HMRC to cap certain tax reliefs

In an attempt to ensure that higher rate tax payers make a reasonable contribution to UK tax revenues, new legislation is to be introduced from 6 April 2013 that limits access to certain tax reliefs. Taxpayers will be denied relief(s) if the claim exceeds 25% of their income or £50,000, whichever is the greater.

This will not affect tax reliefs which are already capped such as Enterprise Investment Scheme and pension reliefs, but may affect “open-ended” reliefs such as interest relief on qualifying loans and gift aid relief. The Chancellor has said that he will consult to make sure that charities are not negatively affected by such a move.

Ironically, this may mean that tax planning opportunities available to 50% rate tax payers in 2012-13, may produce more tax savings than if applied, and capped, in 2013-14 when the top rate of tax is reduced to 45%.

50% tax rate payers therefore have one more fiscal year, 2012-13, to take advantage of certain, unlimited reliefs.


Form A Strategic Alliance

Looking for a smart way to grow your small business? A strategic alliance may be the answer. A strategic alliance is essentially an agreement, formal or informal, to combine efforts with another business. The project may range from leveraging better prices from suppliers by bulk buying to building a product together with each partner carrying out the part of the production process they are best set up for.

Just who might be a good candidate for a strategic alliance depends on what you want to achieve. Partnering with a key customer can cement the relationship and protect your custom with them.  Partnering with a firm that already has a well established brand offers the opportunity to become better known by association. Even partnering with a competitor to achieve specific strategic goals can be beneficial. Apart from the bulk buying type deal, it could involve working with them to win contracts that may be too large for you to handle by yourself.

The nature of many SMEs is that they are specialised in one area or another. That means your skills and knowledge will be most attractive as a strategic alliance partner to a business whose product or service you complement in some way. Relationships can be formed vertically (between supplier and manufacturer or between manufacturer and distributor) or horizontally (between similar firms in the same industry). They can operate at both the local and global level – forming an alliance is one way that SMEs can get started in overseas trade.

Whatever the nature of the alliance there are some rules for ensuring it works out to deliver the advantages you want from it.

Communication should be your foremost consideration. While it isn’t necessary that each member of a strategic alliance have exactly the same objectives, each should still be committed to a common outcome. To make sure that you and your alliance partner share similar goals it is important to be honest from the outset. That is, be frank about what you hope to achieve from the alliance and what you can provide to make sure your partner’s needs are met.

One of the most common mistakes is a failure to clearly lay out the details of the alliance from the beginning. The result of this failure can be significant – mismatched goals, insufficient commitment, and an inability to alter the alliance easily at a later stage. Especially important is defining where the alliance ends and competition begins.

When considering an alliance look for situations that will deliver strong benefits to both members. Only take part in an alliance when you think it will improve your business relationship with the other party overall, not just during the term of the arrangement. Alliances are only worthwhile if they represent a win/win situation for all parties involved.

For the SME entering into an alliance with a bigger firm there are other challenges.  Try to establish connections with several of the company’s members. This is important because, in a large firm, it is more likely that if one department is dealing with you others will be unaware of, or at least unfamiliar with, the alliance. It could destroy the value of the alliance to you if your key contact suddenly leaves or is moved to a different office.

Don’t get too locked into an alliance. The benefits deriving from an alliance can decline over the longer period as each organisation develops along its own strategic pathway or outside factors alter the situation. One type of alliance may have suited your goals at an earlier stage of the business’ development but have since lost relevance. Others may have proved to be too narrow and need to be widened to meet your continuing business needs.

Forming a strategic alliance is becoming a more and more common tactic for expanding the reach of an enterprise without committing to expensive internal expansions beyond its core business. For small businesses a strategic alliance may consist of no more than ‘bartering’ with customers, suppliers and even competitors. But the terms can go way beyond that and open up the possibility of allowing your business to share expertise, assets, expenses and risk with another business without necessarily incurring cash debt or trading away too much of your equity.

What is your business worth?

value of your businessIf you are planning to sell your business it’s clearly an advantage to have an objective idea of what it is worth. Remember though ultimately a business is worth what a buyer is willing to pay, it’s easy for a seller to undervalue and lose out in the deal, or to unrealistically overvalue and miss out on attracting buyers.

If you are contemplating selling, here are the ‘Golden Rules’ to follow:

Avoid making the first mark in the sand on the value of the business – it’s good negotiating tactics to let the potential buyer give you his indication first.

If you want to achieve the best price, it is extremely helpful to have more than one party interested in acquiring the business. This often means making some of your competitors aware that the business is for sale and giving them some confidential information, at first this might seem unthinkable and unacceptable – it is something you should talk to your advisers about.

The best price will be obtained if you can find a large company for whom your business has a ‘strategic fit’ with their future plans.

There are a number of different valuation methods and different methods may be appropriate for different types of business. For example, if you run a services business there’s little point in evaluating it based on the value of its physical assets. Other methods consider intangibles, such as goodwill, that are difficult to put a figure on but which can represent a significant element of the value of some businesses. And value may also be in the eye of the beholder – it will actually be worth different amounts to different people depending on their reason for wanting a business.

A variety of factors are taken into account in ensuring that a valuation is accurate and useful. Primarily, the valuation needs to be in line with hard data, particularly your current and past financial position. Some valuation methods focus on financial data such as profit levels, asset value, cash flow and debt carried by the business. Other factors are not so cut-and-dried. The valuation might incorporate financial projections for the next three to five years. It might consider intangible assets, such as intellectual property like patents and trademarks, brand names and goodwill. You also need to consider the context. Your own company may be doing very well but its value will be diminished if it is part of an industry that is in serious difficulty or in decline overall.

There are over a dozen different valuation methods. The crudest methods operate by rule-of-thumb or ‘multiples’. For example, landscape businesses are estimated to be worth 1 to 1.5 times their discretionary earnings plus the value of their capital assets. However, multiples only give a rough, industry wide ballpark figure for business value. They do not necessarily give the real value of a particular business. More accurate methods include the ‘balance sheet’ approach, which basically subtracts business liabilities from assets. The ‘adjusted book value’ method is similar but uses current market value rather than purchase price or depreciated value.

Retail and manufacturing businesses are generally assessed according to the value of their assets because they tend to store large amounts of value in their inventory or capital assets while service company valuation is based on the ‘capitalisation of income valuation’ method, which places a heavy emphasis on intangible assets. It’s also possible to calculate the value of a private company by comparing it with an equivalent public company and making appropriate adjustments. Business value can also be estimated by anticipating cash flow over a three to five year period and adjusting that into current pound terms.

A current valuation can be important at times other than sale. There are numerous business and legal situations that require a detailed valuation, among them: when considering a merger or acquisition; when seeking investment capital; when buying out a partner or implementing an employee stock ownership plan. A properly determined valuation inevitably enters into less pleasant activities such as shareholder disputes and divorce settlements also. Tax minimisation planning can involve business value, for example in developing estate plans and gift transfers.

A valuation can also indicate how your business compares to its direct competitors. If the value is below that of competitors it should be a prod to focus you on building more value into your business. This will improve your outlook in terms of succession and estate planning.

With this many potential situations requiring a business valuation it’s important to have an up-to-date professional estimate of the real value of your business. To get a valid and commercially useful valuation you will need to work closely with a professional who has experience in the area. Your accountant already has a good understanding of your business and will be able to advise you on which valuation method will be best suited to your business circumstances.