In the first of our regular LFR on the Money features, our Financial Editorial contributor Pankaj Patel takes a looks at Banks and Small Businesses. We have also included a downloadable summary of the 2012 Spring Budget in which Pankaj has carefully summarised the most relevant points.
Banks and the small businesses
Over the recent months, we have come across ever increasing pressure being levied by lending institutions i.e. banks, upon small and medium sized businesses (‘SME’s). There is certainly a very noticeable drive to reduce exposure to small businesses including those with sound cashflows and business forecasts. I am beginning to wonder, is there any SME that the banks will be agreeable to lend to, and the only scenarios I can envisage are where there is tremendous security in terms of bricks and mortar, personal guarantees and in all likelihood a sound business which actually does not require the loans!
These institutions are also very quick to seize upon the slightest of breaches in LTV or debt servicing covenants. The immediate reaction is for the banks to issue letters warning of the breach and to then invoke the clauses in the loan agreements without so much as having constructive meetings to assist the SME out of the predicament. The breaches, in our experience, are cynically being used to call in loans where the banks want to reduce their exposure or to raise margins as a means of profiteering from businesses that actually require guidance and assistance in trading through some of the most difficult times in living memory.
In a recent development, one lending institution, having written to the client for being in a temporary breach of the covenants, (which was since rectified by the client so that the LTV covenants were restored) then went so far as to inform the client that they would be taking a more entrepreneurial approach to safeguarding the loan security. They have proposed to the client that in order to retain the loan (and that also at a higher margin), the bank would share in the profits of the underlying freehold property held as security when this asset was eventually sold.
Quite how this would safeguard the banks current debt exposure is mystifying. Further, I am dumbfounded that the banks would even consider taking a commercial interest in the businesses to which they lend to.
My recent experience of dealing with banks I have to say is one of covering their own exposure to the fullest extent possible whilst forsaking the opportunity to assist the owners and managers of the SME which form the backbone of this country’s economic strength.
Budget 2012
The recent budget introduced several measures that will affect the SME. These changes should be taken into account when planning for your businesses over the next two years. I highlight some of these below.
Capital Allowances
The Annual Investment Allowance (‘AIA’) was an important incentive for SME’s to reinvest profits within their businesses. The tax break was significant such that for each £1 invested in qualifying expenditure up to £100,000, a deduction of £1 was achieved against profits; a great way to increase investment in the economy whilst at the same time being able to manage the tax liability of the company.
From 6th April 2012, the AIA investment limit has been reduced to £25,000. Unfortunately the Chancellor has removed the incentive for SME’s to reinvest in their businesses in a tax efficient manner and many will now search for alternatives to reduce the tax burden.
SME’s should consider leasing as opposed to purchasing assets for investment in order to secure a more advantageous tax treatment.
In my opinion, this was a generous incentive for reinvestment in the economy and it is a great shame that the tax break has been reduced so drastically.
Capping of income tax reliefs
The Chancellor is proposing to introduce a cap on the total amount of income tax relief that an individual can claim commencing as of 6th April 2013.
Further details are yet to emerge but it seems that an entrepreneur with one successful business generating high levels of profits, who invests in another business that generates a loss above the proposed limits will not be able to obtain tax relief. The proposal is to cap the relief at 25% of income on all uncapped income tax reliefs for anyone looking to claim more than £50,000 of such reliefs.
For an investing entrepreneur, part of the incentive in investing in a new business will also include the tax reliefs available to potentially mitigate any investment loss from a failed start-up. By reducing and capping such available reliefs, the Chancellor is stifling investment into the economy. Again, such a shame at a time when the economy requires a further stimulus of money to create jobs and opportunity.
National Loan Guarantee Scheme (‘NLGS’)
The Chancellor introduced the NLGS to assist SME’s in obtaining finance, an initiative to be welcomed with open arms given the great difficulty in obtaining funding at present times.
The threshold for businesses qualifying includes those groups of companies with turnovers up to £50million. In my opinion, this limit would be better served at lower levels of turnover of around £25million. This would ensure more of the funding would be targeted at SME’s who are in dire need of it.
Corporation Tax
The Chancellor continues to reduce the main rate of corporation tax which, for the financial year commencing 1st April 2012 will be 24% and then reduces to 23% and 22% for the subsequent years.
Whilst this is to be welcomed for inward investment into the UK for larger companies, there is no benefit for those SME’s whose profits are below the small companies threshold of £300,000.
I feel it would have helped the burden on SME’s to allow for some of the benefit in the reduction in corporation tax to be rolled into the small profits rate of 20%. Any reduction on this would have eased cashflows and helped these businesses to lessen the burden of the withdrawal of the AIA discussed above.
You can also download a full summary of the 2012 Spring Budget by clicking here.
Pankaj Patel is proprietor of PR Patel & Co, a firm of Chartered Accountants and Registered Auditors in North West London. The firm has always considered service to be one of their key strengths. At the core of the firm is an ethos of building long term client relationships, and to provide all the accountancy, audit and tax services that clients require. They work closely with their clients and offer a tailored service based on their experience and knowledge.
Pankaj Patel trained and qualified at one of the top four accounting firms. He started PR Patel & Co seventeen years ago, and has gained a wealth of knowledge in the SME market. The practice has grown and developed purely through referrals from satisfied clients, a number of whom are actively involved in the sign and wide format digital print market. Pankaj is happy to provide a free 1 hour consultation for a review of your business. For further details please contact Pankaj at pankaj@prpatel.co.uk
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