Page 1

Issue 20 Winter 2009

Technical advice to help prepare for 2010 Inside this issue: VAT Rate Change Planning ahead could save you money

Preparing for the Audit Make the process painless

Clamp Down on Tax We take a closer look at changes to the tax system

Going it Alone Paul Daly looks at startup companies


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Inside this issue

›››

In this issue we focus on a variety of technical factors to help you get your business on track. Issue 21 will focus on tangible ideas to drive profitability.

Publisher: ASE Plc, Rowan Court Concord Business Park Manchester, M22 0RR Website: www.ase-global.com

P3 | GOING IT ALONE

Paul Daly looks at startup companies

P4 | VAT RATE CHANGE ARE YOU READY? The Budget 2009

P6 | KEY YARDSTICK REVIEW

Telephone: +44 (0)161 493 1930 Fax: +44 (0)161 493 1931 Contact: David Kendrick Design and Print: Bourn Design Ltd. © Copyright 2009

Results for 9 months 30 September 2009

P8 | PREPARING FOR THE AUDIT Are you ready?

P10 | CLAMP DOWN ON TAX Changes to the tax system

Two become one! ASE and Trevor Jones complete reorganisation Since 1975, sister companies under common management Trevor Jones Chartered Accountants and ASE Limited have specialised in the Automotive Industry, focusing on assisting dealers and manufacturers with risk management, audit and tax compliance and best practice profitability advice. In order to maximise the opportunities available for the business and its staff and clients, a decision was taken earlier this year to re-organise the group and merge the two businesses together into a new entity - ASE Plc. Clients of both businesses will benefit from increased access to profitability statistics and an internal knowledge base, whilst ensuring we maintain strict levels of confidentiality. The enlarged business now operates its head office out of new prestigious offices near Manchester Airport and has the combined resources and expertise to be truly regarded as the leading professional services adviser to the motor trade both in the UK and its overseas markets.


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Going it alone Article by Paul Daly

The motor trade thrives on an entrepreneurial spirit and many of its best people dream of owning their own dealership or dealership group. The complexities of achieving these dreams and understanding the risks and rewards involved can make the process an extremely daunting one. However, for many, these obstacles are seen as challenges to be overcome and with the right approach and advice many successful businesses have been created over the years. Many of todays leaders in the retail motor industry have their origins in a start up or MBO situation. A combination of poor recent trading performance, reduced property prices and difficulty in accessing finance mean that motor trade businesses are attractively priced and offer significant potential investment returns. There are definitely bargains out there for those who relish the challenge of turning around an underperforming dealership. The sector is also attractive to those who believe in being counter – cyclical and want to be prepared to take advantage of the inevitable up-turn in financial performance when it arrives. The main ownership options available include: Management Buy Out (MBO) – We regularly encounter the scenario where the existing owner wishes to retire or exit the business and has no immediate succession plan. Typically a trusted existing manager or management team within the business will be given (or request) the opportunity to acquire the business. Acquisitions of this nature are common because they have advantages for buyer and seller and provide the most realistic chance of “doing a deal” if the acquirer has limited funds: • The manager will be known to the manufacturer, captive finance company and bank making their approval for the transaction easier to obtain.

• Often property will be extracted from the business making it more affordable to the acquirer whilst providing a rental income to the retiring seller. • The seller may be willing to defer an element of the consideration for the purchase to assist with the funding of the deal. • Due diligence and other costs associated with the transaction are minimised due to the knowledge already in the acquirer’s possession. • The seller leaves knowing his business and staff are in safe hands. Management Buy In (MBI) – Similar to the MBO other than the management comes externally from the business. This route is typically followed if the existing management is not considered suitable or has no appetite for the purchase. An MBI exhibits many of the advantages of a MBO and is particularly appropriate for situations where a manufacturer has a preferred manager to purchase and operate the site being disposed of. In this scenario, the manufacturer may well look to assist with the funding of the unsecured element of the purchase enabling relatively low levels of investment on behalf of the Buy In team. Start up – Only for the brave! In this scenario the entrepreneur will identify open points where representation is required, court the relevant manufacturers, locate suitable premises, recruit staff and essentially start the entire business from scratch. In reality this is most often achieved with significant help from the manufacturer. Some key considerations for a new venture of this nature are: • Starting a new business in a cold territory presents significant challenges to profitability. A lack of aftersales PARC combined with the high fixed cost of operating a modern dealership mean that often substantial losses are incurred in the early years whilst the business establishes itself.

• A “clean sheet” approach means that any inherent disadvantages of existing businesses (such as poor reputation, staff issues, culture) are avoided and the entrepreneur has the opportunity to truly stamp their style of working onto the business. • The role of the manufacturer is absolutely pivotal to the success of a new venture of this nature, particularly with regards to their commitment to supporting the business financially in its early stages. Similarly to the MBI route, a manufacturer may be willing to support a particular candidate – often referred to as a “sponsored dealer”. In all situations, raising finance will be a challenge and most new ventures will have difficulties with security. In any of the above cases, management should be prepared to pledge significant security or personal guarantees. In conclusion, the current funding environment remains difficult but is a barrier to overcome rather than a brick wall. For those who relish a challenge and are excited by the prospect of being their own boss and enjoying all the benefits that brings there are significant opportunities. MBO/MBI options remain attractive for both buyer and vendor, particularly as property developers who have alternative retail or residential purposes have currently retreated from the sector. We believe that the current low transaction prices for motor trade businesses are a short term blip and confidence in the market will return as the funding difficulties currently being encountered ease. Taking advantage of the current market could pay significant dividends in the future.


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Budget 2009

VAT RATE

CHANGE ARE YOU READY? Article by Michelle Malone

Care and preparation is vital in dealing with the VAT rate change correctly and avoiding a potential VAT and profit hit.

Just about every dealer in the country is using the impending VAT rate increase as a marketing tool to give sales a boost before the end of the year, and cost conscious customers are already asking how they can ensure that their purchases will be subject to VAT at 15%. Do you know the answer? If all aspects of a transaction are completed prior to 31 December 2009, the situation is simple and there will be no doubt that the lower VAT rate should be used, but what if some element of the transaction spans the rate change? This article looks at when it is appropriate to apply the 15% rate and also examines areas where you need to take care to avoid a VAT and potentially a profit hit.

Transactions Spanning the Rate Change – Sale of Vehicles If we think about a normal transaction, it has three main elements – the delivery of the vehicle to the customer, issuing of an invoice and receipt of payment. At what point each of these happen, in relation to the date of the rate change will dictate what VAT rate needs to be applied to the transaction. The most common type of “split” transaction is the receipt of a deposit before the rate change, with delivery and invoicing happening after December. The standard treatment for this is to account for VAT at 15% on the deposit at the time it is received and at 17.5% on the balance

of the transaction. If however the customer pays in full for the vehicle, 15% VAT can apply to the whole transaction. As long as a customer is able to fund the purchase in advance of receiving the vehicle, this could be a very attractive option to them. Raising an invoice in December, even if no payment is received until later, will also set the VAT rate at 15% on the transaction. If you do receive a deposit before the change and the balance after, a special optional rule allows you to change the VAT rate on the deposit to 17.5% rather than 15%. This does mean that you are accounting for an extra 2.5% VAT on the deposit element so this treatment is only suitable for VAT registered customers. Using this option does however simplify the administration for such deals.


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Finally, if goods are supplied to your customer before 1 January 2010 but no payment is received or invoice issued until after this date, further optional rules again allow you to account for VAT at 15%. This treatment can apply even if you have already raised the invoice, however you must issue a VAT adjusting credit note within 45 days of the rate change. In practice though, it is unlikely that you would supply a vehicle without receiving payment or issuing an invoice too.

What About Services? You may also have services that span the date of the change. Under the normal rules, if an invoice is issued or part payment received after 1 January for services performed partly before this date, VAT is accounted for at 17.5% on all of the services provided. The optional rules however, allow you to apportion the total work you performed between that relating to before the rate change and that relating to after the rate change. You are permitted to charge VAT at 15% on the pre rate change element of the service and 17.5% on the balance. The downside to this treatment is the additional administrative complexity of splitting the work done and invoicing at two different rates.

Anti-Forestalling Legislation H M Revenue and Customs have recognised that manipulation of transactions may be undertaken to artificially obtain a 15% VAT rate. Anti-forestalling legislation is therefore in place which would create an additional 2.5% VAT charge on affected transactions and these rules will need to be considered whenever your customer cannot reclaim all of the VAT you charge to them.

Two potential problems can be found in these conditions. Firstly, if you provide funding via a captive finance house or a finance house connected with your motor trade business, you may be classed as arranging finance. Secondly, depending on the price of the vehicles and extras offered by your franchise, you could find yourself with a deal that totals in excess of £100,000. If this is the case and you receive payment or issue an invoice in advance, you will need to be able to demonstrate that this is your normal commercial practice should you wish to apply a 15% VAT rate to the transaction.

Effect on Vehicles in Stock Although the rate change may provide a boost for sales in December, unfortunately it could have a detrimental effect on the profit made on any used stock you still hold at 1 January 2010. Consider a VAT qualifying used vehicle purchased for £10,000 plus VAT of £1,500 which you decide to display for sale at a VAT inclusive price of £14,000. If the sale takes place before the rate change you will account for output VAT of £1,826 leaving you with a profit of £2,174. If the sale takes place after the end of December however, are you really going to be able to increase the sticker price to take account of the increased VAT you will have to account for? If you do not, the output VAT burden will increase to £2,085 eating into your profit margin by £259. The situation is similar with non-qualifying vehicles. As output VAT will be calculated at the new increased rate on the same profit margin, your business will retain less of the sales value of the vehicle.

The main situations that are caught are as follows although the majority of them should not apply to your deals:

In light of the above, regular reviews of used stock will take on added importance around the rate change to ensure that profit is not lost to VAT.

 You receive payments from persons

New Vehicle Purchase

connected to you for future supplies; or

 You issue advance invoices to persons connected to you for future supplies; or

 You provide or arrange funding for your customers to enable them to pay in advance for goods or services to be supplied by you; or

 You issue VAT invoices that do not have to be paid for at least six months; or

 You receive pre-payments or issue advance VAT invoices in excess of £100,000 and this is not commercial practice; or

You supply rights or options to receive goods and services from you free of charge or at a discount.

Care should also be taken when considering whether to purchase new vehicles to put into stock prior to 31 December 2009. Although your input VAT position will be neutral no matter if you pay VAT at 15% or 17.5% on purchase as you will be able to reclaim this from HRMC, you will again lose out on sale of the vehicle if this takes place after 31 December and you don’t pass the rate change on to your customer.

Housekeeping Issues So far we have looked at how the rate change will affect sales but we should not neglect its wider impact on your business’ VAT affairs. Firstly, you must ensure that all of your systems reflect the revised VAT rate. Although updating your DMS system will be foremost in your mind, if you also use spreadsheets to perform some of your calculations do not forget to update any formulaes that include the current VAT rate. You may still need the ability to use the old VAT rate in your DMS system however, as, if you issue credit notes after the rate change for invoices raised before the end of December, you must match the VAT rate the invoice was issued with i.e. 15% on the credit note used to reverse it out. If you hire any equipment and receive schedules that detail what VAT recovery is on repayments in the future, remember that the amount of VAT you are entitled to recover will change and just because you have a schedule showing an amount of input VAT it does not mean you are entitled to recover it. Finally, fuel scale charges and demonstrator scale charges reflecting the private use of fuel and demonstrators will also need to be updated and new rates should be published on HMRC’s website shortly. If you need any guidance concerning how the rate change will affect your business please contact our VAT manager Michelle Malone.


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YARDSTICK

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

0.7

9 Months September 2009

1.5

12 Month National Average 2008

-0.2

12 Month National Average 2007

0.6

1.6

Trevor Jones F.C.A.

Net Profit as a Percentage of Turnover

1.8 1.3 1.8 1.5 2.1 2.1

12 Month National Average 2006

It is difficult to imagine the above results when one considers the run out of 2008. Overall profits should exceed 1% as a whole for 2009 and apart from London all the regions have shown strong results. Factors affecting this have been:-

General

1. Massive savings in costs be the dealers. 2. An amazing used car performance from reduced stocks. 3. Scrappage.

Vehicle Sales

0.7 0

0.5

1.0

1.5

2.0

2.5

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

73 76 79 72 72 67 60 70

9 Months September 2009

72

12 Month National Average 2008

68

12 Month National Average 2007

69

12 Month National Average 2006

74 0

20

40

60

80

0.9 1.1 1.0 0.8 1.2 1.0 1.2 1.0

9 Months September 2009

1.0

12 Month National Average 2008

0.9

12 Month National Average 2007

0.9

12 Month National Average 2006

1.0 0.5

1.0

1.5

60

9 Months September 2009

67

12 Month National Average 2008

76

12 Month National Average 2007

63

12 Month National Average 2006

77

75 71 67 68 67 66 60

20

40

60

80

Overhead Absorption has shown a significant improvement on 2008, but this has come, in the main, from major cost savings and not from improved performance. That said, Overhead Absorption ranked at 82% (National Average 3 months to 31 March 2009) earlier in the year and since then has shown a steady decline. This in my view is the single most important factor facing dealers in 2010 will need to be addressed if the decline is to be reversed.

Used to New Ratio Over recent months, this ratio has fallen significantly mainly because of the focus on Scrappage. Clearly the Government initiative has had a positive effect on New Car Volumes and many used car purchases have been converted into new car customers under the Scrappage Scheme. It will be very difficult to switch back to used cars when Scrappage goes but this must be a necessary action point for the majority of Dealers, whilst re-visiting the Sales Process on an almost daily basis to ensure that no new sales are lost, particularly in Q1 2010.

2.0

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

0

Overhead Absorption

100

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

0

9 months to

3.0

Vehicle Sales Expenses as a Percentage of Gross Vehicle Sales Expenses continue to be a major worry with the bottom 10% spending as much to sell a vehicle, as the Gross Profit earned from it. Surely this cannot be correct? In times of record vehicle sales performance, it is really disappointing that this ratio could reach 2008 levels by the end of the year. The question is not how much have you spent? It is have you had value for money from your spend? At current levels of expenditure, it would seem that for many the value for money criteria is not being achieved.

100

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

161 158 190 191 167 182 208 186

9 Months September 2009

188

12 Month National Average 2008

144

12 Month National Average 2007

134

12 Month National Average 2006

Sales per Sales Executive On the face of it, this ratio shows an increase of 26% year on year which is a significant improvement that is to be welcomed. How has this improvement been achieved? • From better sales processes? – Unlikely • From a reduced number of sales executives? – Likely • From Scrappage – Highly likely The sales process and the constant review of performance is vital if we are to achieve optimum performance from our single biggest cost in sales, the sales executives.

130 0

30

60

90

120 150 180

210

240

49 56 60 57 53 54 45 50

9 Months September 2009

54

12 Month National Average 2008

58

12 Month National Average 2007

63

12 Month National Average 2006

64 0

20

40

60

80

94 87 82 83 95 91 111 81 90

9 Months September 2009 12 Month National Average 2008

57

12 Month National Average 2007 12 Month National Average 2006

65

59 100

12 Months ago I wrote in the article: “The current recession is by far the worst I have ever known mainly because of the speed and ferocity with which it exploded upon us. I cannot find anyone who thinks that 2009 will be any different from the last 6 months of 2008 and as a result, most manufacturers are taking steps to reduce the supply of new vehicles.” Certainly it is true that in the earlier part of the year, New Vehicle Sales fell by almost 30% but as a hedge against this fall and in an effort to survive, dealers: 1. Cut costs by a significant amount, meaning in some cases that it was difficult to maintain service levels. 2. Cut Used Car Stocks by approximately 1/3 and ended up making more gross out of less investment. It is also true that ‘outside factors’ have helped significantly:1. Residual values of Used cars, having ‘fallen through the floor’ in October/November 2008, started to rise again and along with shortage of quality Used cars meant that Gross Margins improved significantly. 2. “Scrappage” was introduced after the April Budget. It is true that it was met with a mixed response from the industry mainly because the Government had been so vague over the criteria. Certain manufacturers were ‘fast out of the blocks’ and without doubt dealers profits have been enhanced in a vast number of cases by this initiative. As a result, profits in 2009 are significantly higher than could ever have been dreamt of 12 months ago. Despite this unexpected rise in profitability across the countries, the banks continue to be difficult in the main. Property values have fallen and with it security levels which means more pressure on overdrafts. Add to that, a massive hike in renewal costs have made banking for some dealers, extremely expensive at a time when interest rates are at an all time low. That said, a much lower number of dealers have been forced to close than was predicted indicating that the banks, despite their own problems, have not been sat with their fingers on the ‘destruct button’ which is really encouraging.

Used Vehicle Days in Stock I never really believed that I would see the day that used vehicle days in stock averaged 36 (National Average) as it did in March 2009. “A world without book drops” could not be better but in the last few weeks, used vehicles sales have flowed and stocks have started to rise, particularly the overage content.

I am reluctant to predict judging from my efforts of 12 months ago, but all the signs indicated a strong end to the year, mainly because of the VAT increase in January 2010, and the run out of the Scrappage Scheme, both of which will bring forward sales into 2009. On the other hand, the excellent used car performance in 2009 has slowed dramatically in recent weeks with a vast majority of cars not reaching their reserve prices in the auctions.

Overage Content This could of course be due to a concentration in some dealerships on scrappage but the control and profiling of used car stock levels will be vital during the coming winter months.

Putting that all together, profits for 2009 should exceed 1% R.O.S., the best result for many years.

Return on Investment - Used Cars

13 Second Health Check

100

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

0 10 20 30 40 50 60 70 80

It’s been a funny old year.

So what of the remainder of 2009?

280

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

Overview

120

140

Throughout 2009, the used vehicle ROI has exceeded 100%, which is truly amazing when that target was considered almost impossible when we started to track it 5 years ago. A Great Ratio Take the used vehicle stock, divide it by 12 and that should be the gross for the month. We have even seen excellent profits from trade sales throughout the year. September however showed a significant downward trend with sales falling and stocks rising, this will need to be watched carefully if dealers are not to face the massive stock losses that they did in 2008.

Profit Drivers above Key Yardsticks Profit Drivers below Yardsticks Net Profit as a % of Turnover


P7 www.ase-global.com YARDSTICK

Overall Efficiency

Key Yardstick Review 9 months to 30 September 2009

The downward trend in labour efficiency can clearly be seen over the last 3 years and this is likely to accelerate in 2010 with the fall in the Vehicle Parc. It is true that this could easily be corrected by reducing the number of technicians and whilst this would certainly improve the ratio, overall service contribution would fall with its negative effect on overhead absorption. These results are common to virtually every franchise in the UK, which is why all the franchise after sales teams are concentrating on finding ways to improve service volumes in a declining market.

Parts Service

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

80 84 82 80 77 81

12 Month National Average 2008

83

12 Month National Average 2007

85

12 Month National Average 2006

85 0

Gross Profit Percentage on Labour Sales MAJOR CHALLENGES FOR 2010

The results for gross profit on labour sales are excellent, with virtually every dealer achieving the 75% target.

1. Life after Scrappage? The Scrappage has been a windfall for some, but not all of the franchises and it does seem that a lot of the Sales Executives have become order takers. I therefore believe that it is vital to revisit the sales process and keep revisiting it during 2010 paying particular attention to the service customers who could be converted into New or Used Sales customers.

This is particularly pleasing at a time when one would expect a downward pressure on prices to affect the margin on labour sales. We are carefully monitoring gross profits on service expecting to see a fall, but as yet none has been evident. Long may it continue.

10 20 30 40 50 60 70 80

74

9 Months September 2009

77

12 Month National Average 2008

77

77 77 77 78 77 88 74

12 Month National Average 2007

76

12 Month National Average 2006

78 0

Without exception the franchises are really concerned about the fall off in the vehicle parc and the knock on downward effect that will have on Service Volumes and Overhead Absorption. This is a major issue! Dealers therefore in my view need to take a long hard look at Service (even though it may not be their area of expertise) to determine what action should be taken to halt the decline in Overhead Absorption, having made significant cost savings already. I have said on many occasions that the Service Manager has probably the most difficult job in the dealership and clearly needs to drive sales forward in a declining market.

Service Expenses as a Percentage of Gross A steady fall in retail, warranty sales will inevitably drive up expenses as a percentage of gross profit unless expenses are carefully controlled. The single biggest post in a service department is non – productive salaries and wages and I am often asked what should the ratio of productives to non-productives be? To be quite frank, I never look at the number of staff members, but rather the actual cost in both categories and where service expenses are higher than 60% of G.P., then it is almost certain that the cost of non-productives exceeds the cost of productives which doesn’t seem quite right?

Managing the Must Knows

It is really disappointing to note that in times of falling labour sales little attempt seems to have been made to sell more to each customer.

I can do no more than quote an After Sales Director of a medium sized group in the South East of England. “I just thought that I would share with you something that I did after the recent Profit Clinic. You spoke about the must know list you had when you started out as an Accountant. I thought how could I apply this to After Sales? I came up with a series of things that I wanted the Managers to know that would drive them and their staff. The results are recorded on a Management Board in my office and record each day:Opportunity/Sale/% Conversion in respect of:-

That said, sales of service plans has increased significantly, particularly through EMAC, this must make upsell easier in the coming months. This will not happen however unless a positive sales approach is taken to selling labour, and the customer facing staff are properly coached in basic sales techniques and potential upsell customers are properly targeted and correctly handled.

The results are really encouraging with margins maintained in line with previous years.

Every department has one and the Managers complete it each day.” The most exciting thing for me is the reported improvements in what is an excellently managed group. 310% 21% 208% 44%

Increase Increase Increase Increase

40

60

80

100

52

53 51 49 50 47 51 54

9 Months September 2009

50

12 Month National Average 2008

48

12 Month National Average 2007

46

12 Month National Average 2006

53 10 20 30 40 50 60 70 80 90 100 110

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

1.6 1.7 1.6 1.6 1.7 1.5 1.7 1.6

9 Months September 2009

1.6

12 Month National Average 2008

1.6

12 Month National Average 2007

1.7

12 Month National Average 2006

1.9 0

Gross Profit Percentage on Parts Sales

Air Con Regas/Tyres/Service Plans and Valets, Number plates.

20

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

0

Hours per Retail Job card

So how can this be done?

90 100 110

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

2. Fall Off in Vehicle Parc

Air Con Regas Tyres Service Plans Valets

83 79

9 Months September 2009

o 30th September 2008

• • • •

81

0.5

1.0

1.5

2.0

2.5

3.0

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

21 22 21 21 21 20 20 19

9 Months September 2009

21

12 Month National Average 2008

22

12 Month National Average 2007

21

12 Month National Average 2006

22 0

The results are difficult to believe but trust me I have been to the dealer and seen it work for myself. They are accurate. Action Point – Decide on the must knows and monitor them daily.

Parts Expenses as a Percentage of Parts Gross Expenses appear to be under control in parts but any reduction in service labour with a corresponding fall in mechanical parts will have an adverse effect on this ratio.

May I finally take this opportunity to wish all of you a very merry Christmas and a prosperous (in what could be an interesting and demanding) New Year.

5

10

15

20

25

30

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

50 46 46 46 44 47 48 41

9 Months September 2009

47

12 Month National Average 2008

51

12 Month National Average 2007

50

12 Month National Average 2006

49 0

12 Months 12 Months 12 Months 2006 2007 2008

9 Months 2008

9 Months 2009

Parts Stock Turn

3

2

2

3

2

The manufacturers continue to improve parts supply almost without exception and whilst ratio has stabilised in 2009, at 2008 levels there would appear to be little obsolescence in dealer stocks at present.

10

11

11

10

11

As a result, the improvement in working capital experienced by the dealers has been significant in recent years.

0.7%

0.6%

-0.2%

0.4%

1.5%

20

40

60

80

100

London South East South West and Wales Midlands and East North East North West Scotland Northern Ireland

7.5

9 Months September 2009

8.2

12 Month National Average 2008

8.6

12 Month National Average 2007

8.0

8.0 7.9 8.0 9.6 8.3 9.6 7.8

7.9

12 Month National Average 2006 0

2.5

5.0

7.5

10.0

12.5

15.0


P8 www.ase-global.com

Article by Ian McMahon

PREPARING FOR THE AUDIT With the industry entering December, dealerships are reviewing their financial performance as many approach their financial year end. The poor performance suffered by many in the industry in 2008, has prompted businesses to review costs and make changes as applicable. The positive news is that many dealerships have returned to profitability in 2009.

that stands up to scrutiny at the statutory year end audit – all whilst managing overheads and staffing levels! Stakeholders will be heartened by a management accounts result that broadly correlates to the year end financial statements. We are often asked about what key processes should be undertaken in preparation for the year end and the audit, and in light of the pressure that businesses are likely to face in reporting their statutory accounts promptly, suggestions are in the list below:

 Review the basis for stock provisioning So why talk about business performance when we should be talking about preparing for a statutory audit? Well, for many businesses who reported a loss in 2008, the 2009 financial statements are going to be the first set of results that will undergo external scrutiny. As a consequence, stakeholders will be keen to see the figures “signed off” as promptly after the year end as is viable. Furthermore, manufacturers and funders are reviewing the performance of many businesses (from management accounts information) and will be further assured once the statutory audited financial statements are finalised. The aim for many financial controllers and directors alike is to maintain a control set within the business which is capable of accurately reporting management accounts information,

Both parts and vehicle stock. Is the policy adopted consistent? Does it reflect market valuation? Is it specific?

 Ensure debt exposure is minimised A drive on overage debt can reduce any provisioning required at the year end. Having a focus on the outstanding items can assist in reducing any expense in providing against actual or potential bad debts

 Ensure reconciliations are regularly prepared for all balance sheet accounts We have consistently maintained that every balance sheet account should be reconciled every month. This way, no surprises should occur at the year end. Given tight trading conditions, can your management information really be allowed to contain errors due to specific accounts not being regularly reconciled?

 Manufacturer amounts receivable and payable Although these items should receive regular attention, and by default should be covered by the 2 points immediately above, the emphasis that the audit process places on such high volume accounts / items means that a well controlled business cannot afford to allow manufacture and manufacturer related items to exist without ongoing monitoring and control.

 Assess the adequacy of prepayments accruals Ensure the monthly review of prepaid and accrued expenses is extended to cover any unusual or non-routine items that might affect the reported result.

 Ensure all online statements are printed as at the year end date With more and more manufacturer systems becoming web based, the need to collate statement information in real time becomes a priority.

 Analysis of tax sensitive accounts Although not strictly part of the audit, preparing a monthly file with supporting documentation for accounts which are often scrutinised during the preparation of the tax computation (e.g. legal fees and repairs) can significantly reduce the burden of the task at the year end.


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 Update the fixed asset register Detailed records of fixed asset additions ensure that the capital allowances claimed on expenditure can be maximised. In conjunction with the monthly basic accounts procedures, one would expect that if the points above are addressed promptly, then the time taken to finalise the audit process and statutory accounts should be minimised.

 Focus on financial covenants A majority of dealers are reliant on either a bank facility or a vehicle floor stocking plan to enable the working capital cycle to operate efficiently. All of these plans carry covenants, upon which the dealer is measured. For many operators, these covenants have remained silent for many years, with breaches of covenant being accepted by the funding provider as long as the rationale presented by the dealer is sound. In the current economic cycle, we are witnessing a number of dealers now being held to task on these same, previously silent, covenants.

The result? • Additional arrangement fees • Reduced facility limits • Conditional facility renewals (including personal guarantees) We believe that the Key Performance Indicators that we use to assess a businesses performance should be an integral part of the management accounts pack, and in the current climate, specific bank covenants should be included and monitored.

Care should also be taken over vehicle registration and invoicing during December, with the VAT change potentially leading to a rush of sales at the end of the year. In all cases ensure the position is planned, rather than being driven by the vehicle admin department.

In short

 Plan the year end balance sheet position

In light of the covenant requirements and other analysis performed by the readers of the accounts plan the company’s balance.

 Sheet Position In practice many groups destock to improve cash holding and decrease liabilities during December, however other companies with more covenant flexibility may chose to invest in seasonally cheap used vehicle stock.

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Don’t put off tasks until the year end – often this takes longer to address retrospectively. Prepare in advance – leaving tasks until the week of the audit fieldwork often compounds the problem. Manufacturer items – need constant monitoring and scrutiny.

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Article by Steve Towler

CLAMP DOWN ON TAX The 2005 merger of the Inland Revenue with HM Customs and Excise has led to a more aggressive and less flexible approach to tax investigations by the new HMRC. New legislation governing information provisions, compliance checks and records, and of course the severe new penalty rules means that tax enquiries are now more of an issue for taxpayers than ever before. Dealers should be proactively dealing with the implications of these changes now because ignoring them is simply not an option if they want to achieve their business objectives in a penalty-free environment. Compliance Checks New legislation that deals with information and inspection powers effectively allows HMRC to undertake statutorily-authorised compliance checks for the purpose of checking a person’s “tax position”. This can include looking at past, present and future tax liabilities, claims, penalties, PAYE matters, and even the affairs of extinct companies and dead people. The definition is so vague that any inspection can be justified! HMRC also have the power to enter any business premises, including vehicles and private residences where business is carried out, and can inspect: • The premises; • Business assets on the premises; and business documents on the premises which form part of a person’s statutory records.

• Documents can be removed or copied and there is unlikely to be any practical limit to the power to inspect anything they are inclined to see! Only 7 days’ notice is required and there is no right to appeal against a decision to inspect. Un-notified visits can also be taken if HMRC authorises it internally. The penalty for obstructing an officer is £300 initially and then a daily penalty of £60. Therefore, it is crucial that dealers are aware of the potential risk to them of such a visit. Dealers should ensure that records in particular are written up and complete. It is also crucial that the record keeping system is able to cope with the possibility of a real-time inspection. Poorly drafted documentation could lead to problems when the relevant return finally goes in, and inadequate business records are likely to raise suspicions, possibly leading to an enquiry.

of penalties being taken for failure to maintain those records. Records are the key to tax compliance under Self Assessment, for both individuals and companies. The law requires the taxpayer to keep all records that may be required for the purpose of enabling them to make and deliver a correct return for the period. These records include: • All amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place. • In the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade.

Business Records

These records include ‘supporting documents’, which are defined as; accounts, books, deeds, contracts, vouchers and receipts.

The basic HMRC approach to records is that if they are incomplete, accounts and returns will inevitably be wrong. This conclusion is far more likely now that HMRC will order all businesses to keep additional books and records that HMRC would like to be able to see but which do not frequently exist. The existence of new specified record requirements also increases the likelihood

This means that the dealer who wants the best possible tax result for a transaction must take the initiative and proactively plan transactions so that the desired tax treatment is achieved by reference to the records that support it. New information notice powers also allow HMRC to demand this information, with failure to provide it resulting in harsh penalties.


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The diagram below illustrates the area of the offence, together with the maximum and minimum penalties and mitigation available:

The New Penalty Regime Currently penalties are negotiated depending on various factors, however, for returns due after 6 April 2009 (for most dealers the return for the year ended 31 December 2008) this system will be replaced with a statutory system. This will have two major consequences for dealers:

Disclosure is unprompted if the taxpayer has no reason to believe that HMRC have discovered the inaccuracy. Therefore, when an enquiry is opened before a disclosure is made; any subsequent disclosure will always be treated as prompted and thus will fall into a higher penalty band.

1. In cases of innocent error where a taxpayer has taken reasonable care to get things right, there will be no penalty.

There are various measures that HMRC uses in deciding how much a penalty can be mitigated, such as the degree of cooperation or the accessibility of the books and records. However, as can be seen from the diagram below, there is a floor below which the penalty cannot be reduced, irrespective of the degree of assistance or cooperation offered.

2. Penalties in ‘ordinary’ investigations are likely to be higher, and in some cases substantially higher as a result of common sense being overtaken by a fixed statutory framework. It will now be procedure for penalties to be fragmented, so it will be possible to assign potential lost revenue in an investigation into a particular category in order to reflect the type of inaccuracy concerned.

Penalties for carelessness can be held over subject to conditions for up to two years, therefore giving taxpayers an opportunity to prove to HMRC that they have amended their ways. However, suspension is not available where the error is an isolated incident unlikely to be repeated or where the past compliance record suggests that a change in behaviour is unlikely. It is however possible to appeal a decision by HMRC not to suspend the penalty.

Penalties are tax geared by reference to lost revenue and levels will vary, however, the rate of mitigation also varies according to offence.

Provisions are also designed to maximise penalties wherever possible.

For example: • Penalties for deliberate errors can be taken from company officers where the officers have gained personally and the company is insolvent. • If penalties straddle tax bands, the higher penalties are matched with the highest rate of tax. As can be seen, the new powers given to HMRC are substantial and the potential penalties for non-compliance are significant. Although the new penalty regime does offer some scope to negotiate with HMRC in respect of which category of offence has been committed, together with the mitigation available, on the whole there is far less wriggle room than under the previous regime. It is therefore more important than ever for Dealers to fully disclose all information to their advisers, both in terms of current records and compliance as well as future large transactions, in order that information can be disclosed to HMRC in the best possible light.

Illustration of penalties charged Max 100%

Max 100%

Deliberate & Concealed

Max 70%

Deliberate Unprompted

Max 70%

Deliberate & Concealed

Deliberate Prompted

Unprompted

Prompted

Min 50%

Min 35% Min 30%

Max 30% Careless Unprompted

Max 30% Careless Prompted

Min 20%

Min 15%

Min 0% No Penalty Reasonable Care

Mistake Despite Reasonable Care

Failure to Take Reasonable Care

Deliberate Understatement Degree of Inaccuracy

Deliberate Understatement and Concealed


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Driving Force Winter 2009  

Driving Force Magazine Winter 2009