Don’t let the imminent VAT rise and the end of the “Time to Pay” (TTP) scheme be the final nail in the coffin.
I am sure you are aware that the standard rate of VAT will jump from 17.5 per cent to 20 per cent in under five weeks’ time. At the same time it is widely expected that HM Revenue & Customs (HMRC) time to pay scheme will end.
Of course businesses that both pay and charge VAT should find that their books balance over time, however – cashflow management in the short-term will become even more important in the early months of 2011.
It’s a double blow for some businesses. They are understandably concerned that they may not have the cash to pay their increased VAT bill and they can no longer rely on HMRC being flexible – they will need to make alternative arrangements as TTP is becoming harder to access.
TTP was set up during the credit crunch to allow businesses to defer tax payments.
It now seems that HMRC have reverted to its pre-recession attitude in the way it deals with struggling businesses. Many businesses are still experiencing cashflow problems, which will be exacerbated by the VAT rise in January. Public sector cuts will add to the woes of many businesses, yet HMRC seems to be oblivious to all this.
In some cases HMRC is pushing struggling businesses to pay tax on credit card at an extortionate rate of interest rather than allowing them to defer their tax.
HMRC is also charging businesses an additional 1.25% fee for paying tax on credit card. The average annual interest rate for credit cards is 18.8%.
This will simply compound the problems of many small businesses. Credit card payments are an expensive way to pay a tax bill. If a business is struggling for cashflow, the last thing it needs is a five-figure credit card bill.
HMRC have confirmed that they are likely to refuse deferred arrangements where dividends are being paid to shareholders or directors or where there is what may be viewed as “excessive” remuneration within a company.
Of course – Over The Horizon Thinking can help you. I have several solutions that I can work around most businesses in these circumstances.
Prevention is always better than cure. Start to put procedures in place now. This will be critical to coming out the other-side without a scratch.
Making the right decision on price is a major consideration. You have the choice to pass the VAT rise on to customers by raising prices, or absorbing the increase yourself.
It will defiantly be worth contacting your key suppliers now to see whether they’re planning to increase the prices of their services or whether they intend to absorb the increase themselves.
With this knowledge, you can plan your own pricing strategies more effectively before the January increase comes into effect.
Regardless of your suppliers agenda it is important to weigh up the pros and cons of each approach before arriving at a decision.
While it might be tempting to let your customers bear the weight of the increase to avoid a downturn in profits, doing so may see a significant reduction in sales, particularly if your competitors have opted to keep their prices the same.
On the other hand, if you freeze your prices at their current levels, you may lose a small amount of profit per unit but benefit from steady sales. When considering pricing strategies it’s vital to pay close attention to the market and to your direct competitors.
But what about those businesses that can’t put their prices up, and can’t absorb the VAT rise themselves.
If you have done your cashflow forecast and still can’t see the light at the end of the tunnel, don’t panic, there are other options.
You may have heard of a CVA (Company Voluntary Arrangement). This can be a powerful tool for restructuring the liabilities of a distressed company.
HM Revenue & Customs (HMRC) have a specialist team that deals with CVA proposals. They generally support a well-considered CVA proposal although they have a large number of standard modifications that I will have covered when drafting the proposal. CVAs offer the opportunity of having a much longer repayment period than could be agreed under their TTP scheme.
Furthermore a CVA can allow for paying less than 100% of the debt due to HMRC whereas a TTP arrangement requires 100% to be repaid.
The arrangement is a legal agreement that protects a company – essentially giving it some time or a breathing space by preventing HMRC and other creditors from winding it up.
It allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed, and allows the company’s directors to stay in control of the company.
CVA’s allow a company to improve cash flow quickly, by removing pressure from VAT and PAYE authorities and other creditors while the CVA is prepared.
In case law, if a creditor has less than a quarter of the company’s overall debts then they can be required to consider the proposal even if a winding up petition is issued.
Ultimately it is also a good arrangement for creditors as they retain a customer and receive a dividend on their debts, which might otherwise be written off in the event of liquidation.
However, it is not a one size fit all or do-it-yourself option for a struggling business.
I will personally review your business thoroughly to establish that it is viable. That means examining the accounts and business plan, identifying any underlying weaknesses and thoroughly understanding the company’s activity, offer, culture and market.
Once it has been established that the company can be turned around, given time, we will produce a proposal that may or may not incorporate a CVA.
Statistically, we assist 1 in 4 businesses using a CVA to restructure debt within the company.
We will only use a CVA if we think it will be successful in the long term.
The failure rate of a CVA is high because many business recovery experts see it as the only option, pitching them at the incorrect level for that particular business.
Much like treatment with alternative medicine, we treat the individual business on a case by case basis, not just using the signs and symptoms of the distress.
So if your business has stomached all the conventional pills and injections it can take, with no sign of relief, then perhaps OTHT can offer you and your business some value.
As a turnaround professional, I will not charge fees for my advice or services rendered; I will however seek equity so that when we are successful we share in the rewards from that success.
It is the stance of the Business Recovery Forum, to which I am a member, that anyone who does not align their outcomes with that of the business owner, does not share the same desire to achieve a result in the most efficient manner, and if they need to charge fees to sustain themselves then one would question their success in the field of business turnaround.