Tag: Insolvency

Autumn Statement 2023

Posted on by Derval Rooney

The Chancellor, Jeremy Hunt, has just delivered the Government’s Autumn Statement which is likely to be the penultimate fiscal statement before the next General Election (with a Spring Budget expected in March 2024).

From an economic viewpoint, the headline was the reduction in inflation over the last year – from 11% to 4.6% (as measured by the CPI), thus allowing the Prime Minister to say that he has fulfilled the pledge to halve inflation this year. This, along with slightly improved debt forecasts since the Spring Budget, gave the Chancellor some headroom to cut taxes.

There had been much speculation in recent weeks about the nature of these cuts. In the end, neither income tax nor inheritance tax have been touched – although the reduction to national insurance contributions will have benefits for workers and the self-employed.

From a tax perspective, there were three main measures which are of interest to businesses and workers.

National insurance contributions (NICs)

The Chancellor announced a 2% cut to the employees class 1 National insurance contribution rate. Acknowledging that a combined rate of tax and national insurance for a basic rate taxpayer was “too high” at 32%, he has reduced the employee’s national insurance rate for that part of income falling between £12,570 and £50,270 from 12% to 10%. This will be effective from 6 January 2024, rather than the usual 6 April.

For those who are self-employed, the Government will abolish the compulsory flat rate weekly Class 2 national insurance contributions (currently £3.45 per week) and reduce the Class 4 contribution rate from 9% to 8% – both effective from 6 April 2024.

Full expensing

The Autumn Statement details the Government’s intention to give companies certainty to plan long-term investments, and to assist companies that want to decarbonise by investing in newer, greener plant and machinery. Full expensing, the previously temporary successor to the Super Deduction has now been made permanent, with the government estimating that this will unlock an additional £14 billion of investment over the next 5 years.

Full expensing provides a 100% deduction for expenditure on new and unused assets that would otherwise qualify for the main pool capital allowances relief over a number of years, reducing a Company’s corporation tax bill in the year of the expenditure by up to 25% of the expenditure incurred. Special Rate Pool assets can qualify for a 50% First Year Allowance. However, land and buildings, cars, and assets used for leasing are ineligible for the allowance.

Research & Development

Following consultation, the Chancellor has indicated that the new ‘merged’ R&D relief scheme will go ahead with effect for accounting periods beginning on or after 1 April 2024. Under the merged scheme, a tax credit (expected to be 20% of qualifying expenditure) will be paid to companies. This tax credit will itself be taxable, but the Chancellor indicated that, for loss making companies, the applicable rate of tax will be 19% rather than 25%.

The current SME scheme will continue to apply for loss-making R&D intensive SMEs from 1 April 2023, whereby a tax credit is available at 14.5% for losses surrendered, rather than 10%. In order to qualify for this scheme, the SMEs were required to incur at least 40% of total expenditure on R&D – for accounting periods beginning on or after 1 April 2024, this reduces to 30%.

Other matters

It’s worth noting that the Autumn Statement is not a Budget – that will happen next Spring. However, the Government will shortly be publishing the Finance Bill which will contain the above measures, and many others which have previously been announced. It’s in this document that we will see the substance of how these measures will operate in practice and, as usual, it’s always necessary to read the ‘fine print’.

If you would like to discuss any of the matters arising from today’s Statement, please contact any member of the tax team.

Thoughts in advance of the 2023 Autumn Statement

Posted on by Derval Rooney

For many years Autumn Statements did not create much interest outside of economic and political circles. They were more like midterm report cards that would signpost how things were going in the economy, with updates on public spending and borrowing. Since 2018 the plan was for the Budget to take place in the Autumn and then there would be an economic update in the spring to be called the Spring Statement. The theory was to avoid two fiscal events in the same year and to enable Parliament to have more time to debate and review draft fiscal legislation. However, since 2018, the reality has been much less clear cut with a plethora of ad hoc fiscal statements and indeed last year a budget statement reversal after the chaos caused by the Truss/Kwarteng budget statement in September 2022.

On 22nd November 2023 Jeremy Hunt will present his Autumn Statement to Parliament. He will no doubt be relieved that he has survived the recent cabinet reshuffle, but that relief will be significantly tempered by the thought of an election which must take place within the next 15 months. The current opinion polls, the state of the UK and global economies and the fact that the current Government has put in place fiscal measures that have led to the highest tax burden in the UK since the end of the Second World War will mean that any thoughts of job security may be temporary.

So, will the Chancellor make any surprise announcements at the Autumn Statement in a bid to both stimulate the economy and start to reverse the trends in the polls? The general thinking is that he has virtually no room to manoeuvre at the minute. Whilst tax receipts have been extremely buoyant in the last six months due partly to the better-than-expected economic growth but mainly to the impact of the increased tax burden, the impact of inflation on public sector costs and the huge increase in government borrowing interest costs (rising to over £100bn this year) will mean there is virtually nothing in the kitty for any big tax give-aways.

With that in mind, it is always worth looking at what might be included in the statement (or maybe even in the Spring Budget):

Corporation tax rates went from 19% to 25% from 1st April this year (despite the Truss/Kwarteng attempt to reverse this last year). The higher rates will no doubt impact on foreign direct investment, and it may be too early to tell whether the higher rate will result in a higher tax yield. Whilst the natural home for a Conservative Chancellor would be to lower corporation tax rates, one must remember that companies don’t vote and we are too far into the current election cycle for a cut in corporation tax rates to have any significant impact in time for the next election.

Inheritance Tax is regarded as the most hated tax in the UK — effectively paying tax on wealth that has already been subject to income tax and capital gains tax. There were some hints earlier this year that this tax may be subject to a root and branch review and that it would be adjusted so as to take most people out of the inheritance tax net, leaving only the wealthiest subject to it. However, inheritance tax is actually not paid by the majority of people and its dislike is more often about its perceived impact rather than its real impact. Whilst the cost of making some significant changes would not be enormous, it would be seen as handing a tax break to the wealthy at a time of austerity and thus it may not have the electoral impact that would make it worthwhile.

Stamp Duty Land Tax has been around for 20 years now and the rate has steadily increased over that time. There may be merit in a reduction in the rate at the bottom end of the property ladder to not only help stimulate the struggling housing sector but also to encourage younger people to get onto the property ladder. Having said that, with the base interest rates now north of 5% after a decade of interest rates closer to 1%, the reduction in SDLT rates may not give the necessary short term boost to first time buyers.

It is highly unlikely we will see any reduction to income tax rates or national insurance rates, the cost of such reductions would be just too great and any such rate cuts at this time could spark unwelcome movements in the UK government bond market similar to those seen last autumn.

Mr Hunt is between a ‘high tax rock’ and a ‘looming election hard place’. It is hard to see him having any wriggle room just now. However, the November Statement is not quite the last chance saloon, that will be the Budget Statement next spring. I suspect the Chancellor and his government will be keeping their fingers crossed that tax receipts will stay buoyant, global economic factors will enable inflation to fall back further and that interest rates will ease back below 5%. They say a week is a long time in politics but the question is will four months be long enough for the economy to provide a window of opportunity for the Chancellor? Watch this space.

Time to plan for an MVL?

Posted on by Rory Moynagh

Written by Jamie Callaghan

With the Chancellor’s Spring statement fast approaching, those business owners contemplating retiring or exiting their business will no doubt be considering the possible implications for them should the Government announce changes to the Capital Gains Tax (‘CGT’) regime. 

As the Government continues to deal with the aftermath of unprecedented borrowing to support the economy during the pandemic, some consider that CGT could be next on the Chancellors hit-list to raise funds. This could be achieved through the removal of business asset disposal relief (‘BADR’) or, as recommended by the Office of Tax Simplification, increasing the CGT tax rate. 

Business owners can mitigate their risk now by discussing a Members’ Voluntary Liquidation (‘MVL’) with an Insolvency Practitioner to explore whether it is an option suitable for them. 

An MVL is an option for solvent companies wishing to wind down their activities and allows for assets to be distributed in a tax-efficient manner, whilst also giving directors certainty given the finality of the liquidation process. Subject to certain conditions, distributions made in an MVL can qualify as capital distributions and business owners can avail of BADR with a tax rate of 10%. At current rates, this relief can save business owners up to £100,000 in CGT. 

An MVL is only an option for solvent companies meaning that the company must hold enough assets to be able to settle all liabilities and interest in full, normally within 12 months. Due to the ability under company law to hold members’ meetings at short notice, companies can often be placed into an MVL within a couple of days. 

While no-one really knows what the Chancellor’s plans are for CGT come 23rd March and beyond, business owners should always keep one eye on their exit strategy and plan accordingly. This will ensure their company’s activities are wound down in the most efficient possible manner.

A Squash and a ‘Fiscal’ Squeeze

Posted on by Rory Moynagh

Written by Rory Moynagh

If there has one benefit from the past 2 years, it is undoubtedly the opportunity to spend more of those precious moments with our kids. Whether that be the school run, homework or generally just being around more, the pandemic has afforded people the opportunity to reset and perhaps realign those priorities in life.

I’m sure like many, after an excitable day, our kids like to unwind before bedtime with a book.

During a recent reading of Julia Donaldson’s “A Squash and a Squeeze”, I’m sorry to admit, but my mind started to wander as I was reciting the words (almost by memory now at this stage!).

With the increase in hybrid working, I’m sure many might relate to the challenges of space being at a premium in our households at times, however I then began to consider the current fiscal squeeze facing many households.

Fiscal Squeeze

Whether it be rising heating bills, electricity costs, shopping bills, credit cards or fuel costs, the squeeze on household income is very much real.

Coupled with future increases in National Insurance Contributions from 6th April 2022 as well as last week’s announcement of future increases in local property rates, the financial pressure facing households continues to increase.

It was recently reported by the Office for National Statistics (“ONS”) that 76% of people were paying more for food, energy and petrol in the 10 days 3rd February 2022 to 13th February 2022. This was an increase from 69% for the period 19th January 2022 to 30 January 2022. Furthermore, consumer prices also rose by 5.5% in the 12 months to January 2022, the highest since March 1992 (7.1%).

The challenges presented by such inflation cannot be underestimated.

Whilst the Bank of England have attempted to curb the rising levels of inflation by increasing interest rates earlier this month, this will also have an additional knock-on effect on those with tracker or variable rate mortgages, further tightening the squeeze facing many household incomes.

Not Just Households, Businesses Too

Of course, this pressure is not limited to purely households, with many businesses also facing rising costs.

Inflation, Brexit and wider economic and political issues have resulted in increased labour, transport and material costs. The resulting impact on margins has been considerable for many businesses, and whilst many have publicly stated that every effort is being made to avoid passing such cost increases on to the consumer, the above ONS statistics unfortunately confirm the reality that such costs are already being passed on and will likely continue to be in the months ahead.

Plan, Plan, Plan

For both consumers and businesses, the only response to such rising costs is to plan accordingly.

Households should start, or if they already have one, update, their household budget. This will not only help prioritise essential expenditure and manage outgoings, but also highlight any potential areas of concern. Once highlighted, any such problems can then be addressed at an early stage before they become too problematic.

Similarly, businesses should review their business plan and update their financial projections accordingly.

Owners should perform extensive sensitivity analysis under various scenarios and take time to strategise regarding both the pressures currently being faced and the future direction of the business as a result.

Again, early phase planning and review, will help businesses identify any funding gaps or financial pressures, which can then be discussed with stakeholders, banks, funders and / or creditors.

What is important to note however is that no matter how big the problem may seem, there is always professional assistance available to help work through the issues.

Advice

Seeking the assistance of professional advisors to review and critique a household budget, or a business’ operational, financial and strategic plan, could provide the very solution to the current pressures being faced.

There are solutions out there that can provide a chink of light in even the bleakest of situations. What is required is early engagement to identify and address the issue, and a focused and tailored approach to its resolution.

Whilst the past few years have presented their challenges, we all must recognise of how far we have come and what we have all been through. Of course, there will be further challenges ahead and we are all aware that the unprecedented level of Government support during the pandemic will have come at a cost.

However, if we all face this current period with the same approach and determination that we have recently shown, people and businesses can come through this and be in a position to take advantage of future opportunities that present themselves.

The Psychology of Debt: Post Pandemic Impact

Posted on by Derval Rooney

Written by Fiona Elwood

As we begin 2022, it is widely reported that rising living costs are having a financial, emotional and physical impact upon an ever-increasing percentage of the population. With National Insurance set to increase in March and the UK as a whole beginning to feel post pandemic inflationary pressures, one of the UK’s leading Debt Charities, StepChange, have confirmed that one in three people in the UK are struggling to keep up with bills (interestingly this is double the pre-pandemic number). Advice NI, another debt advice charity, has also recently issued a call to ‘encourage everyone to take a look at their finances now to help deal with what’s coming over the next year’. 

In my role as a debt advisory professional, we often meet with people struggling with their finances and in nearly every case the emotional (and physical) side effects of their financial difficulties are clear for us to see.

Whilst most households in Northern Ireland will have mortgages, car loans, personal loans, credit cards along with other essential monthly financial obligations such as childcare costs, It’s important to consider that debt impacts different people in different ways.  One person may suffer severe anxiety owing £1,000 on a credit card whilst another person may consider a credit card bill of ten times that, normal. Debt and financial pressures are not a new issue, but the effects of the pandemic have shone a light on the fact that any amount of debt can have a serious mental health impact. 

The commonly accepted emotional effects of debt include: Depression and Anxiety, Resentment, Denial, Stress, Anger, Frustration, Regret, Shame, Embarrassment and Fear. A recent study by Queen’s University Belfast on the Impact of debt and financial stress on health in Northern Irish households outlined that “neither the size of the debt, the type of debt nor the number of different lenders used affect health whereas the subjective experience of feeling financially stressed has a robust relationship with most aspects of health. In particular, financial stress negatively affects self-care problems, problems with performing usual activities, experiencing pain and feeling anxious or depressed”.

The key advice around resolving financial difficulties is to seek professional help.  When the financial problem is addressed and the appropriate solution is determined and implemented people will often describe more positive feelings such as relief, freedom and accomplishment. The age old saying of a problem shared is a problem halved has never been more true.

We often witness that when an individual begins a process such as bankruptcy or Individual Voluntary Arrangement to resolve the issue, there is a clear sense of relief experienced by the person and it is notably visible. Many of our clients describe the feeling of having a weight lifted from around their shoulders and many describe the day they accept the issue and seek help as being the first day of the rest of their lives. The role of a debt adviser is not the most glamorous of occupations but the ability to make a positive impact on someone’s mental health does make it all worthwhile.

Anyone affected by debt should seek professional advice and also avail of debt counselling to help deal with the mental health impact. StepChange, Advice NI or Christians Against Poverty are just a few of the amazing debt charities providing fantastic support in this area and their work (in an area that often remains unspoken about) should not go unnoticed.

https://www.stepchange.org/

https://capuk.org/

https://www.adviceni.net/

Financial Analysis Amidst a ‘Smash and Grab’

Posted on by Rory Moynagh

Within the construction industry, ‘smash and grab’ is the term used to describe an adjudication that seeks to recover funds due to a contractor. The contractor will claim payment for an amount stated in an interim application process, regardless of whether the sum represents the ‘true value’ of the works. This may arise out of technical argument based on the failure of the payer to serve a valid ‘withholding’ or ‘payless’ notice in the required timeframe.

Accordingly, a payer losing a smash and grab adjudication must pay the contractor the awarded sum, however they may attempt to hold off until the ‘true value’ is confirmed. Payers may have concerns around the recovery of such amounts if it later transpires that the ‘true value’ is less than the amounts claimed.

Stay of Execution

The payer may seek a stay of execution with regards to payment and it is during this part of the process that financial analysis may play a key role in the argument surrounding the need for a delay.

HNH has been instructed to provide financial analysis or advice in one form or another as part of an increasing number of ‘smash and grab’ adjudications in the last 12 months. On most occasions, it has been our role to provide an independent view on the financial standing of the contractor.

Test of Insolvency

The tests of insolvency outlined in the Insolvency (Northern Ireland) Order 1989 or Insolvency Act 1986 (England and Wales) are typically the first ‘go-to’ when considering the financial position of a company.

The Order / Act outlines the various tests that are referred to as the ‘Cash Flow Test’. It is stated that a company is insolvent if it is otherwise proved to the satisfaction of the High Court that the company is unable to pay its debts as they fall due.

The Order / Act also states that a company is insolvent if it is proved to the satisfaction of the High Court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities. This is often referred to as the ‘Balance Sheet Test’.

Commercial Approach

The Tests of Insolvency outlined in statute are often considered black and white, however it is useful to remain mindful of key case law on this matter. In the matter RE: BNY Corporate Trustee Services Ltd v Eurosail (2013), the Court ruled that the balance sheet test should adopt a commercial position and consider when prospective and contingent liabilities were likely to fall due.

Instead of a mechanical exercise of comparing the value of a company’s assets against the value of its liabilities, a more sophisticated test should be adopted, requiring a judgment as to whether the present assets of a company will reasonably enable the company’s present and future liabilities to be met.

Ratio Analysis

The Tests of Insolvency are limited to considering whether a company may or may not be insolvent at a point in time. For those companies that are teetering on the edge due to cash flow pressures, further analysis may be undertaken to outline potential concerns.

Additional analytical tools which are useful to measure financial health are various ratio calculations, particularly the financial gearing ratio of the company. Financial gearing refers to the relationship, or ratio, of a company’s debt to equity.  When there is a high proportion of debt to equity, a business is said to be highly geared.

Banking covenants are most represented in terms of financial ratios which highlights the significance of these calculations. A borrowing company may agree to maintain a financial ratio, such as the debt of equity ratio or others such as interest coverage ratio or the ‘current’ ratio which measures the capability of a busines to meet its short-term obligations. Each of these ratios are regularly monitored to evaluate the risk of failure of a business.

Recent Judgement of the High Court in Northern Ireland

James Neill of HNH was instructed in a recent case heard by the High Court in Northern Ireland during the Covid-19 lockdown, which was decided solely on the papers. The case centred around the enforcement of an adjudicator’s award following a smash and grab adjudication. The written evidence put forward analysed the financial position of the contractor by reference to the Tests of Insolvency and the debt to equity ratio.

The judgement noted that whilst the contractor was not insolvent the company appeared to be facing cash flow pressures and relatively high gearing. The Judge decided that, whilst the contractor had a right to rely on the smash and grab adjudication, there was a risk that the company would struggle to pay back the full amounts if ordered to do so. A stay of execution for 14 days was granted to allow sufficient time for the ‘true value’ adjudications to be concluded.

Insolvency Advice

Outside of the forensic analysis and provision of expert opinion with respect to the position of the contractor, those facing smash and grab adjudications may find themselves having to make payments of amounts not previously anticipated.

It is useful to understand the various scenarios which may unfold if adjudications are successful and upheld. How will the payer’s cashflow be impacted? Will the payment of smash and grab adjudications place the payer in a risk of insolvency?

Key to a successful financing strategy is to address the issues head on, make a focussed plan for a sustainable recovery and seek professional advice as soon as possible. Early advice and acting quickly is often integral to the implementation of an effective turnaround.

Insolvency Reforms Announced

Posted on by Rory Moynagh

In the wake of the liquidation of Carillion, the administration of House of Fraser and a number of high profile CVAs, the Government has announced a number of proposed reforms to the current corporate insolvency and corporate governance frameworks which contain the most significant changes since the 2002 Enterprise Act.
The aim of the reforms is to ensure that companies are given every possible opportunity to be restructured while also ensuring that, where a company is not viable, those in charge of the company act properly and fully discharge their responsibilities. The rights of the distressed company must be adequately balanced against the rights of its creditors and other stakeholders.
The proposed reforms include the introduction of a 28 day moratorium giving viable but financially distressed companies ‘breathing space’ and allowing them to instigate restructuring measures or seek new investment. The company’s directors would remain in control with the support of a supervising Monitor, likely to be an Insolvency Practitioner.
During the period in which the moratorium is in operation, creditors will be prevented from taking action against the company. Crucially, secured creditors may feel the greatest impact as, not only would they be unable to take enforcement action during this period, but in many cases, the costs incurred during the moratorium will be met by assets that would otherwise fall within the scope of their security. The proposed benefit for all creditors, however, is that early intervention is likely to enhance the prospects of meaningful recovery, leaving the company in a better financial state than would be the case without a moratorium.
Also of note for struggling companies and their suppliers, is the proposal that the termination clauses in contracts for supply of goods and services on the grounds triggered by the company’s entry into an insolvency process, will become unenforceable. This may have a significant impact on companies within certain industries and may ultimately increase the restructuring options available.
Other proposed reforms include the introduction of measures to strengthen transparency requirements around group structures and shareholder stewardship, and increased powers of insolvency practitioners in relation to the challenge of schemes designed to extract value from financially distressed companies at the expense of its creditors. Additionally the introduction of the power of the Insolvency Service to investigate directors of dissolved companies in a similar manner to the investigations into the conduct of directors of insolvent entities currently in place have also been proposed.
While the proposed reforms will undoubtedly have an effect on struggling companies and their directors, they are ultimately intended to strengthen the business environment, increase confidence and maintain the reputation of the UK as a fair, transparent and dependable place to do business.

For further information on the proposed reforms, please contact Rachel Foster or James Neill.

‘Bankruptcy Tourism’ – The End?

Posted on by Rory Moynagh

News has begun to surface in recent days that the Bankruptcy term in the Republic of Ireland (ROI) may be reduced from three years to one year, to bring Irish bankruptcy law into line with legislation in the UK.

The move for this legislative change is being pioneered by Labour Longford – Westmeath TD, Willie Penrose who has been a long standing critic of current Irish bankruptcy law.

Mr Penrose is reported as stating “This is critical, the current situation where it is three years bankruptcy here and one year north of the Border is rather silly and impractical”.

The less onerous duration in Northern Ireland has led to ‘Bankruptcy Tourism’ in recent years – referring to the practice of ROI residents travelling North to avail of the 12 month UK bankruptcy regime.

Although supported by the Labour party, the Dáil’s Department of Finance has previously opposed any such change, and failed to raise the issue in the Government’s mortgage arrears package earlier in the year.

The Minister for Justice, Frances Fitzgerald may be bringing the proposed legislation change to the Cabinet in the next number of weeks.

James Neill, Managing Director of HNH Group and a Licenced Insolvency Practioner, commented on the proposed change; “This is a potentially ground breaking development in bankruptcy law with a far-reaching impact across both the island of Ireland and UK. It is particularly pertinent when you consider the current stage of our recovering economies, both north and south of the border and has the potential to further stimulate recovery in Ireland”.

With the upcoming Irish general election in the spring of 2016 it will be interesting to see whether this potential legislation change will become a bi-partisan issue supported across the isle or whether it will become an election sticking point that parties will bump heads over.