Stafford's Accountant Blog

Due diligence is an Americanism which has infiltrated its way into the English business vocabulary. It is commonly used in the context of Company A buying Company B or Company B’s assets (the latter, incidentally being much the simpler from a due diligence and tax perspective).

All it means is checking that there are no skeletons in the cupboard of the entity you are buying. It is not that complicated (though it can be time-consuming) and it is something that can perfectly feasibly be done by you or your staff. Lawyers and accountants tend to make a bit of a meal of it all and often work to very lengthy and complicated checklists. However, if it is important to you to be absolutely sure if the kettle is on an operating or finance lease, go ahead.

Most of the purely commercial due diligence may well be done by you as the potential acquirer in the early stages of the negotiations where information will gradually be released by the vendor as their confidence level increases. Some other areas may not have been covered in such detail – the main ones being legal, financial and IP related due diligence.

In order to avoid the professional fees running away during the acquisition process I suggest the following:

• Hold off on due diligence until the deal is looking fairly secure. It is actually unlikely that the process will throw up anything which is a deal-breaker. This is far more likely to come from dodgy negotiating tactics throwing a spanner in the works at an advanced stage. By all means get everyone teed up but hold the starting gun. The only possible exception to this is in the IP area. I have come across deals which have foundered because, fairly late on, the IP protection was not as robust as everyone thought. This could take the form of incomplete patent protection, competing patent claims or disputes or even problems with efficacy or toxicity (one now defunct client found major problems in this area by a cursory check on the internet!)
• Do what you can yourself. As you can see from the following link which I have used as an example http://www.meritusventures.com/template_assets/pdf/diligence.pdf the process is not technically complex.
• Meet with the professionals beforehand and work out with them what the real risk areas are. You can then concentrate on the key areas and forget about the kettle.
• Get the professionals to liaise with each other to avoid unnecessary duplication. This is more common than you might think.
• Make sure their report is only a couple of pages long. If it really takes longer than two pages to report the main findings, eyebrows should be raised about the whole deal.

You might want to have a look at any environmental issues, marketing, production, IT to name but a few. But the really important areas are management and organisational compatibility. Many mergers/takeovers do not work well because the new owners get bored with the implementation phase and move onto the next deal. Proper implementation is vital but this sort of detail often gets ignored at the time (a bit like Iraq) and look what happened there. So the bedding in process after the acquisition/merger really is worth taking a bit of time over.

Of course acquisitions take place in the charity and Not-for-profit sector too, particularly nowadays where consolidation is becoming more common as organisations realise they are just too small to fulfil their charitable objectives. The Charity Commission has also produced a very sensible checklist which can be found at http://www.charity-commission.gov.uk/Library/chkduedil.pdf and this could easily be adapted for commercial purposes.

Don’t forget that due diligence can work in both directions. Firstly, you as the potential acquire might well want to check out the acquirer. Do they have the wherewithal to complete the deal? If there is a share/loan stock element will the share hold their value and the loans be repaid? What is their management like? Do you trust them to maximise the chance of any earn-out coming to fruition?

Also, you might well want to get ahead of yourself if a sale is on the cards in the future. Why not do some due diligence on yourself and see what comes up? It could be quite informative. This is particularly so with tech companies where you will be trying to prove there isn’t a problem – which is difficult at the best of times.

Anyway it looks like we are stuck with the “due diligence” terminology along with bottom line, boot-strapping, lines in the sand, elephants in the room, learning curve, squaring the circle, re-inventing the wheel, power lunch, slam dunk, etc. The genie is well and truly out of the bottle with these particular phrases

Tax – when the irresistible force meets the immoveable object

(or how to succeed before the First Tier Tax Tribunal)

You have been involved in a protracted struggle with HMRC for what seems like an age. You are racking up costs with your accountant and little or no progress seems to have been made. You don’t want to give in because you feel that you are in the right but there seems nowhere left to go.

Why not give the First Tier Tax Tribunal a try? It has a number of advantages for the taxpayer:

• It is free;
• Costs are rarely awarded except in exceptional cases;
• The tribunal is independent;
• It is an informal process and barrister representation is not required;
• The Tribunal approaches matters in a common sense way;
• Any findings of fact by the Tribunal are normally binding so the only avenue of appeal from the Tribunal is on points of law (if there are any);
• It may provide finality quicker than continuing with correspondence and negotiation.

However, those who are not familiar with the process will be at a significant disadvantage when faced with an HMRC presenting officer who deals with the Tribunals on a regular basis. It is important to understand which lines of attack are likely to succeed and, just as importantly, which ones will not.

Here are some of the approaches which will fall on stony ground:

• It is unfair;
• This is my first mistake;
• I didn’t know I had to ……;
• I was only a few days late;
• My accountant/bookkeeper let me down;
• I paid late because I am having cashflow problems at the moment;
• I can’t afford to pay a penalty of this size;
• I promise it won’t happen again;
• We have put processes in place to ensure it won’t re-occur;
• I thought I didn’t need to send it because it was a nil return;
• HMRC have not replied to correspondence and have been generally inefficient;
• I thought I’d submitted it successfully on-line;
• I didn’t know internet payments take 3 days to clear.

Approaches which may well work are too diverse and variable to include in a short article like this but prerequisites for success are:
• Understanding the tax law concerned;
• Assembling a body of supporting evidence;
• Concentrating on the most promising lines of defence;
• Spotting weaknesses in HMRC’s case;
• Presenting the case clearly, logically and forcefully.

Many cases before Tribunals deal with the concept of reasonable excuse. However this is not “reasonable” in the common sense meaning of the word. Instead it is a legal construct which has evolved following a number of decided cases and can be a deceptively tricky area.

So my advice, as an accountant with extensive involvement with the Tribunal system over a number of years, is to bear in mind the possibility of opting for the Tribunal approach. But careful preparation and a professional approach are vital.

It is a fact that tax is going up. So how can you buck the trend? What follows is a summary of  business tax advice you as a business person can do to keep the tax dogs at bay (legally):

• Operate as a limited company rather than as a sole trader or a partnership.
• Pension payments can be tax deductible up to £50,000p.a. saving tax at your marginal rate;
• Business equipment gets a 100% first year allowance up to £100,000 (£25,000 after March 2012);
• Cars emitting less than 110g/km attract a 100% first year business tax allowance;
• You can claim £3pw to cover household costs;
• If you register for VAT it is possible to make a profit by using the Flat Rate Scheme.
• Controlling personal income can optimise Working Tax Credits;
• Wages paid to family members can be tax deductible as long as they are reasonable;
• Sometimes a change in Accounting Policies (which are the recognised ways of treating income and expenditure) can produce savings;
• If you buy another business, buying the assets of the business rather than the shares owned by the vendor will usually be more tax-efficient (but less so for the vendor);
• Make sure mobile and broadband contracts are in the company name.

So if you are a couple and have profits of up to £102,650 you can get your tax bill down to £17,700 just by a careful use of salary and dividends. Every little helps as they say.