Ray L Best

• Diploma in Financial Planning
• CF3 Financial Proctection

We were contacted by an accountant for assistance as one of his client companies had a problem: a young director had effectively merged his company with another business. The purchase price had been held over until the monies were available.

The problem was that difficulties in working practices had arisen between the two directors, and progressive ideas suggested by the young director were dismissed, and the company was not making any real progress.

The accountant suggested that I meet with him and the young director first, and then attend a further meeting with both directors. At the joint meeting, the older director became extremely belligerent, so I terminated the meeting.

The accountant and the young director both telephoned to apologise and suggested that any planning to resolve the differences between the directors be put off for a couple of years.

I disagreed, as did my associated tax adviser; we believed that providing they could persuade the elderly director to confirm that he would accept £237,000 for his shares and was willing to wait for his money for two months, we could reach an agreement. A combination of financial and tax planning would provide most of the cash required.
Agreement reached and all the appropriate papers signed, the other director was happy to resign.

Our planning began, and our first strategy was to provide a £300,000 pension contribution without using cash (this method of making a pension contribution was covered in the first feature article I wrote for Tax Adviser Magazine). This resulted in a £60,000 Corporation Tax saving.

The second planning strategy was to establish a flexible director’s pension scheme and transfer a variety of small pension pots totalling £108,000 into this. The total value of the flexible pension was now more than £400,000.

We were now able to transfer a commercial premises that the company owned into the flexible pension scheme. This was arranged on a part transfer part purchase arrangement, which allowed for the transfer of £90,000 in cash to the company’s bank account.

The outcome

The planning combination had achieved positive cashflow of £150,000, short of the £237,000 required to pay off the older director. The younger director arranged a personal loan to cover the balance and now owned 100% of the company.

Over the years ahead, the increasing profitability allowed the loan to be repaid. The company went from strength to strength and was eventually sold for several million pounds.

It was a perfect spring morning and my day off, so I was looking forward to a nice, relaxing day when the telephone rang. A Chartered accountant contact of mine wanted me to meet one of his business owner clients; it was rather urgent.

I asked him to send me copies of the full accounts for the past two years and agreed to meet the company at their premises the next day.

James introduced me to Karl and Julie. Their business was a niche within a niche, with employees in five different countries.

James stood up in his immaculate Saville Row suit and bright orange tie and explained that the business had grown considerably since it was started some seven years ago. He provided a very good outline of the business.

Julie, who was the driving force of the business, looked pale with a worried look about her. Karl, her husband, who was responsible for the computer system, was staring at me with his arms clasped together and frowning.

Holy smoke, James, tell Ray what the problem is!

The problem was that they had run out of cash and had no way of paying more wages. Their year-end was looming in just two months’ time, and looking at the projected profit and loss, they were going to need to pay a lot of Corporation Tax at some point.

By now I was feverishly writing notes, including how the directors paid themselves, and what the ongoing cash flow position was, as profitability was improving.

Once I had exhausted the questions about the company, I asked the directors about their personal financial arrangements. Like many entrepreneurs, they were exceptionally cautious about their domestic financial arrangements.

I asked if I could return in two days’ time as they needed to provide me with some further information, and I needed to carry out further research and speak to my tax advisory team.

The clients were very well-organised, and I had the outstanding information emailed to me the same day. This allowed me plenty of time to complete my preliminary report.

We established that the company could use a cash injection of £240,000, and that would be sufficient to pull it through its current difficulties.

One of their problems was that they had a very unhelpful year end, so I suggested that as soon as their year end was complete, they applied to change this to a more favourable date. It may sound like a trivial matter, but when you are engaged in planning your future, everything counts.

They were also paying themselves incorrectly, taking relatively high dividend payments, so that they could overpay their mortgage, which was not a sensible use of money.

I suggested that they re-arrange their mortgage on an interest-only basis, thereby raising the monies they desperately required now.

Even combined, these actions alone were not enough. Karl and Julie needed a systemised way of controlling the tax the company paid each year. They also needed a scheme that would allow them to provide emergency funding for the company should they run into difficulties again.

The outcome

Once we had implemented the planning and systems, the company did exceptionally well. The directors’ hard work and dedication paid off with a company that had a multi-million price tag.

We got in with a business we had carried out planning for some years before. They were fine, apparently, and didn’t need our services as they had been given advice by their accountant and his tax adviser.

We agreed to meet up and discuss what advice they had been given.

“We have set up an LLP,” they informed me.

I asked who the members of the LLP were.

They could not tell me straight away, so I asked where the LLP incorporation document was. They eventually found it – the members were the two of them.

And where is the financial planning report you have acted upon?

They produced a huge 200-plus page report. “What on earth is that?” I asked.

They explained their accountant had taken a film partnership report, overtyped some of the pages, and charged them £1,000. By now, I thought they might be winding me up, but they were serious.

I explained that to form an LLP requires a straightforward report, not the bundle of nonsense they had. I asked them to tell me more about the planning advice they had received.

They told me that their limited company had lent £750,000 to the LLP and that the LLP was buying machinery with the cash. The £750,000 was almost all spent now.

“I am not sure you have been advised correctly,” I responded. Rather than put my foot in it, I asked if they would allow me to contact my tax advisers and request they prepare a brief report at my expense.

A few days later, I contacted them again; “I am afraid you have a real problem.”

The tax adviser’s report confirmed my suspicions.

The loan they had made to the LLP needed to be repaid within five months. If they failed to do so, their limited company would face a tax penalty.

I informed them that they should not have lent the LLP any money. “You would have been better off arranging for the limited company to buy the machinery and leasing it to the LLP. If you had done so, then you would have been able to claim capital allowances worth £140,000,” I explained.

As they could not afford to repay the £750,000 by the due date, there was only one possibility of saving themselves from serious financial problems. They needed to instruct their current advisers to reincorporate the LLP, with their limited company as a member.

The outcome

Although their hapless advisers resisted, the clients insisted that they follow our advice. When I met the clients later, they informed me that we had saved them £280,000.