Hit the road Positive leadership for troubled times - ICAEW

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MAY 2012 CORPORATE FINANCIER FINANCE & MANAGEMENT From the Faculties CORPORATE FINANCIER COVER STORY Keep in touch with our selection from the ICAEW other faculty magazines ACQUIRED TASTE It’s one of the most quoted statistics in business: 80% of acquisitions fail to create value for shareholders. But new and comprehensive research by Cass Business School, carried out in the wake of Kraft’s hostile takeover of Cadbury, has highlighted positive aspects of M&A. By Marc Mullen I n September 2009, Kraft Foods made an indicative £10.2bn bid for Cadbury. With a UK general election just around the corner, the fact that Cadbury was a confectionary company with precious little strategic importance to UK plc did not negate the opportunity for political point scoring. Jobs were at stake and the hostile takeover, successfully completed for £11.5bn in February 2010, became the subject of chatter in the Westminster bubble. In June 2010, MP Vince Cable, one month into his role as Business Secretary in the newly-formed UK coalition government, spoke at the Cass Business School. He said, “Too many takeovers in the UK fail even by the limited criterion of shareholder value – and often with serious implications for the people who work for the firms on both sides. “For me this is not about foreign or domestic ownership – it draws no distinction between the two. It is not about protectionism or strategic industries. It is certainly not about protecting bad management by blocking takeovers. It is about changing the way in which unfettered short-term speculation can have damaging long-term consequences.” 16 17 AUDIT & BEYOND BE PREPARED The latter stages of any audit can be a fraught affair – for both auditors and clients. But in the Audit & Assurance Faculty’s external audit lecture in March, Chris Elliott from Mercia Group explained how a bit of enhanced preparation can make the process of “Wrapping up the audit” much easier. It starts with smart planning – including outlining the timetable for the key personnel and flagging up areas that have affected previous client audits. Getting the fieldwork right first time – which means sharp communication skills as much as it does attention to detail on site – is key. Auditors should also consider relevant standards as they go, rather than retrofitting the audit towards completion. Equally, testing management’s accounting estimates is better done as and when potential issues arise – often in the face of a team actively trying to avoid fleshing them out until near completion. Elliott had several other tips – but the overall message was to be ready for trip-wires, think about curing typical completion headaches along the way and constantly review performance to ensure lessons are learned for each subsequent audit. For more from the Audit & Assurance Faculty, visit icaew.com/aaf CORPORATE FINANCIER ACQUIRED TASTE It’s one of the most frequently quoted statistics in business: the majority of M&A deals fail to create value for shareholders or their businesses. Worse, they can be highly controversial: Kraft’s hostile takeover of Cadbury in 2010 became a national scandal. Cass Business School used that as a jumping-off point for a new piece of research into the value of M&A. And Corporate Financier also asked seven leading figures in national business how they looked at the thrill of the deal. Cass saw pros and cons. Domestic M&A activity comes out relatively well in terms of shareholder value; deals tend to boost employment; and sensible ones bump an acquirer’s share price. But long term, the picture is murkier, and it’s hard to stand up the claim that deals contribute to overall economic activity. Post-deal integration, as expected, remains a tough sell, too. The views of CF’s vox pops are similarly mixed – although, again, they mostly point out that deals with a lot of research and post-merger planning do best. Sample? “M&A can get overly complex,” admits MITIE CEO Ruby McGregor-Smith CBE. “More needs to be done to weed out bids that are based solely on extracting value… by cutting workforce, pensions and terms and conditions,” says TUC general secretary Brendan Barber. For more from the Corporate Finance Faculty, visit icaew.com/cff TAXLINE LET ME ENTERTAIN YOU… Forget pasty-gate: VAT – and tax generally – on food and drink (especially when it comes to expenses) has always been a bit of a nightmare. For example you can’t make an input tax deduction for client sustenance (which comes under “hospitality”) unless the client is an overseas customer. The key point is whether an employee incurred an expense “acting as a host” – in which case input tax is blocked. But if the employee is buying lunch just because they’re away from the office on business, input tax can be claimed – just as it can be for their hotel accommodation, a Christmas lunch or a meal rewarding a team for good performance. It gets more confusing when events are mixed – a box at the football, say, half to reward employees and half to entertain clients. That would mean 50% of input taxes are blocked – unless the employees are also wining and dining the clients, which would make them “hosts”. Even more complex rules apply to subsistence for business owners. And 2011 legislation changing the rules on claiming input tax for entertaining overseas customers also allows businesses to make claims backdated four years. But beware: the output tax effects are also nightmarishly complex. And then there are the subcontractor rules… For more from the Tax Faculty, visit icaew. com/taxfac 28 MAY 2012 FINANCE & MANAGEMENT
TECHNICAL Technical updates Our regular round-up of legal and regulatory changes TAX News and updates from the Tax Faculty weekly newswire. Subscribe free: visit ion.icaew. com/TaxFaculty and click the sign-up link on the right. FINANCE BILL 2013 CONSULTATIONS The Tax Faculty is maintaining a list of the many consultations announced in the 2012 budget for inclusion in the Finance Bill 2013 (FB 2013) at icaew.com/ consultFB2012. One of particular interest to business relates to research and development. The consultation is on the design of an above-the-line R&D tax credit for large businesses to be introduced from April 2013. The rate will be 9.1%, as announced in Budget 2012. The consultation is at snipurl.com/ ATLcredit and you can submit responses to Tim Power at ATL. credit@hmtreasury.gsi.gov.uk by 29 June 2012, or via Ian Young at the Faculty. Separately, HMRC is in the process of publishing additional documents supporting other consultations for FB2013, including: Transfer of assets abroad and gains on assets held by foreign companies. Information powers to enable compliance with the US FATCA (Foreign Account Tax Compliance Act). This will be done in conjunction with France, Germany, Italy and Spain and with the financial institutions that are covered by FATCA. Real Time Information – including PAYE late payment and filing penalties. Capital gains rules where companies use a non-sterling functional currency – consultation on simplification of the rules. Corporation tax reliefs for the creative sector. These consultations will be updated periodically in HMT’s own tracker, visit hm-treasury. gov.uk/tax_updates.htm. P35 PENALTIES: THE DETAIL Earlier in the spring HMRC announced significant improvements to the P35 employers end-of-year return process. The changes represent the first fruit of the joint initiative between HMRC, ICAEW and other tax professional bodies and charities launched late last year. HMRC has now clarified the detail of the changes: It will change the date when it issues the “Notification to complete form P35 Employer Annual Return 2011/12” from mid-February to mid-March 2012, so employers will receive it much nearer to the end of the tax year. From 28 April 2012, where it believes a 2011/12 P35 remains outstanding, it will issue an “Employer Annual Return Reminder”. From 31 May 2012, it will introduce a “P35 Interim Penalty Letter” which will be issued over a five-day period, so that it reaches employers within a month of the filing deadline. The letter will state that the employer has incurred a late return penalty and explain what to do to avoid it increasing. Improve the online guidance for submitting P35s online, including specific advice about the test-in-live service. The on-screen messages will also make it much clearer that even when a successful test transmission has been made, a live transmission is still required. We would encourage those using commercial payroll software (where the text of test/ live messages may vary) to sign up for HMRC’s email alert facility to help them avoid this problem. Instruct Employer Helpline staff to tell employers about filing dates when setting up new employer schemes, to help them avoid a penalty. For next year, improve the information on the P35 and the reminders to include a warning that the first penalty notice will cover four months. “Taken together, these measures should help employers to avoid incurring unnecessary penalties and significantly reduce the number of cases where penalties in excess of £100 are charged,” explained HMRC. TAX RATES AND FILING As announced in the Budget, corporation tax will fall this year by an additional 1% and further decrease by 1% a year until it reaches 22% from April 2014. The small profits rate remains at 20%. Readers may recall the difficulties companies had filing some corporation tax returns last year. This followed the Chancellor’s surprise amendment to the expected rate of corporation tax for the financial year 2011, announced in his 2011 Budget statement. Companies with years ended after 31 March 2011 were unable to file returns until HMRC had updated its computer system for the 26% main rate (we had expected it to be 27%). This meant waiting until October 2011 to file returns online. This time, HMRC prepared a work-around in case a surprise rate change happened again – as it has. The Tax Faculty was told that the necessary changes should be implemented by July 2012. This will mean a short delay for some companies, which like to file soon after their year ends, but it is unavoidable. The risks of fiddling with the IT system without considerable testing are just too great. Expect further updates in the Tax Faculty weekly newswire. FINANCE & MANAGEMENT MAY 2012 29
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