March 2020

The Coronavirus “CV” situation, coupled with the collapse in the oil price has created the most challenging economic conditions that the North East of Scotland has seen in our lifetime and, unsurprisingly, resulted in requests for the Meston Reid & Co insolvency team to provide personal financial advice.

Job loss and/or a reduced salary level will undoubtedly leave many people/households in financial difficulty. Most of us have a relatively set amount of income e.g. a job or State benefits, or a mixture of the two, but what happens when earned income all but disappears ?. Equally in these CV times, those who are self employed are highly likely to experience fluctuating income e.g. a share fisherman or no income e.g. events organiser, with downward movement as work dries up.

Whilst the first reaction tends to be one of panic and uncertainty, a clear head is required to look at matters objectively. The key areas of focus when looking at what is affordable are maintaining a regular flow of income ( howsoever that is achieved ) and essential expenditure.

If you are unlucky enough to lose your job, there may be some redundancy to live on, or you may face a reduction in income from your existing employer. For most, such outcome is largely outwith your control and although banks are making every effort to be supportive and family members might be in a position to provide short term gifts/loans, there remains a natural requirement to document the position in order to explain it to both yourself and anyone who might be approached for assistance.

Clearly, cutting back on expenditure is never an easy/happy task, and it is hard to make choices when one has become used to a certain standard of living. Everyone has a different view on what is essential, which tends to mean that an independent second opinion helps to introduce a sense of reality and pragmatism.

The first step in taking charge of the household expenditure is to prepare a monthly budget that covers a full year. Taking a twelve month view helps to even out income fluctuations and identify those months when expenditure is higher than normal. For example, it may well be acceptable to spend a little more in some months e.g. a holiday in Summer or at Christmas, if there are other months when you expect to have reduced outgoings, and undertake to stick to the budget rather than spending cash in a quieter month simply because it has not been earmarked for a specific purpose.

There are plenty of sources of a standard income/expenditure analysis e.g. the Meston Reid & Co website Scotdebt.net. Using a bespoke document will provide a memory trigger in order to ensure that all items are included in the assessment. This exercise will show an overall picture and if the figures reveal that you are spending more than you receive, the expenditure analysis will require careful review in order to identify where you can cut back. Clearly, the first area to assess is non-essential outgoings e.g. cancelling/downgrading a subscription TV service or reducing hobby expenditure. Of course, one positive aspect of the CV situation means less socialising and hence less costs in this area.

Even if you have little disposable income after paying essential expenditure i.e. mortgage and utility bills, there remains an opportunity to assess where savings can be made e.g. undertaking a mortgage review or taking advantage of the recently announced mortgage deferral for three months. Perhaps switching utility providers will reduce your costs.

However, it is not always possible to know what lies ahead. In the event that an unexpected event arises you will find that the budget requires to be revisited which, as an exercise in itself is no bad thing.
Your monthly budget will also take account of repayments to credit providers. When you have store card and credit card repayments that stretch the family budget, one has to take a view on how best to tackle them. For example you might decide to pay the minimum sum for a month or so but remain mindful of adhering to the terms of every credit agreement because falling into arrears can become a serious matter. With one eye on the CV situation, one would not expect a creditor to threaten formal debt recovery proceedings and Banks and HMRC have gone out of their way to make it clear that they want to help wherever possible. If there are pressing creditors why not have a chat with them and explain your position.

Boring, and perhaps as obvious as it sounds, you should exercise caution when considering a “quick fix” by using a payday loan or a credit because that step can quickly become a long term financial drag on household finances. The view that all expenditure is essential, despite what your friends may say, should not cloud your judgement about your own position.

If you are struggling to establish a clear picture in respect of your personal finances you can approach an approved money advisor for assistance and advice.

This article is written by Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, Aberdeen. The views expressed in this article are his rather than of the firm.

February 2019

Having dealt with all kinds of businesses for over thirty years, the old adage remains true that “ cash is king”. Indeed, a lack thereof tends to be the main reason for business failure. However, every business is slightly different and has its own model against which key performance indicators can be used to judge progress. One or two negative signs do not necessarily mean that financial failure is inevitable, but the more signs that are in evidence without corrective action being taken, the higher the risk of an unwelcome downward spiral.

My insolvency team are consulted on a regular basis by worried business owners and this allows one to spot some of the tell-tale signs of a business in difficulty. Of course, someone seeking help does not have to heed advice, particularly if the advice provided is not what one wishes to hear, but experience shows that where tell-tale signs are not dealt with efficiently and effectively, the team’s follow-up call a number of months later is the beginning of a more formal insolvency process.

Without a doubt, reliable and timely management information which charts business activity and financial results is as important to a small business as a large one. Very often, you find that you are working in the business rather than on the business and fail to see the big picture before it is too late. In this regard, it should be stressed that if the person leading the business is not particularly comfortable with standard management accounts, there is nothing to stop a different financial presentation which focuses on the key issues : perhaps in the form of either graphs or pictures. The fundamental point is to highlight trends that require to be addressed.

As noted above, cash is king, and thus effective credit control and cash utilisation is equally crucial to ongoing success. Research has shown that one of the main reasons why businesses do not get paid on time is because the owner feels that they might be upsetting a customer by pressing for payment. The reality is that if you aren’t being paid why should you worry about upsetting the customer : you can’t afford to keep that type of business anyway. If your family depends upon the success of your business, why put their future at risk by being shy about positive cash flow ?

Typically, management information will highlight the key costs involved in running your business. These should be reviewed regularly with a critical eye in order to ensure that they are justified and perhaps make you think if there might be a better way of achieving the same result.

Nobody makes the correct business decision every time. Most successful people in business know their strengths and are happy to accept advice from others who have suitable knowledge/experience. Being headstrong and not listening to anyone is unlikely to promote success, because nobody is an island and every business is dependent upon others.

Another tell-tale sign when looking at a business is the attitude to quality i.e. is there a consistent and high quality attitude towards the business product/service or does nobody really care as long as you can leave by 5 pm ? If he is thinking of quality, a window cleaner will not enjoy a significant level of repeat business if he leaves streaks/marks on a window and knocks the heads off the householder’s prized roses when placing his ladder in the garden.

As both the owner and the business become more mature, some people find it difficult to accept change to existing work practices meaning that inefficient systems are retained e.g. why use a fax when an email is both quicker and more direct ? Accordingly, one must be flexible, understand why change is beneficial, and act accordingly.

Discussion with many business owners often reveals an inability to delegate effectively, coupled with an overdeveloped sense of self perfection. Don’t spend the whole day running around in ever decreasing circles thinking that nobody else can do what you do. After all, there will be competitor businesses out there and thus, it seems logical that others can provide a very similar product/service. Thus, consider recruiting high quality people, delegate empowerment and let them grow the business for you.

Another issue which can sometimes drag a business down is the inability to communicate, or the general lack of communication. It is a fundamental aspect of any business that those within the business, together with external business partners/contacts understand what the business is trying to achieve. An owner may find it terribly frustrating to see everybody acting in a particular way because he has not communicated how he wishes the business to operate. That is not to say that one discusses trade secrets, but merely ensures that everyone involved with the business is pulling in the same direction.

These general thoughts reflect consultations with all types of businesses. There is no divine right to be successful, but planning, taking advice, working effectively and acting promptly tends to create conditions conducive to success. Are you in that group of people ? If not, it is rarely too late to ask for help.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

December 2019

Unless you have been living in a cave without any form of communication, you will be aware of the media frenzy surrounding Black Friday and Cyber Monday. On the face of it, companies appear to be offering tremendous bargains across a wide spectrum, whilst also gearing up for the Christmas rush. Unlike years gone by, the whole of December appears to feature a variety of sales and special promotions which was not normally be seen until Boxing Day at the earliest.

Typically, the current selling frenzy is in the retail industry but at what cost to the retailer ? Indeed, stepping aside from the issue of whether or not this approach generates a much higher volume of online sales at the expense of high street sales because consumers act on the basis that a low price is more important than, say, personal service, the insolvency practitioner starts to look around for candidates for retail administration/liquidation appointments in January/February. Why?

Experience suggests that, in general terms, buying turnover buys trouble on the basis that chasing sales on a reduced margin might make the business look good from a sales viewpoint, but all of the normal costs still require to be paid such as premises, utilities and staff : none of which offer a price reduction for goods and services whilst the business is selling as much as it can. As a result, cash flow might be positive in late November and December, but when the suppliers’ bills arrive in January/February, the wage bill is higher as a result of all that overtime, and the PAYE/NIC and VAT requires to be settled, the business can find that it has insufficient cash to deal with these obligations.

In contrast, restaurants, bars, hotels and similar establishments enjoy a significant increase in turnover at this time of year without having to sacrifice margin. Understandably, such businesses look forward to this opportunity to make money, as do those who eschew an online presence because they provide a slightly different offering that entices customers into their shop.

A key purpose in running a commercial business is to make money such that one can invest in the future but clearly, if reserves are already quite low and creditors press for payment, a short term cash injection from a seasonal increase in sales is unlikely to create the basis of a sustainable activity. It is not uncommon for a retailer to receive a knock on the door from a licensed insolvency practitioner in eth first month or so of a new calendar year because a bank or other large creditor has become concerned about trading viability and hence debt repayment, or for the business owner to seek advice from a licensed insolvency practitioner about the options available for dealing with the cash flow difficulties that have been created by the rush to increase turnover at the expense of a realistic margin.

In summary, don’t be busy losing money. Turnover is a standard measure of business performance, but a healthy gross margin coupled with robust cash flow are much better in the long run. Not necessarily a happy thought for readers in the weeks before Christmas but a practical one which simply seeks to advise the exercise of appropriate business sense and caution when looking at how turnover is being achieved.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

October 2019

In any business, no matter the size, it is vital to know the financial position at all relevant times and for the business owner to have a good idea how the short/medium term future is likely to unfold. Why? Well, if you don’t know, how can you be sure that there is not a financial challenge around the next corner which cannot be met and may result in business difficulty, or even collapse.

In short, if your business fails because you have no reliable financial information or don’t act upon it when the messages are clear, who will you blame if it all goes sadly wrong ?

Previous articles have always extolled the virtue of timely and informative financial data about your business. In this regard, it is recognised that if the standard profit and loss account and balance sheet format beloved of accountants fails to inform you suitably e.g. because the layout is unclear or difficult to understand, why not prepare something that is relevant to your needs and understandable? Not everyone likes the standard style of information presentation and if you feel uncomfortable with bland figures, how can you reach an effective decision if the current financial position is unclear and the impact of decisions is not understood?

It is not a sign of weakness to receive financial information in a way that you understand i.e. a graph, tabular form, or simple narrative. Perhaps you will wish to concentrate on the key performance indicators which let you know if the business is trading well. For example, a firm of lawyers might measure chargeable hours per person, the recovery percentage of such time by way of fees issued, and cash collected. If these three aspects exceed a pre-determined target, everything else should fall into place and allow the business to prosper.

Even if a business is trading well, producing profits and generating positive cash flow, a business owner will often ask how the business is performing compared to others in the same sector. It is helpful to be measured against competitors and learn from them where appropriate.

In reality, there is a plethora of information available if you know where to look e.g. one’s trade body, special interest groups, discussion forums, local Chamber of Commerce, and the internet. The Office of National Statistics collects/publishes a large amount of business data for numerous industry sectors and further, if you are aware of companies in your industry, why not download a set of accounts from companies house : access is free.

Your lawyer or reporting accountant/auditor will act for many businesses and thus, whilst respecting the requirement for confidentiality, is likely to have a significant amount of information available about how your business performs compared to others. Don’t be afraid to ask, and if your professional advisor can’t help directly he is likely to be able to point you in the direction of a source that can.

Whenever information is sourced and in whatever form, it is important to interpret what you are being told because, for example, your business may have specific circumstances which means that a slavish comparison is inappropriate. However, when you are able to compare, say, a standard gross margin between businesses similar to yours, any significant variations should be queried and corrective action taken. Again, if you are not clear what significance key financial ratios have with regard to your business and your competitors, ask for an explanation.

One word of caution is that “locker room chat” may not be a reliable source of information given the propensity for some business owners to be somewhat over-optimistic with their description of t wellbeing of their business. Also, they may not be fully conversant with their own financial situation in the first place which suggests that a second opinion can be useful. Fake news is unreliable news and shouldn’t form the basis of your key business decisions.

The more trustworthy the information, the more a business owner should feel able to take notice of it and use it to judge financial performance. If the information yields questions, be willing to find answers, listen to advice and act accordingly.

If you have any doubt about how to benchmark your business, or how to obtain financial information that will help steer your business in the right direction, do not be afraid to ask because too many businesses fail because owners don’t understand the financial fundamentals of what they are doing.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

August 2019

Many readers will be aware of the close HMRC attention in recent years in respect an Employee Benefit Trust “EBT” which, in broad terms, is a trust established either in the UK or offshore by a limited liability company to hold cash or other assets for the benefit of certain employees. Quite often, the only employees of the company who benefit from an EBT are the directors.

Generally speaking, the purpose of an EBT is to incentivise employees and help retain quality staff by providing a benefit to them. When first conceived, they were not designed to be used ( some might say “abused” ) as they have been over the last 25 years or so. An EBT and the company that creates it, are two separate legal entities which means that once the company has transferred property/cash into the EBT, it is run by trustees who have ultimate control over trust property, although they will often be guided by recommendations from the company. As the trust is a separate legal entity, it will continue to exist even if the company has a change of ownership or is liquidated.

For many years up to the mid 2010s, it was not uncommon for employers to pay bonuses to selected employees by transferring money to an offshore EBT : it is the offshore EBTs that attract HMRC interest. Typically, money is passed to an employee from the trust by way of an interest-free loan which, in practice, remained unpaid indefinitely. Perhaps unsurprisingly, HMRC considered these to be tax avoidance arrangements that sought to avoid income tax and NIC because, if the loan was never repaid, the cash was seen as representing net-of-tax money which, in normal circumstances would have been subject to tax and NIC before being passed to the recipient.

The 2017 Finance Act introduced the concept of a loan charge which applied to all loans made subsequent to 6 April 1999 which had not been repaid before 5 April 2019. The charge is designed to represent the income tax and employee’s NIC which would have been deducted if the monies had been processed through the company’s payroll in the normal manner. Broadly, if £600,000 was placed into an EBT and then lent to an employee, HMRC can contend that income tax and NIC liabilities of at least £550,000 would have been created and paid to HMRC : a significant loss to the Treasury. This helps to explain the large demands which many companies are facing from HMRC as a result of the legal challenge to the validity of an EBT scheme.

Liquidators have the ability to agree a company’s tax liability with HMRC but clearly, if the liquidator advises HMRC that there are assets left with which to pay the claim, one might argue that the liquidator is entitled to pursue the person who received the cash under the principle of unjust enrichment and therefore, seek restitution to the company of the deductions which should have been withheld at the outset.

Directors of some companies which have been unable to repay employee deductions to HMRC have sought to liquidate the company, hoping to avoid HMRC because HMRC tend to pursue the company for the employee deductions. However, where the employee was also a director, legislation allows HMRC to pursue directors personally. Such an approach is becoming increasingly frequent when HMRC discover that the liquidated company has no assets and consider that the directors are to blame.

In short, where a director was involved with an EBT and HMRC are able to demonstrate that the director knew, or ought to have known, that the income tax and employees’ national insurance should have applied, the company status can be ignored, leaving HMRC to pursue the directors and bankrupt them if necessary.

From a liquidator’s viewpoint, one option is to invoke section 212 of the Insolvency Act 1986 to pursue directors on the basis that the directors owe a fiduciary duty to act in the best interests of the company and hence, all stakeholder groups. If participating in an EBT gave rise to a loss to creditors because significant sums were transferred out of the company and creditors are prejudiced, the liquidator can pursue a director’s personal assets.

Further, section 213 of the Insolvency Act 1986 allows a liquidator to argue that paying funds into an EBT was designed to defraud creditors by placing company assets beyond their reach, and that directors should be aware of the duty to ensure that a company pays tax on behalf of itself and its employees. Sometimes HMRC pursue a claim directly against a director, often in conjunction with the liquidator, thereby closing all doors of escape for such director.

When challenging an EBT, the argument is often given that an EBT must have seemed too good to be true in terms of the ability to continue to live and work normally in the UK without paying tax on substantial income earned from UK employment and thus, those who participated have only themselves to blame. The counter to this view is that all those who became involved in an EBT did so on the advice of professional advisors and hence, had every right to believe that what was being entered into was a perfectly valid scheme.

Experience shows in recent years that HMRC have their sights set firmly upon directors of companies who established EBT arrangements. Accordingly, seeking to liquidate the company in the hope that the whole saga will be swept away and forgotten is likely to be a forlorn hope for many directors.

As might be expected, an increasing number of directors are beginning to seek advice regarding their personal financial affairs because when the money was received in their hands through an EBT it was spent rather than invested i.e. there is nothing left to settle any amount that may be due to HMRC. A worrying time, with the slightly good news that HMRC seem to have adopted a conciliatory approach to agreeing repayment terms because they understand that EBT participators were not trying to evade tax but merely avoid it using a scheme which is now shown to be inappropriate.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.