Author Archives: Matthew Cook - Partner

About Matthew Cook - Partner

T +44 (0)20 7874 8870

Matt is experienced in helping companies that are looking to grow. Specifically, he has been working with a number of companies assisting with the development of their management accounting and reporting for internal management control and also banks and external funders. In particular, Matt has worked with a number of property and construction clients where his detailed understanding of project accounting has added significant value.

As every property developer knows, development projects have never been a favoured investment among funders – especially mainstream banks.

Investors tend to see property developments as high-risk options, as the asset they’re being asked to lend against doesn’t yet exist. And in the post-recession climate, and the unpredictable times we find ourselves in, they seem more reluctant than ever to finance them.

In this context, the slightest cause for concern can be enough to discourage funders from taking on property risk. Developers must therefore guard against giving them any excuse to say no.

In my experience, less-than-adequate project accounting can be one such excuse.

Robust project accounting allows a development’s stakeholders to monitor the financial health of the work in progress. Without the transparency it brings, any problems with a scheme could go unnoticed until they cause serious financial damage to the project.

That’s why investors will often insist on seeing evidence of good project accounting before deciding whether to fund a development.

Benefits

Effective project accounting drives several important benefits for property developments.

Firstly, it joins the dots between operations and financial control. It connects the quantity surveyors and project managers on the frontline, with the accountants who report on the development’s financial performance.

It also accurately forecasts and monitors cash-flow and profitability over the course of the development. This provides stakeholders with crucial, up-to-date intelligence on the scheme’s financial situation, and helps prevent any unexpected shortfalls from occurring.

Finally, by ensuring smooth financial performance, sound project accounting keeps funding flowing into the development. And it puts developers in a better light when looking to fund future projects.

Best practice

So how can developers go about ensuring their project accounting is up to the mark? I believe a robust process depends on three vital elements:

1. Forecasting
2. Reporting
3. Timelines

Let’s look at each of these aspects in turn.

1. Forecasting

Project accounting can only be as effective as the forecasts it is based on.

The first step is therefore to create a reliable financial forecast for the development, based on a well set-out project appraisal, accurate costings and, importantly, the right level of detail.

Too little forecast data restricts transparency, and risks introducing inaccuracies. Yet too much will be incomprehensible to stakeholders, also harming transparency. And it will take too long to compile.

2. Reporting

With the forecast in place, actual financial performance data needs to be reconciled against it each month. The aim should be to expose any differences, understand their impact, and identify their cause.

As with the forecast, monthly reports must be presented in a way that can be easily understood and interpreted by a wide range of stakeholders. These include site managers, the board, investors, and so on.

The monthly reports should be discussed by the senior management team. It’s their job to act decisively to address any major variations from the forecast as the project progresses.

Between reports, any unforeseen changes must immediately be reported to stakeholders, along with their implications for the project’s financial situation. Such changes might include construction delays, cost increases, disputes or significant currency movements.

3. Timelines

The key to keeping project accounting on track is to lay down – and keep to – strict deadlines for three key milestones:

1. data to be provided by site surveyors and project managers
2. invoices to be received and input into the accounts
3. monthly management reports to be compiled and distributed to stakeholders

Technical support

Project accounting for property developments is a complex exercise. Getting it right will require input from financial experts with deep experience in the technicalities of the property and construction sectors.

Skilled project accountants will produce clear and accurate management reports that can inform strategic decisions, and of course, satisfy lenders’ demands for transparency. They will also know how to make sense of the numbers, and discern what they mean for a project – and for the business behind it.

Please get in touch if you’d like to discuss project accounting for your property developments.

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FOC OP

The Future of Construction report published by Raconteur Media in this week’s (Sunday 27 March 2016) Sunday Times, highlighted the forecasts for the global construction sector growth of more than 70% by 2025 and underline what opportunities there are to be had by those businesses operating in and alongside it.

What is particularly good to see is the role that British businesses are playing in that and their role in the innovations that are being brought to the sector.  See the article on Ten ways we are changing the way we build.  With so many ways that the sector is adapting, many driven by use of new technologies, but not all, there are great opportunities for businesses to improve site efficiencies and processes.

We have seen this with several of our own construction clients and would urge others to remember that their investment in improving processes and developing new solutions for customers could well qualify for an R&D tax credit.

Download a pdf of The Future of Construction report here

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Many construction business owners are missing out on valuable tax breaks because they are under the misapprehension that Research & Development (R&D) tax relief only applies to those conducting formal research, such as pharmaceutical companies.

Any construction company undertaking some form of innovation may qualify for R&D relief.  This is much more common than is often thought, with construction companies often coming across a problem and developing a new or unique solution to overcome it.  If you have an employee who is a problem solver, for example, one would expect to have a claim and the cost of an employee can be considerable.

Is it worth it?

If you are an SME  (Small and Medium-sized Enterprise – fewer than 500 employees and either turnover of  up to €100m, or gross assets of  up to €86m) you benefit from an enhanced rate of R&D relief. A profit-making SME can claim an additional deduction of 130 per cent of the R&D spend.

For year ending 31 March 2016 – the effective tax saving is 26% of R&D spend

Graphic 1

There are separate rules for larger companies.  They are restricted to claiming an additional deduction of 30 per cent of the R&D spend.

For year ending 31 March 2016 – the effective tax saving is 6% of R&D spend

Graphic Large

What if we’re not making a profit?

Even loss-making companies may be able to access cash back, which will be particularly welcome by start-ups or those needing cash to fund development.

SMEs can convert 230 per cent of R&D spend into tax credits at a rate of 14.5 per cent and receive cash.

For year ending 31 March 2016 – the effective tax saving is up to 33.35% of R&D spend

Graphic SME Loss

For a large company using the R&D Expenditure Credit scheme, a taxable receipt of 11 per cent of the R&D spend is granted.

For year ending 31 March 2016 – the effective tax saving is up to 8.80% of R&D spend

gj-large-companies-loss-making

Red tape?

There are time restrictions, so businesses should not delay in finding out whether they might qualify for R&D relief.

Claims must be made within two years of the end of an accounting period but it is possible to go back and amend a tax return to include a claim.  So if you submitted a tax return for the year ended 31 December 2014, you have until 31 December 2016 to go back and make a claim.

The claim is a relatively straightforward process, involving explaining what you did in writing and putting the costs against it before the claim figures are included in the computations.

Well worth it

We have guided a number of our clients in the property and construction sector through this and we were all delighted when we saw how quickly HMRC accepted the claims and in certain instances repaid substantial amounts of tax.

 

 

 

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Following David Cameron’s “surprise” announcement at the Conservative annual conference a few days ago, the government have today officially launched Help to Buy Part 2. help-to-buy-logo-jpg

Help to Buy Part 2 in simple terms is where a purchaser can buy a property with a just a 5% deposit with the lender purchasing a guarantee from the government covering up to 15% of the value of the property. This reduces the risk to lenders and in theory should increase their willingness to lend to those with smaller deposits at more competitive rates. The scheme is available to both first time buyers and existing home owners buying either a new build or an older property up to the value of £600,000.

I say “surprise” announcement as this all looks quite planned! From today you are able to apply for a mortgage under the scheme from one of the banks currently offering Help to Buy mortgages. Mortgages will only be guaranteed from January 2014, the original launch date advertised. It should be highly unlikely that someone completes in November or December 2013 then defaults before January 2014!

One interesting point to come out of the detail is the fee the government is receiving from the lenders (which effectively will be passed on to the borrowers). The lenders will be charged a fee of up to 0.9% on the total mortgage amount. 0.9% of the £130bn of mortgages expected to be in the scheme is over £1bn for the government – assuming no pay-outs of course! A nice immediate cash windfall!

£12bn of mortgage guarantees has been made available by the government. How popular will the scheme be? Rightmove have announced statistics from their website since Cameron made his announcement that imply huge interest. The doubters are saying this will cause a huge property bubble problem and will be difficult to withdraw. Others are saying availability and the fees charged can be adjusted to keep the scheme under control.

As always, we will wait to see the overall effect on the housing market over the next few years!

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In the last budget, the Government released details of their new ‘flagship’ property scheme named ‘Help to Buy’ that they are pinning their hopes on to give the economy a much needed boost.

The first stage of this scheme which has been available since 1 April 2013 is to assist anyone buying a new build home. First time buyers and home movers are eligible to buy a property up to the value of £600,000 only requiring a 5% deposit. 75% is funded by a mortgage which leaves 20% paid by the government through an equity loan. The big plus point – the government loan is FREE for 5 years. Even after that there is only a 1.75% annual fee rising each year by RPI. Very cheap even compared to current mortgage rates.

Latest reports indicate that the scheme is taking off and interest has been “huge”. Hardly surprising really given the availability and minimal restrictions.

The scheme has recently received a lot of bad press with one leading commentator even going so far as branding it one of the “most stupid economic ideas” of the past 30 years. Even the departing Mervin King has thrown in his concerns stating the measure must be temporary.

Ignoring the negatives for the moment and concentrating on the potential positives:

  1. There is no doubt this will give the property market a boost and will benefit property developers in a big way. This in turn will free up cash and should help the developers to build more properties. Maybe this will help with the supply problem? If so, presumably supply will balance off with the demand and prices will not over inflate.
  2. Furthermore, increased activity from the developers will feed down to all their subcontractors and suppliers – which must be a good thing to assist job supply.
  3. Gardeners, cleaners, decorators, plumbers, electricians etc are all used more by purchasers of property. Not to mention all the new furniture, garden equipment, tools, computers, kitchen appliances etc that need to be bought. All this again will help the economy.
  4. The asset is in the UK and it is a significant asset!!! At least money is not being sent out of the country and all related purchases can circulate and benefit the UK economy.

This is all just the start. From January 2014, the second part of the scheme will kick in which will be available on ALL properties, not just new build, and is expected to be some sort of government mortgage guarantee. We await the full details of this stage from the government in due course but the impact of this stage of the scheme could be even bigger!

One thing is for certain – the property market will be closely monitored over the coming months and the government will be hoping this gamble will pay off to prove their doubters wrong!

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Any tax relief given by HM Revenue & Customs should be jumped on at the first opportunity – you just don’t know how long they will be around.  Contaminated Land Remediation Relief was introduced in 2009 to provide an incentive to UK property development companies to develop derelict or contaminated land.  Given the tough economic times at the moment, especially for the property sector, it is surprising how often this relief is overlooked!

Here are the answers to 4 frequently asked questions:

1. How much relief can you claim? 

A company can claim an extra 50% of the costs of cleaning up the contaminated land against their taxable profits.

2. What is Contaminated Land?

Land is in a contaminated state if it has something in, or under it that is causing harm or is likely to cause harm and arose as a result of industrial activity.  Some common examples are land contaminated with asbestos, arsenic, radon and, although it doesn’t strictly fall within the definition, there is specific guidance to deal with claims to remove Japanese Knotweed!

3. What costs qualify?

The principle is additional costs incurred as a result of the contamination.  For example, materials, subcontractors and even internal staff time costs.

4. When can the relief be claimed?

The relief is available when the costs are charged to the company’s profit and loss account.  In the most common example, in property development companies where costs are carried forward as work in progress on the balance sheet, the relief is claimed when the developed properties are sold.

The advice is simple!  Any costs you believe are related to land remediation should be grouped together as they are spent to be reviewed when the tax computations are prepared.  Remember – it is much easier to ensure all costs are collected if this is done throughout the year rather than looking back in hindsight when the year-end has long passed.

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