Kevin Reed is a freelance journalist and consultant at practice advisers Foulger Underwood.
Don’t forget your headspace!
We live in an exciting world where we can extract information instantly, communicate to anyone, anywhere, and go everywhere.
With the pace of life accelerating rapidly and our to-do list forever growing, I want to bring your attention to the one important thing most of us are forgetting - time for you!
I’m not talking about the brunch you had on Saturday or the trip to Italy you made this summer, I’m talking about allocated time for headspace.
Switching off
Switching off from social media and being at one with your thoughts! No, I’m not a wellbeing guru, but I have learnt a lesson or two!
I have always been a social butterfly packing out my weeks with loads of plans, seeing family and friends, endless trips, dinners, always having something to do or organise while progressing a career I love. And this is exactly how I reached burn-out.
Side effects of burning out are insomnia, depression, anxiety, and a range of other health problems.
My top tips
So what can you do to give yourself headspace?
There are number of ways you can make time for you. So here are my top tips:
- Find a class you love - yoga and meditation are fantastic ways to de-stress (I would highly recommend yoga)
- Discover the art of doing nothing - saying no to plans and having free evenings.
- Read a book - this is a great way to let your mind wander.
- Enjoy social-media-free days - you will be surprised just how much extra time this gives you for yourself.
- Try the Headspace meditation app - I have only used this once but I have friends that use it regularly and love it.
As well as the above, make sure you have support when you need it. There is no harm in asking for a deadline to be moved, sharing the workload or off-loading problems to a family member or friend.
Has this made you question how much time you allocate for your headspace?
Have you got any other tips you can share?
Please comment below!
MPs force rethink of controversial HMRC loan charge
HMRC's efforts to claw back "unpaid" taxes through its loan charge have been dealt a potentially fatal blow.
A cross-party group of MPs led by Ed Davey has forced the government/Treasury to rethink the retrospective tax/anti tax avoidance measure aimed at freelancers and contractors.
The aim of the loan charge, set to feature in the April 2019 finance bill, is to end disguised remuneration schemes - where agency workers and the like were 'loaned' money rather than being paid a salary that would have attracted tax and NI. The "terms" of the "loans" were such that they would never have to be repaid.
The scheme gave HMRC the power to go back 20 years in pursuit of tax "avoiders". This is where it ran into trouble and earned, with some degree of justification, the label "retrospective taxation".
Review the policy
The government now has to review the policy before the end of March.
HMRC’s pursuit of retrospective loan charge taxes has been criticised by the House of Lords economic affairs, which said there was “disturbing evidence” and “reports of increasingly aggressive behaviour towards taxpayers”. It calls on the Government to reform the Loan Charge, which Lords declared is “clearly retrospective” and ”undermines basic principles of tax fairness and certainty.”
Mel Stride, finance secretary to the treasury, said the government accepted the call for the review but maintained that the disguised remuneration schemes were "gross aggressive tax avoidance."
Tax principle
Ed Davey had this to say: "This review is about an important tax principle. The government are in effect in breach of the rule of law with the retrospective nature of their loan charge. And the unfairness of that has brought misery to thousands of people. While ministers have listened, the review that’s now been established must respond to the concerns of MPs...
“Treasury ministers have a duty to respond seriously and substantively.”
Loan charge action group spokesperson Steve Packham said: “We are delighted that MPs have forced the government into accepting a review of the appalling loan charge which, if it comes in, will destroy families and cost lives. This is a victory for the campaigners, for parliament and for the rule of law." He said it was vital the review was "genuine" and not a "whitewash".
Misleading information
Phil Manley, partner at DSW Tax Resolutions and a LCAG campaigner added: “Despite being forced to concede defeat, it was an appalling and utterly ungracious response from Mel Stride. He conceded to having a review, but then tried to preempt its conclusion, parroting the same misleading information the Treasury have been peddling for months.
"As he knows full well, but again deliberately misrepresented, the Rangers case says employers are liable, not employees!
"He also continues to claim that the schemes were defective, but he knows that this is meaningless and has no basis in law, especially as he also knows the schemes were legal at the time.
“So we need some honesty at last from him and the Treasury. We call on the Government to now, at last, listen to the overwhelming evidence and majority parliamentary support for reform to this manifestly unfair legislation before it destroys the lives of tens thousands of families in just three months’ time.”
Accountants chat to win more clients
Accountancy is a well-established profession that provides an important service. With the clear opportunities this situation presents, also comes challenge. The more essential a service and the bigger the customer base, the more difficult it is to compete.
Expertise, quality, diligence, integrity have to this point been the key ways in which one organisation positively distinguishes itself from another. That’s what a client requires when they use the services of an accountant. These aren’t going away and nor should they, but what does the modern consumer look for beyond these? What do accountancy firms need to acknowledge has changed about today’s customers? The answer? Expectations.
As technology moves quickly, so does the expectation level of a customer. Think of the mobile phone market. In a short period, the expectation of a customer looking for a mobile phone has changed to the point where “making a call” is one of the last things they consider. It’s simply a given and their decision is based on a myriad of alternative features driven by technology.
Customer expectations
Is it complacent to suggest that “making a call” is not comparable to the expertise, quality, diligence and integrity of an accountancy practice? Of course these traditional features remain vital, but a mobile phone company adapts to the expectations of its customers in exactly the same way an accountancy firm must.
So where can accountants find competitive advantages to match the rising expectations of their customer base?
As with many other business improvement strategies, the answer lies with technology. What are customers looking for beyond the “given” of a quality product or service? How can accountancy firms improve the business side of their operation? Can these questions be successfully responded to in a financially viable way? They can, in many ways, through Live Chat.
Instant benefits
Live Chat is a feature currently used by less than 10 per cent of businesses, but those that are incorporating it, are seeing instant benefits to their services, external customer perception, data analytics and to the size of their customer base. Why? Because Live Chat solves problems by positively reacting to the expectations of the modern consumer. Here’s how…
Customers expect speed of service. They want to visit a website and have their questions answered immediately, not by having to suffer through call centres or unanswered emails. Firms using Live Chat instantly upgrade their customer reaction time compared to those that don’t.
How many customers are accountancy firms losing by having substandard data intelligence on their website visitors? Who is visiting regularly without committing? Where are they based? What questions or problems might they have? Answers to these will often never be known without the intervention of a proactive “can I help?” appearing as they search your site. Once again, imagine one company using Live Chat and another not?
Need to run a call centre as part of your organisation? However large or small it is, the telephone operator can only handle one call at a time. Imagine the capability of a Live Chat operator working on several chats simultaneously, gaining valuable data and insight as they do?
Live Chat not only enhances your customer service and your customer’s experience, it also does it in a way that’s more cost effective than the clunky, traditional models of 90 per cent of other businesses.
It’s time to think beyond the traditional measurements of a successful accountancy practice, it’s time to start thinking of these in the same way a customer does, as a given. It’s time to think about Live Chat.
How's the future looking for HMRC?
HMRC is upbeat in a new year progress report on its modernisation programme to "become the tax authority of the future".
An update on GOV.UK says the revenue is "very close" to the target of 90 per cent of staff being able to move into regional hubs that will be replacing 170 local offices.
The civil service trade union is a tad more more downbeat. PCS general secretary Mark Serwotka reckons the HMRC readiness assessment is a "fallacy”.
“HMRC’s claim that 90 per cent of staff will be able to move to the new regional hub offices is already proving to be a fallacy. The department’s own figures show that it has lost 17,000 years' worth of experience in the last year alone as a result of the office closures," says Mark.
“With wages continuing to stagnate, HMRC is finding it difficult to retain new staff, making it harder to deliver its core functions. This government needs to accept that HMRC’s transformation programme should to be halted as it will leave us with a tax authority not fit for purpose.”
On the other hand, HMRC says the new hubs will make it easier for staff to collaborate and work flexibly.
“Our regional centres are in locations where the majority of our employees are already based – the impact on our people was key to our location decisions. We want to keep as many people as we can and still expect around 90% of our 2015 workforce across the UK will either work in a regional centre or see out their career in an existing HMRC office.
“We have been clear that, if someone can move to a regional centre, transitional site or specialist site, and has the skills HMRC needs or is able to develop them – there will be a role for them. The moves to regional centres will be phased, with some offices remaining open for longer as stepping stone sites and transitional sites remaining open for up to ten years.”
Here are a few more points from the HMRC:
- Through the Locations Programme, HMRC is on track to deliver savings of around £300m up to 2025. It will deliver annual cash savings of £74m in the tax year 2025 to 2026, rising to around £90m from 2028, while modernising how HMRC works, and helping to improve customer service.
- High-speed digital infrastructure will support state-of-the-art data analysis and risk assessment systems to help HMRC target compliance activity.
- Analysis shows that improved IT and high-speed broadband/WiFi at our Croydon regional centre are already allowing more flexible working.
- We have just under 60,000 full-time equivalent (FTE) colleagues, up from 57,000 FTE in 2015. In part, this is due to recruitment of nearly 3,000 people into customer services. We also received extra investment in the 2017 Budget to support our work to tackle avoidance, evasion and non-compliance which led to the recruitment of an extra 1,400 FTE.
- We’ve always had a pivotal role in making sure that goods flow into, and out of, the UK, and in making sure we collect any taxes and duty due on them. That’s why we’re now delivering essential programmes that will support access to European and world markets.
- As we prepare for an EU exit, we are creating additional roles and have launched several recruitment campaigns.
- Currently there are around 3,000 FTE working on EU exit (at 31 October). Depending on the final outcome of negotiations, we may need up to 5,300 FTE. However, we have already secured additional temporary accommodation in regional centre locations across the UK and increased the size of some regional centres to support this work.
- As a department we’ve prioritised the projects that make the most difference, pausing some work and stopping other projects to make room for this EU exit work.
As far as the future goes, HMRC's message has some phrases that will resonate with accountants everywhere...
"We need tax specialists with digital skills, along with data analysts and digital experts."
And to bring that about? "That’s why we plan to work with universities and local colleges to attract the best and brightest talent.
"We have cutting-edge systems that enable analysts to sort and sift billions of pieces of data to find discrepancies – so we need people who understand digital technology and can make the most of it.
"We are on track to achieve our ambition of becoming the world’s most digitally advanced tax authority."
All sounds good in theory...