Author Archives: Larry Phillips - Consultant

Preparing your business to succeed in 2021 and beyond is a very big topic and raises many commercial, legal and tax questions around the areas of; workforce, workplace, having the right structure, making commercial relationships work given the new challenges and the management of change.

Preparing to Succeed in 2021 and beyond: Commercial, legal and tax questions from British businesses

Larry Phillips - Consultant - lphillips@goodmanjones.com

Posted on 25th January 2021

Categories:

• Business Tax
• Tax
• UK Business & Entrepreneurs

Preparing your business to succeed in 2021 and beyond is a very big topic and raises many commercial, legal and tax questions around the areas of;

• workforce.
• workplace.
• having the right structure.
• making commercial relationships work given the new challenges.
• the management of change.

The following summarises many of those specific questions. These formed the basis of an event that we ran in conjunction with BDB Pitmans who can advise on the legal issues raised. A video of the full event can be found at the end of this post.

Workforce

Have staff gained new employment rights during the pandemic?

The answer is “No”; but many employees think they have, and they are using existing rights in different ways.
Key areas to watch at this time are:

• Flexible working rights
• Furlough and misconceptions about rights
• Health & Safety: you have not looked after my health and safety in the office or in travelling to work or at home
• The whole piece around “selection” (e.g. for a change in working conditions: for a pay cut: for changed working hours: selection to go on furlough: selection for redundancy).
• Whistleblowing
• Employers create a Business Case for any decisions taken at this time.

Are all staff entitled to work flexibly now?

Again the answer is “No”; but many employees think they are entitled because they have proven they can work at home.
Key points:

• Flexible work is about more than homeworking; but home-v-office work is the main focus at present
• Ultimately this is the employer’s choice
• Formal Flexible Working Requests have not gone away, and are difficult for employees to achieve.
• Big link to other areas such as childcare, maternity, illness, shielding, caring for others
• Businesses need to conduct assessments of what they need in terms of office work.
• Old pre Covid assessments will be invalid now, and current ones will need to be done again post Covid
• There is an inevitable balance for employers now though as staff expectations have changed.

Now that staff are working remotely, what are the issues?

• Employment taxes are dependent on where employees carry out their duties and not necessarily where the business is based. If your staff are working remotely make sure you know where they are physically located as this could affect their tax liability as individuals and your obligations as an employer.
• Pay rates vary significantly depending on location. Consider whether it is appropriate to renegotiate rates if employees want to continue to work remotely or flexibly.
• Devolved taxes mean that employees in the UK could be paying different tax rates depending on where in the UK they are located.
• There is a lot of talk about reducing salaries to match reduced travel costs and work location
• This would still need employee consent, backed by an employer Business Case
• Employers choice, but must have strong Business Case, and must be clear on what the “base” of work is
• Most businesses are still working on an office base with temporary home working
• Moving to permanent homeworking is a completely different legal and Health & Safety risk assessment animal

Do I need to update employment contracts to reflect e.g. need to declare location?

• This depends on whether you are changing the “base”
• Another question was “my employees may be working 60% of time at home; what does this mean for our contracts”. There will need to be some sort of certainty / policy to rely upon, but it is possible for the contractual base to remain in the office with flexibility away from that amounting to 60% at home.

I have some staff who have chosen to work from a different jurisdiction. What will that mean going forward?

• Individuals temporarily working overseas for periods of less than 6 months will usually remain taxable in their home country. However, UK businesses may still have employment tax filing obligations in the overseas jurisdiction despite the employee only working there for a short period.
• If you agree to your staff working remotely from a different jurisdiction make sure you know what employment tax obligations that will impose on your business in that country.
• Be aware that staff working in a different country could create a permanent establishment for your business in that country which in turn could mean you have business profits tax liabilities there as well as employment tax obligations.
• Staff are not entitled to “choose” to work abroad. If they are working abroad, employers need detailed clarity on who they are working for (e.g. UK employer but posted to France is very different to moving to be employed by a French subsidiary)
• Productive activities within a country’s borders could lead to a profits tax presence for the employer in that country and we are noticing that organisations which are allowing staff to work overseas might be incorporating companies in that country to employ that person and to isolate the tax on the profits that the individuals are generating. VAT registrations might be required.
• Different countries have different salary levels and tax rates. Salary equalisation allows the employer to consider the appropriate level of remuneration for the work in the overseas country and the tax rates applicable to that employment. This would be to prevent an individual being unduly enriched by moving to a country with a low-cost base and/or low tax rates whilst retaining a UK level of salary.

What can I do to look after key staff when cash flow is so uncertain?

• Share option planning is a valuable tool for incentivising key management. Enterprise Management Incentive (EMI) is an HMRC approved share option scheme for trading ventures. It comes with several valuable tax breaks for both the employee and the employer. It is flexible and can be used for selected employees with performance targets and time frames to achieve them. Often it is “exit only” which means that the employee is incentivised to grow the business for sale. They participate in the sale at low tax rates.
• The UK tax system differentiates between trading and investment companies. Often a demerger is undertaken prior to share option planning to separate out the division or activity in which management have a direct responsibility to ensure that a management package is directly related to the activities that they can control, and they do not indirectly participate on external factors such as increased in commercial property values. A demerger might also be necessary to ensure that the options are issued in a group which is “trading” per the tax definition.

Workplace 2021

Why do I have to continue paying rent and service charge for a building that I can’t use?

• Unfortunately for tenants rent remains an ongoing liability as the current circumstances do not fall within any inured loss of rent provision. The Coronavirus legislation only served to postpone matters by preventing landlords from talking action to forfeit the lease or seek orders for bankruptcy or winding up – it did nothing to reduce the underlying liability.
• In practice this has been an area for negotiation between landlords and tenants with many landlords granting some form of rent holiday even if that rental liability was rolled up and applied across successive rent periods or added by way of an additional lease term
• Service charge is a reimbursement of costs incurred and these should be reduced where the Landlord is providing fewer services due to a lack of occupation. Note however that there may be additional costs incurred in putting in place safeguarding for office attendance.
• Tenants should have an open conversation with landlords to explain the impact upon their business and cash flow and explore terms that can be agreed in return for rent and service charge concessions such as the removal of a break right, agreeing a rent review upfront or committing to additional lease term if there will be a an ongoing requirement for space

My property requirement has changed but I have an ongoing lease: what are my exit routes?

• In the absence of an imminent term expiry or break right there are essentially three routes out of a lease assignment, underletting or a negotiated surrender.
• The first point to check is whether you lease permits assignment or underletting. Most market rented commercial leases will provide some ability to dispose of your lease/ occupation in this way.
• Where permitted an assignment or underletting will require landlord’s consent in most cases and you will need to check the terms of your lease as to the terms that are required and the conditions for consent.
• An assignment is a cleaner break for a tenant as an incoming tenant will take its place in being directly liable to the landlord. In the case of an underletting the tenant remains liable to the landlord but mitigates its liability by passing on that liability to the undertenant.
• Where there is no ability to assign or underlet the parties will have to agree terms for a surrender if the Landlord is minded to accept the same. The default position is that the Tenant is liable for the rent for the remainder of the term and it will therefore be a question of negotiation as to what the landlord will require by way of reverse premium to allow the tenant to exit the lease balanced against its ability to re-let the property.
• One must differentiate between leases of less than 50 years from those of more than 50 years. Tax considerations for exit strategies differ. As well as considering the tax profile of an exit strategy one should also consider the accounting treatment. This would be to ensure that balance sheets are not eroded by recognition of property losses or conversely to allow acceleration of tax relief due to accounting for onerous leases.
• If premiums are paid to landlords, the tax treatment of the landlord should be understood whilst negotiating the exit as different exit strategies will have a different impact on the landlord.
• One must differentiate between leases of less than 50 years from those of more than 50 years. Tax considerations for exit strategies differ. As well as considering the tax profile of an exit strategy one should also consider the accounting treatment. This would be to ensure that balance sheets are not eroded by recognition of property losses or conversely to allow acceleration of tax relief due to accounting for onerous leases.
• If premiums are paid to landlords, the tax treatment of the landlord should be understood whilst negotiating the exit as different exit strategies will have a different impact on the landlord.

I still need an office but how can I future proof my business given the changing requirements for staff and occupation?

• Tenants should provide for flexibility in assigning , underletting and sharing occupation of their property. They should also consider being able to underlet or share part of the premises if they find that the space or cost is too great
• If you are taking space over more than one floor consider taking the floors in separate leases to increase flexibility
• We are starting to see some landlords accepting “Covid Notices” whereby in times of lockdown or significant restriction there is a reduction in rent although this is more common in retail leases – as is the concept of a base rent with a percentage turnover top up.
• Take shorter leases or leases with more frequent breaks – the market has moved in terms of landlord expectations

I own the building, what can I do to protect myself from falling demand?

• There will be different treatments for conversion from commercial to residential when the property is to be retained compared to conversions for a sale. The tax legislation tends to provide better tax incentives for trading operations than investment activities. VAT planning is key here.
• The recent planning law changes have created a much wider Class E commercial use class so that there are more options in terms of the type of occupier that you can market to.
• There is also the prospect of converting from commercial use to residential use under permitted development rights but you will need to check with your local planning authority as to whether those permitted rights have been disapplied.
• There will be different treatments for conversion from commercial to residential when the property is to be retained compared to conversions for a sale. The tax legislation tends to provide better tax incentives for trading operations than investment activities. VAT planning is key here.

Structuring for the future

What can I do to protect the strong parts of the business?

• The demerger legislation allows different parts of a business to be separated into new structures. The demerger legislation is flexible and allows for continuity of ownership of the separate activities or alternatively allow different activities to be taken forward under different ownership. The latter is often seen most frequently if different activities require different skill sets as it allows management with the appropriate skill set to take “their” business forward independently of the others.
• There are two mechanisms used to implement a demerger with the appropriate mechanism being dependent on the facts of the particular case.

We are considering an exit in 2021/22 – what are the key areas we should consider?

• We recommend you undertake due diligence on your business – what would a potential buyer notice? Think about the position of (i) your key customer/ supplier agreements (ii) your intellectual property/ brand protection (iii) your employees and (iv) real estate.
• Consider whether all of your shareholders are on board with a sale, will you need to persuade any minority interests or option holders?
• Do you need to undertake any succession planning pre-exit?
• The valuation of the business is key, but the last 12/24 months may not accurately reflect your business. You need advice early on so that you can structure the sale to overcome this potential hurdle.

Is now the right time to hand the business down to the next generation?

• The right time for succession planning depends on the family and all families are different. In the current economic climate property values and company values could be argued to be depressed and therefore succession planning can be more efficient at this time.
• Many entrepreneurs do not have dedicated pension pots as they often think of their business as their pension. The entrepreneur should consider the income on which they will live after a gift and this might require pre-gifting planning to allow them to retain an income generating asset. For example, a manufacturing concern which owns a freehold factory may be subject to a demerger with the older generation retaining the freehold factory to generate rental income form the business (akin to a pension) whilst gifting the trading activities to the new generation.
• Some individuals feel that the current climate is a good time to gift as they feel that they do not wish to learn the new skills that inevitably will be required into the future.

Commercial Relationships

Covid has made some of my commercial relationships simply impossible. What can I do?

• Review the terms of your commercial contracts to identify whether there is a mechanism to address the problem. Is there a right to (i) terminate for convenience (on notice) (ii) terminate on the basis of a force majeure provision (iii) terminate on another basis.
• Even if the contract does not provide you with a clear answer, we are seeing clients successfully re-negotiate existing contracts with counter-parties on the basis that the counter-party wants to maintain a long term trading relationship in these uncertain times.
• You do have a commercial relationship with HMRC. Talk to them early if you need time to pay. It is much easier to agree terms with them in advance of a payment becoming due.

Managing Positive Change

How do you effect positive change?

• Focus on positive opportunities
• Be transparent to gain trust of staff
• Employers have scope to change
• A Business Case to support the need for change is vital – take advice on it from the standpoints of commercial, legal, and tax perspective
• Present it to and share it with staff. Take their views before deciding your course of action
• A good Business Case can cut through all later challenges: without it you can get backed in to a corner and “lose the dressing room”. With it you can gain trust and “buy in”.

Watch the full event

If you would like to talk through these or any other issues you have please get in touch with me, Graeme Blair or Richard Verge at Goodman Jones. BDB Pitmans or your own lawyer will be able to advise on the legal perspective.

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