Heads should roll for the banks’ refusal to lend

With no one lending, the property sector remains in the doldrums and will be stuck there until the deal flow returns – so is there anything that property companies can do to aid cash flow and gain a tax advantage in these quieter times? Green shoots! Not exactly, it seems to me that until lenders start doing their jobs again the industry will remain in the doldrums.

Why is it that lenders never seem to learn the lessons of the past? Surely now is the time when shrewd lenders could be cherry-picking the best deals and making good fees and strong returns from any number of development deals waiting on the sidelines to be done. Low valuations with great upside potential, a good LTV ratio, a couple of years with lower labour and raw material costs and quality management teams twiddling their thumbs. And yet most bankers are still saying no.

So, innovative thinking is needed to make the annual accounts look slightly less of a disaster than they could look, and anything that can be squeezed from the Chancellor should be welcomed with open arms. So where do you start looking?

Losses Not everyone will have gone into financial reverse but it seems likely that there will be a fair number of entities reporting losses in the current financial year. If the first draft of your year-end financial statements don’t show losses it may be worth reviewing the stock values that have been included or looking closely at the adequacy of provisions for your bad debts or making sure that full account has been taken of all liabilities due to creditors. It is always good to get the bad news out whilst everyone else is doing the same thing, so now is the time – provided of course the losses don’t create any breaches in your banking covenants.

It is also important to remember that accounting losses are not the same as tax losses and it is worth making sure that your accounting loss does in fact create a tax loss that you can then start to utilise. So, with your tax losses established, how should they best be used?

The legislation allows both carry back and carry forward of tax losses. If you are confident about the future then holding a ‘tax asset’ to offset against future profits may be attractive. Losses can be carried forward for an indefinite period of time against income from the same trade – so care should obviously be taken if there is a planned divergence of business activities or a change in ownership.

Losses can also be carried back and set against the profits of the previous year. This has the obvious advantage of creating a revised tax charge in the previous year, leading to a refund of tax previously paid – thus generating real cash flow for the business. The company obviously has to have sufficient profits in the previous year to be able to absorb the current year loss with any surplus losses being carried forward.

In his April budget speech Alastair Darling extended the period for which companies and unincorporated businesses could carry back their losses. The previous unlimited one year losses have been extended a further two years for losses of up to £50,000. So assuming a 21 percent small companies rate of corporation tax, this additional carry-back could be worth up to an additional £10,500.

This is however only a temporary measure and is available for losses in the two years prior to November 24, 2010 for companies, and for the 2008-09 and 2009-10 fiscal years for unincorporated businesses.

Business rates Although more relevant to property investors, the anguish over the introduction of empty property rates in April 2008 still rumbles through the industry. Business rate relief on empty property was removed on April 1, 2008. Empty retail and office space previously received 100 percent relief for three months and 50 percent thereafter, while industrial space received 100 percent relief permanently. However, since April 1, 2009 all properties with rateable values less than £15,000 will be exempt from paying business rates for one year and for smaller businesses there are reliefs worth exploring.

Where the rateable value is below £15,000 a year (£21,500 in London) the lower business rate multiplier should be used and there are reductions of up to 50 percent on a sliding scale of rateable values between £5,000 and £15,000. In addition, the threshold below which the empty property rate does not apply has been increased to £15,000 for the 2009-10 fiscal year.

One other point on rates, the business rates inflation uplift of five percent (set when the RPI was at 5.1 percent) applicable from April 2009 can now be spread over the next three years – two percent in 2009-10 and three percent over the following two years. This deferral of the increase in business rates will therefore assist current year cash flow.

Spreading of tax payments It is clear that the Business Payment Support Service (BPSS) has been a big success with taxpayers. Recent figures show that over 140,000 businesses have taken advantage of delaying their tax payments for between three and six months costing the exchequer over £2.5bn.

The BPSS will look at a deferral of any liabilities due to them – PAYE, VAT or corporation Tax – but you do need to be in genuine difficulty and unable to pay tax on time but likely to be able to pay if given time.
This scheme is not for everyone, but if you are in a cash flow crisis the scheme can be an invaluable provider of working capital for the business.

Capital expenditure on plant and equipment Finally, if you are not yet into the realms of losses and cash flow difficulties but instead are waiting patiently for the inevitable pick up in deals, then perhaps the opportunity to replace some of that old or worn-out plant and equipment while there are good supplier deals around has crossed your mind.

For the 2009-10 tax year (expenditure incurred in the 12 months from April 2009) a temporary first year allowance of 40 percent of the cost will be allowed against your trading profit over and above the regular £50,000 annual investment allowance, on which of course 100 percent of the expenditure will be allowed.
In conclusion, don’t get too depressed about the lack of lending and deal flow – use this period of inactivity to get organised and profit from what the taxman has to offer. There are plentiful opportunities if you look closely.

For more information
Paul Windsor is a partner at specialist UK real estate tax advisor WSM Property wsmproperty.com Tel: 01234567890