Is there ANY light at the end of the tunnel?

                                                                     

It’s been six months since our last newsletter. We had hoped that this long lead-in period would give Turning Circle the opportunity to come up with something fresh, vibrant and radical to say about the state of the UK economy and the turnaround sector.
As far as the UK big picture is concerned, unfortunately not much has really changed since the spring. It has all been rather stagnant.
Zombie companies still abound in their thousands, (see ‘Night of the Living Dead article - March 2011’), propped up by hyper- low interest rates and clearing banks petrified of taking bad debt hits on their balance sheets. There are too many small businesses out there that will never again make a decent profit in their lifetimes. That cannot be any good for our country.
Meantime, the Coalition Government continues to attempt to steer a sensible course through an economic storm. Messrs Osborne, Cable et al have our sympathies as there is very little national governments can do in times of such massive global uncertainty; sadly, they and their colleagues look like they’re paddling a coracle through a hurricane.

However, there have been some specific developments of interest that we’d like to comment on:
• HM Revenue and Customs Time to Pay (TTP, effectively PAYE/VAT deferral schemes) have been of great help to the beleaguered SME sector since late 2008 in preserving business cash flow; especially since the banks drew their lending horns in. TTPs are still available to deserving cases but the amount of scrutiny now being applied to tax repayment deals by HMRC appears to be much more detailed.

As a case in point, recently, Turning Circle was successfully able to negotiate a 12 month time to pay arrangement for a client’s unpaid VAT bill. The company had never previously had a problem with unpaid VAT while the sum owing was just over £100,000, which represented three months arrears. In the past such TTP proposals could often be agreed via a ten minute phone call. This time, in order to have our proposals approved, we had to prepare a detailed cash flow forecast supported by sensible assumptions and then deal with no less than fifteen follow up queries.

Conclusion: TTP arrangements are no longer being dispensed like confetti; treat any TTP proposal like a bank loan or overdraft application.

• It would also seem to be the case that HMRC are now proceeding on a ‘two strikes and you’re out’ basis. If your business has taken advantage of TTP in the past then you will subsequently be expected to pay all your current crown liabilities on time. Seemingly, without exception.

So , consequently it’s not surprising to hear, if we take a day in isolation, (say 5th September), that of the 253 company winding up petitions being heard in the High Court that day, the vast majority were issued by HMRC.

• The above reality chimes somewhat with recent insolvency figures. Company liquidations are up by 4.4% year on year. (4,233 in the second quarter of 2011). We would suggest that this hike is due, in part, to the HMRC’s new ‘get tough’ approach as outlined above. Personal insolvencies also rose slightly from 30,145 in Q1 2011 to 30,513 in Q2 2011. We are not surprised to hear this as we are currently receiving an increase in enquiries from individuals who need to deal with the consequences of personal guarantees being called following the failure of their businesses.

• However, the above corporate statistics need to be tempered somewhat. Many thousands of companies can’t even afford the costs of liquidation; they have simply stopped trading.
It might be easy to conclude from all of the above plus the daily tales of woe emanating from the business pages that there is barely anything to be cheerful about. However, hopefully there could be a chink of light at the end of the tunnel.
We are beginning to see evidence of a fledgling turnaround finance culture; private investors are now showing signs of wanting to support cash strapped, yet viable businesses in the continuing absence of bank funding solutions. This obviously is to be welcomed as there are plenty of growing small businesses out there who could grow even faster if only they were provided with some liquidity!
Turning Circle continue to be closely involved in a wide range of business rescue projects that have preserved jobs , including more than 100 successful company voluntary arrangement proposals.
If you have any clients or business acquaintances that you feel can benefit from our services or if you want to work with us on our various turnaround projects, please do drop us a line.

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Night of the Living Dead?



 

George Osborne will deliver his second Budget Speech on March 23rd. I’m sure that we will all be looking for Mr Osborne to set out a coherent growth plan for UK PLC which gets the economy moving. It’s clear that in order for this to happen, we must trade more, we must innovate more and we must invest more.

And here’s another thing.....it might be easier for us all to do this if those UK businesses that are no damn good were actually allowed to fail!
 

The total number of company insolvencies in the whole of 2010 was 20,954, down 17.6% compared to the whole of 2009. You might want to conclude that this statistic heralds a general bounce back for the UK economy and that George Osborne has a fine platform on which to build his growth strategy.

This writer begs to differ.

I believe that there are a large number of zombie businesses out there still notionally ‘trading’; the ‘living dead’ if you like. Businesses that can never hope to be profitable being propped up by a combination of:

HMRC ‘time to pay’ (TTP) schemes,

continued abnormally low interest rates,

and in some cases the vested interest of the clearing bank sector, desperate to improve their balance sheets and unwilling to make further bad debt provisions for these loss-making businesses.

I further believe that the number of UK corporate insolvencies will increase significantly from the middle of the year onwards for the following reasons:

• HMRC ‘TTP’ (effectively PAYE/VAT deferral), schemes have been of great importance to the cash flow management of the UK SME sector, especially with the absence of commercial lending facilities during that late 2008 period of real financial crisis. However the level of unpaid tax in Britain is now in excess of £ 40 billion and the Coalition’s budget deficit sums will simply not add up unless this TTP arrears figure comes down. Expect a continued significant tightening of TTP during 2011! Many companies will simply be unable to pay their tax bills on time. There is increasing evidence already of HMRC issuing many more winding up petitions to non-compliant businesses.

• The inflation rate continues to rise and an interest rate rise therefore must follow. I understand that the official UK inflation rate is now 4%. As I munched on my ‘new price’ 77 pence standard size Kit Kat yesterday evening on the train home and later applied for a third mortgage to fill up my car with petrol, all I can say is what’s the ‘real ‘ rate then ?? Being serious, an increase in the cost of money will have a profound negative impact on those ‘living’ dead’ who have become almost inured to the low costs of their business loans and overdrafts.

• As the clearing banks repair their balance sheets, and future bad debt provisions become far less of an issue, they will have far less hesitation in pushing the many business waifs and strays on their portfolios into an appropriate insolvency procedure.

As business turnaround specialists, Turning Circle want to support and assist those businesses that may have short –term problems but who, nonetheless, have realistic, profitable futures. There are thankfully many hundreds of thousands of these companies. However, there is nothing we or anyone else can do if our client is fundamentally and permanently loss-making. The ‘living dead’ cannot be brought back to life.

Let’s hope though that the upcoming Budget Speech helps those struggling UK businesses that can prosper to prosper. It will not be easy.

Finally, during the last quarter, Turning Circle have been involved in a number of business rescue projects that have preserved jobs , including successful company voluntary arrangement proposals. If you have any clients or business acquaintances that you feel can benefit from our services or if you want to work with us on our various turnaround projects, please do drop us a line.


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Turning Circle Solutions sponsors football team

 

Turning Circle Solutions recently became proud sponsors of Ducklington Under 8s Boys and Girls football team.

                                              

 

Ducklington is a village just outside Witney in Oxfordshire.

They are a great bunch of kids who are well coached, who respect the game, and who most of all enjoy their football!

We wish them all the very best for the current season.
 

 Come on you yellows!
 

 
 

Standing up for the Tax Man

 

Her Majesty’s Revenue and Customs are rightly getting it in the neck this week. The massive level of tax coding discrepancies just announced clearly identify that that faithful old tax warhorse, the PAYE system, simply can’t cope with 2010 UK employment patterns.

 

Even more embarrassingly, the HMRC’s top official, Dave Hartnett, initially resolutely failed to apologise to the taxpayer for this fiasco. Or as he often calls them, rather horribly, ‘the customer.’

This potential public relations disaster was only averted by a quickly placed boot up the backside of Mr. HMRC by the Chancellor and a same day retraction. Oh dear....
 

So why are we standing up for the tax man? Well, it’s clear to this writer that many, many, thousands of UK SMEs have been able to survive horrendous trading conditions thanks mainly to the HMRC ‘Time To Pay’ (‘TTP’) scheme. Originally introduced in November 2008 to allow businesses time to pay PAYE, corporation tax and VAT, TTP created a climate of eye boggling leniency, as far as unpaid tax was concerned, for UK businesses during the whole of 2009. Some companies were being given as much as three years to repay their tax liabilities. Simply unprecedented.

It’s not surprising that therefore that the level of unpaid taxes in UK shot up from £2 billion as at 30th June 2008 to £28 billion as at 30th June 2009.* And I guess all this economic forecasting we’ve been hearing about assumes that every penny of this unpaid tax is going to be collected.

This climate of tax repayment leniency simply could not continue in 2010 as the UK public sector deficit continued to mount and generous TTP schemes are now far harder to come by. This situation is hardly likely to improve as we move towards 2011 when we consider the level of public sector cuts now being actioned by the Coalition .

Nonetheless, in our opinion, if approached in the right manner, HMRC still continues to be a significantly more visible, supportive and practical ally to the millions of small businesses experiencing cash flow difficulties than, say, the banking sector. And for that we need to thank the tax man. They are not to be pilloried all the time.

If we were to distil a debt negotiation approach that finds favour with HMRC it would be this;

• Always be polite; do not treat HMRC as the villain of the piece, the tax officers are 1) only doing their job and 2) human after all and quite enjoy being treated as such.

• Respond to tax demands and correspondence on a same day basis. HMRC hate being ignored.

• Be prepared to talk with openness and honesty about why your business is experiencing cash flow difficulties. You have to present a convincing case, so speak from the heart . But do your research first!; do not expect HMRC to agree a repayment deal if they are the only creditor being deferred while all your other suppliers are being paid on time!

• Explain how the debt to HMRC will be repaid and also produce a cash flow forecast to support your proposal. The proposal should effectively be treated as if it were a mini business plan.

• Include the first tax payment instalment with your proposal as a means of good faith.

• Faithfully note down whom are you speaking to and the time and date of any conversation end ensure that any TTP agreement is evidenced in writing. HMRC is rather large and unwieldy organisation; it is often the case that you need to speak to a number of tax officials to get a TTP agreed. Make sure you keep a trail of what was said and by whom.

• And if you can’t stick to the terms of a TTP then don’t hide, communicate the problem with HMRC at the earliest opportunity. They may be prepared to alter the terms of the existing arrangement.


We have been able to agree a number of sensible TTP arrangements for our clients in 2010 and if you have any clients or business acquaintances that want assistance in dealing with tax demands that can’t be met out of current cash flow resources, we’d be delighted to work with you in producing a workable repayment solution.

And if a TTP can’t be actioned then the next business recovery tool for your client is of course the Company Voluntary Arrangement. But that’s for another article.
*(And when I get hold of the current figures for 2010 unpaid tax, I’ll pass them onto you.)

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Words of wisdom from Sir Isaac Newton….

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.’
 

Sir Isaac would of course have been at home in the current economic climate…

 

British business continues to operate in an environment of massive uncertainty. The recent General Election provided little more than a parochial sideshow as Greece went bust and the entire economic rationale for the European single currency creaked alarmingly. The UK is seemingly in for a period of extremely weak national economic growth but who knows how long this will last for? As well as the potentially seismic changes in the euro zone, (our biggest export market of course), inflationary pressures keep building, and ultimately interest rates must start rising again.

 

Admittedly the fact that we are outside the euro zone allows us, to an extent, to remain masters of our own economic destiny. However, those business recovery gurus at Begbie Traynor recently reported that currently no less than 161,000 British limited companies are experiencing ‘significant’ or ‘critical’ financial distress owing creditors, suppliers and service providers more than £55bn.

 

This is partially down to hardening attitudes of trade creditors more willing to take court action to recover what they are owed.

With the clearing banks still rebuilding their balance sheets and funding solutions for the SME business community remaining extremely thin on the ground, we can but hope that the coalition’s government emergency budget on 22nd June offers clarity, common sense and hope to our hard pressed businesses.
 

Moving on, we hope you like our new look website, which has been designed with a view to providing some direct, jargon free, user friendly advice for troubled businesses. We would of course welcome any suggestions or constructive criticisms you may have of site contents.

Finally, here’s to us all enjoying some sunshine and a bit of World Cup success!

Where’s Cicero when you need him ?

Trying to make sense of the Budget – 25th March 2010

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest we become bankrupt. People must again learn to work, instead of living on public assistance."

I don't know if you've seen this quote before but it's from Cicero and he wrote it in 55BC. Over 2,000 years later it's as true today as it was then. Only it was more likely to be heeded then.

Mr. Darling, recognised as one of the few strong men in the Cabinet, might as well have been at the hustings when he presented his Budget Speech. Yesterday was a time to attempt to set off political fireworks in advance of what is likely to be a very tight General Election contest rather than deliver a long –term economic strategic report for the benefit of the generally ailing SME business sector.
Should the Tories win power in a few weeks time, they have also promised a Budget Speech so we could be looking at a completely different financial route map very soon.

The elephant in the room of course is how, when and where public expenditure cuts are going to be made and we’re not likely to get a detailed explanation on that front from any of the major political parties when there is an election to be won. No wonder us grubby little votes get frustrated with politicians. Where’s Cicero when we need him?

Nonetheless there were a few slivers of information that were relevant to business owners, the self employed and the business turnaround community which merit attention. Plus it is important to remember that there are significant tax changes that are to be effected from next month over and above what was announced by Mr. Darling yesterday.

Investment tax breaks for businesses extended by doubling of allowance to £100,000: 

Comment: Spend up to £100,000 on capital equipment and get full tax relief immediately! Can see some of the intellectual justification for this decision as a motor to get growth going for manufacturing/hi tech businesses. Of course the huge numbers of service companies who rarely invest in capital equipment would have been far happier with a simple cut in corporation tax.

RBS and Lloyds to make available £94 billion of new business loans – nearly half to SMEs: Comment: Your correspondent got quite excited in late 2008 when the Enterprise Finance Guarantee Scheme was announced, offering government backed support for the bank funding of small business. Unfortunately the reality was a crashing disappointment. Loans were simply not made available for small businesses as the banks repaired their balance sheets. Time will tell if the above announcement is not simply another vote grabbing headline of little substance.

 

Government body to be set up to adjudicate when small businesses feel they are wrongly denied a bank loan, known as the ‘Small Business Credit Adjudicator.

Comment: Sounds great doesn’t it? To the correspondent it all comes down to delivery. Will small businesses really be given a chance to argue their case to get funding when seemingly unfairly denied, quickly, efficiently and effectively? If this idea had been introduced in say 2008 much of the resentment felt by the small business community about using taxpayers’ money banks that will still not lend to them could have been averted.

HMRC Time to Pay scheme to be extended for whole of next Parliament:

Comment: Surprising and welcome news allowing struggling companies the opportunity to continue defer PAYE/VAT/corporation tax liabilities and thereby improve their cash flow. The Revenue time to pay scheme is a vital source of credit for small businesses. Apologies for small advert, but Turning Circle specialize in negotiating time to pay arrangements for business customers, contact us for further details.

Capital gains tax reliefs for entrepreneurs doubled to £2million.

Comment: With the 50% rate of income tax and the restrictions on personal tax allowances coming in next month, never has there been such a gap between income and capital gain tax rates. This differential has been heightened by the above news. Expect a lot of business owners in the happy position of being able to sell all or part of their company shareholdings cashing in at as low a tax rate as 10%  as an efficient alternative to taking highly taxed annual dividends. This is a welcome short-term development for some entrepreneurs.  But, surely, it can’t be long before the rate of CGT is also increased, whichever party is in power come the spring.     
As always if you’ve got any further questions on the Budget or require more detailed advice, please do contact me. We will also shortly be updating our company’s website, do feel free to comment once it’s up and running.

 

 

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Crystal ball gazing is for mugs.....

 

Is it really ten years ago that UK business faced the looming catastrophe of the deadly ‘Millennium Bug’? What a damp squib that turned out to be. Just five years ago the eight billion pound cost of London Olympics was decried by hordes of respected commentators as being something that this country would never be able to afford. Who would have thought in late 2004 that eight billion pounds out of the public purse would be considered to be a mere drop in the ocean compared to the stunning level of UK deficit in late 2009? Who could have foreseen eighteen months ago that 50% of our major clearing banks would effectively be under state ownership?

My point is this; it is easy for all of us to make windy, portentous predictions; the fact is that none of us really have a clear idea about our country’s economic prospects over the coming year. What can be said with confidence is that in 2009:

 

• Many thousands of small businesses were kept afloat by HM Revenue and Customs generous ‘time to pay arrangements’ for arrears of PAYE and VAT.

 

30th June 2008 – level of unpaid taxes in UK £ 2billion

 

30th June 2009 – level of unpaid taxes in UK £26 billion

 

• To put it mildly, the banking sector were incredibly cautious in lending money to the SME sector. The replacement to the Small Firms Loan Guarantee Scheme, the Enterprise Finance Guarantee Scheme has been, in this writer’s opinion, a travesty. I understand that banks need to repair their devastated balance sheets; why not be more honest about that requirement instead of pretending that there is still government backed money to lend to small business?

 

• Forgive me for standing on my soapbox but there is a clear lack of understanding of UK business from our all shades of our political elite. Too many individuals with serious political responsibilities are theoreticians; too few of them have real life business experience.

 

I would strongly hope ... but could never predict! ... that 2010 will be a year when we start to fully embrace the business turnaround culture. Whether you are an accountant, lawyer, operations expert, investor, funder, IT specialist, or are one of the unsung heroes out there actually owning and managing businesses, there are plenty of jobs to preserve and businesses to protect. I believe it is going to be extremely busy. Thank you for your support and we look forward to working with you in 2010.

 

Wishing you and your families a peaceful Christmas and a prosperous New Year.

 

 

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