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

Let’s start with a definition. Most of us in the profession know what they mean by an audit in the same way that medics will understand what “Choledocholithiasis” means (gallstones to save you looking it up). But most lay people don’t.  Basically it is a fancy name for checking things. You might also come across the word “assurance” which is another fancy word for checking things. It is not what we do when we prepare accounts for a typical SME. SMEs do not usually need an audit unless their sales exceed £6.5m p.a. and, although we have a critical look through the client’s records when we are doing the accounts, we aren’t auditing them.

Auditing can be split into two types – those required by Act of Parliament (statutory) and other audits.

Statutory audits include audits under the Companies Act 2006 when sales are greater than £6.5m p.a. or other exemptions are not satisfied, and under the Charities Act 2011 where income exceeds £500,000. Incidentally, Charities are much more complicated in this regard than Companies. I won’t attempt to set out the requirements but have a look at http://www.charity-commission.gov.uk/Publications/cc15b.aspx if you are interested. These acts don’t dictate what auditors need to do and these are fleshed out in Audit Regulations and Auditing Standards.

Other audits include a whole set of audits including:

• Purely voluntary audits where the entity concerned thinks it would be a good idea;
• Audits imposed by outside investors in investment agreements (which often require a statutory audit;
• Audits required by the Memorandum and Articles of a company (rare except with quite old companies);
• Grant audits from UK/EC grant funders. These audits normally place specific requirements on the auditor to check, broadly speaking, that money has actually been spent on the project being funded and that the expenditure properly relates to the project and the types of expenditure being grant-aided;
• Internal audits where (usually a large organisation) conducts a self-examination of its own internal systems and procedures. It may have its own Internal Audit Department or may use an outside body. The nature of these audits varies widely;
• Audits instigated by HMRC under their statutory powers;
• Independent examinations for charities. These are a sort of hybrid as they are required when a charity has income over £25,000 and there are specific requirements but the examiner’s report is on the lines of “nothing has come to our attention to suggest that………” which is obviously much better from a professional negligence perspective than “these accounts give a true and fair view of……” which statutory audits require.

So what do auditors actually do? In a nutshell they do the following:

1. Plan what they are going to do;
2. Document the client’s accounting system;
3. Check the system operates as documented (not always required);
4. Check specific accounting transactions;
5. Check the printed accounts agree with the underlying records;
6. Check the accounts disclose everything they should.

But, you may say, testing everything is impossible, and you would be right. We get over this in two ways. Firstly we have a concept of materiality which broadly says that you ignore anything small. Secondly, having eliminated the small items, we only check some of the big items. This is called sampling. This cuts down the checking to a manageable size. However it clearly avoids about 99% of the transactions so is highly unlikely to unearth any small irregularities.

Audits are supposed to give (note cautious wording) ”reasonable assurance that the accounts are free from material misstatement… by fraud” but note that this is not a guarantee – more of an aspiration. Clearly this aspiration fell short in the cases of Barlow Clowes, Polly Peck, Enron etc. Realistically, discovering frauds of any size is very rare. I have only ever been on one audit where a fraud was discovered in 35 years of auditing.

Do audits have any real benefits? My own view is that it is not worth having a statutory audit if you don’t need one. This is because the amount of time the auditor spends on “peripheral” matters such as planning and documenting what they do and checking accounts disclosures etc reduces the time available for actually rootling about in the systems and transactions. However, agreeing with the auditor some sort of tailor-made specific report and specific areas to look at could well be helpful, particularly if the emphasis was on efficiency, system improvements and better controls.

Audits are also useful if you are checking a customer’s credit-worthiness. This is something that clients do not do often enough even though it’s very simple. Unfortunately, as most small companies don’t have an audit and don’t even have to file a Profit and Loss account at Companies House – just a Balance Sheet – it’s difficult to get any useful information. But if an audit has been conducted, anything less than a clean audit should raise eyebrows. Watch in particular for paragraphs headed:

1. “Basis for Qualified Opinion”,
2. “Basis for Adverse Opinion” or “Adverse Opinion on …”
3. “Disclaimer of Opinion on….”
4. “Qualified Opinion on other matter…..”
5. “Emphasis of matter”

1-4 normally mean the auditors think the accounts are wrong. 5 normally means there’s something significant which you need to be aware of (often related to future funding or lack of).

(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.

If you pay between £30 and £500 per month into a pension from age 21 to age 65 and increase those monthly contributions by 5% compound each year, the table below shows the sort of pension you might expect if growth in real terms (i.e. stripping out the effect of inflation) is either 2 or 3% and the rate of tax relief the payments attract is between 20% and 50%:

In reality, you will probably pay nothing until you have to and/or start panicking and the level of contributions is likely to go up in a non-linear way as promotions happen, mortgages are paid off and kids leave home. Rates of tax relief will also vary. But you can probably see that, to get a £30,000 pension at age 65, you will probably need to contribute an average over your working life of about £150 per month (i.e. the amount actually paid out of the bank) assuming you get a mixture of 20/40% relief on the contributions and that annuity rates stay at around current levels.

Who should you pay it to?

Advice on pension providers is tightly regulated so it is not possible to go into specifics. But it is true to say that the two main factors which will affect the value of your pension pot at retirement are charges applied to the fund and investment performance. Sometimes there is a link between the two but not always.

There is little chance that you will optimise your fund by personally selecting funds (unless you support the Random Walk theory) which postulates that a blindfolded monkey throwing darts at the FT financial pages would probably do as well as expert selection. Interestingly, this experiment is currently being replicated by the owners of Sophie the Shetland sheepdog in the US – tastefully called “Sophie’s choice”. We watch with interest.

For those of a conventional disposition, a good financial adviser is probably the way to go (unless you are in a large group scheme). Factors you should consider when selecting an adviser are:

• Have they been recommended by someone whose opinion you trust?
• How are they remunerated and is it clear what the costs will be?
• Do they seem thorough and efficient?
• Are they independent?
• Have they explained everything to your satisfaction including policy charges?
• How will they monitor your scheme after set up?
• What qualifications and experience do they have?

Alternatives to pensions

Some people, having had bad experience with advisers and/or investment returns, have been turned off pensions. This is a shame as a pension should in theory provide a better net return than an equivalent investment. This is because of the following:

• You get tax relief at your marginal rate on contributions made;
• The pension fund itself is not liable to taxation;
• You can take 25% of the fund out tax free when you reach retirement.

The main drawback is that you normally cannot get access to the whole fund and have to convert 75% of it into some sort of regular payment for life.

Other investments can sit easily alongside pension funding and a spread of risk is good. But most savings portfolios should contain a pensions element for the reasons set out above.

Some criteria may be deal-breakers i.e. if the criterion is not satisfied it’s a “No”. Others may be on a scale of 1-10 i.e. to what extent is the criterion satisfied? Others may be binary factors but not deal-breakers. Some may be more important than others. Some may be factors rather than criteria i.e. you might just want to hear the response to consider what you think of it.

Here is my suggestion for honing down the options. I have assumed that you are either a potential personal tax or small business client requiring a reasonable range of expertise:

Deal-breaking factors

Exclude those who:

• Do not have a recognised qualification (see my earlier blog on choosing accountants and hotels for details);
• Cannot demonstrate familiarity with any specialist factors which your business may have;
• Cannot deal with the range of services you require;
• Are one of the “Big 4” (they will be far too expensive);

Important factors

• Is there a partner or manager who is a Chartered Tax Adviser?
• Will you have a person who will be your primary point of contact?
• Have you met that person?
• Did you get on with them?
• Are their technical staff qualified (see above) or working towards a professional qualification?
• Do they have a proper website?

Things to consider

• How local are they?
• Have you read a draft “Terms of Business” letter?
• Do they charge extra for any ad hoc queries raised by letter, email or phone?
• Have you received a detailed and fully costed quotation?
• How much was it?
• Do they outsource any of their work e.g. to India?
• Do their offices appear smart and well-staffed?
• Have they been recommended by someone whose opinion you respect?
• How advanced are they from an IT point of view?
• How well was the person you met able to explain the services they would perform and clarify any tax and accounting issues which are likely to be relevant to you?
• How well did they handle any questions you had? Try asking them to explain things like:
  • What sort of business entity you should use and why?
  • How does VAT work?
  • How should you take money out of the business?
  • How do Working Tax Credits interact with business profits?
  • How do you determine whether someone can be treated as self-employed rather than employed?
  • Can you apportion income legally between working and non-working spouses or partners?
  • Were they willing to provide references from existing clients of a similar size or nature?
  • To what extent did you feel that they would be pro-active rather than re-active?
  • If they are in business on their own, what would happen if they were ill or on holiday? Also, were you satisfied that they could handle the work and that they were not too busy with other client commitments?
  • How efficient do you think they would be?
  • How many times did they say “that’s not a problem” when you queried something?

Decision

I suggest you exclude any candidates who do not pass the deal-breaker test. I would also think seriously about any candidates who did not pass the important factors test. Following that, maybe draw up a table for the things to consider, rank them in order of importance to you and analyse the extent to which each candidate satisfies the criteria. Then apply a bit of “gut feel” and off you go.

Staffords Blog

1. How much money do you need to retire?
2. When should you retire?
3. What should you do after retiring?

I do not recommend you reach for your old Johnny Nash LP “I can see clearly now” because he clearly can’t – “There are more questions than answers and the more I find out the less I know”. Remember that one?

Incidentally, by retirement I do not mean slippers and telly but a move from your current job into a new phase of life.

Departing from tradition in this series of articles, I would like to include a few numbers. If you want to retire on £50,000 at age 55 you will need a pension pot of about £900,000. If you want it to go up at 3% p.a. the figure rises to £1.35m. If you sell your business and want to live off the income and not deplete the capital in real terms, you would be looking at a pot of well over £1.5m. Sobering stuff.

“When” is more tricky. I suggest it should be as soon as you reach your required income in retirement figure. Only then can you assess dispassionately what is a meaningful and fulfilling activity. It might be business-related or it might not. Ah but, you say, I am part-way through turning my organisation into Megagiantcorp plc with a market cap of several squillions. I reply “Maybe so, but the fun bit is probably in the past and now it’s all about money, status or power, or some combination thereof.” Research has shown repeatedly that money does not make you happy, status is an illusion and I personally only have respect for who people are, not what they are. Power is control and is inherently unhealthy. Remember the words of Lord Acton the historian “all power tends to corrupt”.

So what meaningful activity are you going to do after packing in the day job?  And what are the factors which are likely to influence this? Studies have shown that things like caring relationships, personal choice and autonomy, acquisition of skills are the key. Influence, hedonism, security, physical thriving or money have been shown not to work.

Life after work is a serious business. I am often left speechless by people I meet who seem unable to retire, constantly seek out new challenges, travel globally, have few interests and no spare time and are constantly fiddling with their blackberries. Continuing at work is an easy choice but, I would suggest, rarely optimal.

And who will care in a few years’ time when you tell people at social functions (assuming you have any friends left) that you used to be CEO of Megagiantcorp? It’s a bit like saying “I was Eastern Region Table Tennis champion in 1974” or “I was professor of Impenetrable Studies”. Nobody really cares.

This is not to say that any continuing involvement with business is unhealthy. There are people around who just find that sort of thing interesting. I would merely pose two questions. Firstly, why are you really doing it? Secondly, have you thought about any better alternatives?

I was talking to someone recently who, in my opinion, would have liked to sell their business. There were various reasons for not doing so, mainly revolving around whether it was the best time, whether there would be any buyers and whether the valuation in these recessionary times was enough. Interestingly, there was no mention of how enjoyable they found their current activity.

So my exhortation this month is to think outside the box and look at your life creatively. Remember that one person’s focus is another person’s blinkers and that there are no pockets in a shroud.

Julian Stafford is a partner in Staffords Cambridge LLP, a leading independent Chartered Accounting company, and specialises in advising new and developing SMEs.

For more: 01223 881444 / www.staffordsllp.com

• 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.

The answer is three-fold:

• Things are rarely as simple as they seem
• The devil is in the detail
• Some things are counter-intuitive

Have a look in Wikipedia under “Alternative Vote” and you will see what I mean. It’s more interesting than it sounds. There is a large amount of statistical theory underlying AV which most of us can only marvel at.  It is a lot more complicated as votes may have to be counted several times and the ballot papers are more complicated. It is also possible to cause a candidate to lose by ranking them higher whereas they might have won if ranked lower. Those who are expert in monotonicity theory will not be surprised at this. The rest of us will be.

Applying this to the business world:

Simplicity

The obvious example here is a business acquisition, sale, merger or flotation. It is not just a matter of saying “I will buy your business for £x – do we have a deal?” Months of disruptive stress, frustration and tedium lie in store. For those who have not been down this road before, the pitfalls are many. One of the most frustrating things about deals like this is that the parties rarely communicate in an open and clear way. Awkward truths are hidden so as not to prejudice the deal. Desires are concealed until the drafting stage. People change their minds and have different or unrealistic expectations. Entrenched positions are taken and the testosterone injections kick in with a vengeance. And that’s all before the lawyers get on the case.

Detail

How many of us have ever been conned into a photocopier leasing contract which we have subsequently regretted? How many of us blithely click “I have read the terms and conditions” on websites when making purchases?  How many of us have taken on a “rogue” employee and found it an expensive process to get rid of them? Yes – me too. We are contractually bound by what we sign up to. A signature in haste may prove costly.

Would you believe it?

My favourite example of counter-intuitiveness is the phenomenon that in a class of 23 there is a 50% chance that two children will share a birthday.  In contract law, if you sign up to a commercial lease, you can remain residually liable years after you have moved out. You have virtually no control over the service charge.  Any improvements you make may increase your rent at the next  review. Finally, if the landlord decides the roof needs replacing a day before your lease ends, you may have to pay for it. I could go on. Similar examples arise with employment, banking, purchasing and taxation.

In this topsy-turvy world where nothing is quite as it seems, vigilance and attention to detail are more vital than ever before. Paradoxically this is happening at a time when technology forces us to take more and more things on trust. Regulatory and compliance matters are more onerous than ever before but ignorance of the law is no excuse. Well actually it sometimes is. Try turning it round to “You are deemed to know every piece of primary and secondary legislation in the land, including all associated regulations and applicable best practice.”

The moral of the AV story is that someone (not necessarily you) needs to check out all the boring but important stuff. Employ a good admin person, use your advisers sensibly and get on with running your business.

Finally, those who read my article on Franchising last year may be interested to know I have just received an email exhorting me to sign up for an oven-cleaning franchise. Need I say more?

Julian Stafford is a partner in Staffords Cambridge LLP, a leading independent Chartered Accounting company, and specialises in advising new and developing SMEs.

For more: 01223 881444 / www.staffordsllp.com

First of all there’s all those pesky initials. It is probably safer to stick to one of the following designatory letters:

ACA, FCA, ACCA, FCCA, CA

Anything else, even if it sounds really quite similar, may be completely meaningless.

If you want tax advice, stick to someone who is a CTA.

For anything to do with Company Secretarial work you need an ACIS or FCIS.

For more straightforward accounting and tax work, an AAT and an ATT respectively should suffice.

The one to be really careful about is an “Accountant”. Amazingly, this term is totally unregulated so it could be someone who is perfectly competent or a psychotic fraudster. You may not know which until your account has been emptied and you are distributed in a selection of black plastic bags over a wide geographical area.

For a bit more detail on all the above have a look at:

http://www.moveaheadonline.com/Articles/pdf/What%20do%20all%20these%20accountancy%20bodies%20do.pdf

Executive coaching is another way to gain practical and theoretical support, although again, appointing the right person is key.

When it comes down to costs, most people are happy to pay large sums for those tangible assets like vehicles or equipment. It’s much more difficult persuading those same people to devote equal funds into securing a service. The impact and influence that good management can have on a business is often overlooked and the return on such an investment under appreciated.

At the risk of repeating an earlier post to this blog, the most important wheel of the SME is the owner. The more knowledgeable, experienced and aware they are, the better the business will run. If you haven’t already done so, think seriously about doing skills assessment. Take a candid look at the personal qualities you have and those areas of weakness. Look at the various areas of the business (finance, marketing, staff, legal and regulatory, systems and processes, technical etc) and areas which are important to you and start working to plug those gaps.

Just one well-targeted bit of training can pay dividends.

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