What is your Accountant talking to you about? We talk with the owners of businesses of all shapes and sizes, in all stages of development, and across a wide range of industries. It is quite remarkable the similarities between what they all want from their professional advisors. Perhaps unsurprisingly, that is ADVICE!
Many of the potential clients we meet with are frustrated that their current Accountants, or Lawyers or any other professional advisors, are too passive in their relationship with them. Whilst these firms often know the right answers, they are waiting for the clients to ask the right question. Of course the problem with that is that clients don’t always know the right question, are too busy to ask it, or are unaware that there is even an issue on which they should be advised.
Let’s consider one of the most common issues where we see accountants being passive, and where clients are unaware of the issue or options…
Business Structures
The vast majority of businesses we encounter are operating as a single standalone limited company. That company trades with customers, collects debts, employs people, has accounts with suppliers etc. It may also own property, intellectual property, plant and equipment or even have large cash reserves. If there was a catastrophe in this business and it did not survive, any accumulated value over many years of trading may be lost to all those creditors that want to get paid. Unpaid Corporation Tax, VAT and PAYE all trump the owners decades of blood sweat and tears!
If that business had a two tier structure with a holding company sitting on top of the trading business, then the valuable assets can be owned in the top company, leaving all of the day to day trading risk in the subsidiary. A catastrophe may still happen, but creditors of the trading business should be unable to access the accumulated value held in the holding company if it is run in the right way.
Of course no business starts expecting to fail, and most businesses believe they are in good shape and well run, so a catastrophe is a remote possibility. If we learned anything from Covid, it is that all businesses are at the mercy of factors completely outside of their control. A pandemic may be extreme, but recessions come around most decades, technology and regulatory changes can turn successful businesses on their head in a blink.
So what are these core issues on our regular agenda to discuss with clients?
The mitigation of risk.
As explained above, the ring fencing of commercial risk into one or more trading entities, away from any accumulated value (Property, cash, assets, IP etc) placed in a holding company, is a key focus. Making sure value is moved up each year in the right way, and that any new, high risk activities are in a separate subsidiary, are reviewed at least once a year.
We also discuss the building of personal wealth outside of the business structure, in pensions for example, or in property, paying off personal debt or just putting money in savings and investments.
The key point is that businesses fail for a variety of reasons, and protecting against the consequences of failure are an important part of the Accountants role. Are you clear on the risks for your business and personal wealth and what you can do to reduce them?
Tax minimisation.
Most clients are happy to pay tax, but don’t want to pay any more than they should, and need to manage the cash flow impact of any payments. Whilst HMRC can directly challenge any transaction where the purpose is to save tax, it is perfectly OK for a business to plan all of the important strategic issues with a clear understanding of the tax impact (positive and negative) of any actions. If the right business decision also reduces tax, that is perfectly acceptable. The key is therefore to ensure that tax is merely a consequence of those commercial decisions, not the driver of them.
In the past decade or so, there has been a significant shift in HMRC’s approach to a wide range of tax issues. They have become much more aggressive in their approach, and challenge many more situations than they have in the past. In fact the last budget included changes that mean advisors caught promoting tax evasion schemes can now go to jail!
What this means is that there has been a polarisation of firms giving tax advice. The vast majority no longer provide any form of tax advisory services, only completing basic tax compliance roles such as PAYE, VAT returns and Self-assessment Tax returns.
That leaves a much smaller number of firms with the in-house skills and experience to understand the more complex tax issues and to offer advice on how to deal with them. As explained above, tax planning must be driven by commercial factors to stand up to scrutiny, so even some good tax advisors my find themselves unable to provide the crucial element of business and commercial advice needed as part of any strategy.
There are also a few areas where tax savings are driven simply by the correct application of the rules. A good example is the Stamp Duty on property transactions. We see many property sales where the SDLT has been calculated incorrectly and missed an important relief that is clearly available within the rules. If the advising firm doesn’t have the expertise or experience to know these complex rules, clients pay too much.
Perhaps one of the most common criticisms we hear from potential clients is that they think their accountant may be secretly working from HMRC! We are very clear that we work for the client, but part of that role is to ensure any tax advice is driven by commercial motives and would stand up to HMRC review. An increasingly challenging situation!
Long term wealth strategy.
This is perhaps the area we see most clients being under advised, and where few business owners pay enough attention to the end game.
Are they building a business to be sold? If so who will buy it, what will drive that value, and is it structured to make a sale easy and tax efficient? If the plan is not to sell a business, how will profits be effectively extracted to build personal wealth for eventual retirement?
Making sure any decisions made on a day to day or month to month basis fit with your own future plans, requires much greater clarity on what those plans are. Whilst we cannot have a crystal ball to see the future, a planned strategy will beat a ‘heads down full steam ahead’ approach every time.
What we saw from Covid was a great many business owners that reassessed their future. Before Covid they were doing OK, making money, enjoying a relatively easy ride in a stable economy, but Covid pushed many to exit in some way or another. For some however, they were simply not in a good place to retire as their hadn’t built enough retirement funds, or the business was hugely reliant on them to turn up to work, or there were some important issues to fix before a buyer would even be interested in looking at it.
Working with clients to develop a clear strategy for the future is crucial. That may be recognising that the business is not saleable, in which case the plan must be to drive profits to build wealth outside of the business so it can simply be closed down when the right time comes. It could be grooming it for a future sale or developing plans to hand over to key management or family. There is almost a unique solution for every single client. That is a balance of what the client wants, what options are practical, and the realism of the financial and economic issues at the time.
The critical thing for any advisor is to help clients to take stock, consider their plans and ambitions, and then to ensure all decisions are taking them closer to that future plan. Sometimes we are just a catalyst to clients thinking, sometimes we are the challenge and voice of reasons, and sometimes we are the driving force to get clients to make the time to plan for the future. This is not a passive role, and clients need advisors that have the commercial understanding and business experience to help them get it right.
If you think your advisor isn’t delivering on this key issue, find a new one.
The business world never gets any simpler. Clients need advisors that prompt on key issues, understand the balance between tax, commercial issues, risk management and many other key elements. If you think your Accountants are not talking about the right things to you, give us a call.
At the very least, make sure Risk, Tax and Long term strategy are on your agenda more often!
To discover a little more about who we are and what we can do for you, take a look at Our Impact page.
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