Family owned and managed businesses will have been put under enormous strain since the start of the Covid-19 pandemic, and unfortunately many may not be able to continue as going concerns. There are likely to be long-lasting impacts on those that do survive, whether that is through operational changes to help protect the health of their staff and customers or changes to the tax landscape as the government seeks to finance the projected £300bn fiscal deficit for this year. In order to protect their businesses and their wealth responsibly, now may be the time for business-owning families to take stock and consider how and who should lead the business into the ‘new normal’.
Leadership
The past few months have put an enormous strain on almost every business, from those in leisure and hospitality businesses, which have faced a complete shutdown, to those fortunate enough to be able to carry on but had to make significant changes to where and how their staff work to allow operations to continue.
One thing that is becoming clear in these uncertain times, with no clear picture of the ‘new normal’, it is those businesses that can adapt and innovate that are most likely to flourish.
The family should consider if lines of succession to running the business are clear and whether or not there is a key-person risk. If anything were to happen to the principal, is it clear from letters of wishes with trusts or wills or from shareholders’ agreements who should take the shares, who would step up to become chairman and so on? More practically, are bank mandates clear so that bank accounts can still operate seamlessly, and for wider family assets will they be frozen pending probate or will family members still be able to have access throughout that period?
For families who were already considering succession in the near to mid-future, there may well be the opportunity to reassess that timeline. Some owners may feel that having safely navigated the business through this storm, and with innovation likely to be key to continued success, now may be the natural time to hand over the reins, whether to the next generation, or perhaps to external managers who may bring fresh ideas and fresh capital.
If the next generation is taking over the management, it may also be the right time to change the share ownership to reflect this. Today, the tax consequences of passing shares to the next generation is a known quantity, even if the lifetime limit for entrepreneurs’ relief has just been restricted to £1m. However, there was expectation recently that there would be wholesale changes to inheritance tax. The all-party parliamentary group did propose wide-reaching revisions to IHT in January 2020, including the abolition of business property relief and a tax charge on lifetime gifts. If implemented, these proposals may increase the tax cost of business succession significantly. Where the next generation is not yet ready to run the business, some families may look to external investors to come in. This may give the company an injection of much-needed funds, or, in some cases, where the family wealth is too heavily concentrated in the business, it may give an opportunity for the family to realise some value and diversify its risk going forwards. Seeing the entire family wealth and legacy coming under such stress over the past few months may have reinforced the need to divest the risk to make the family wealth more secure.
A social contract?
Much has been made of a potential enhanced sense of community or ‘togetherness’ that has arisen out of the pandemic. It may be that this drives a change in corporate and shareholder behaviour. Either because family businesses will reassess their own values and believe that they should and want to ‘give back’, or because extra media and public scrutiny will increase additional reputational risk for those businesses that are perceived to not be ‘paying their share’.
Most of the targeted support provided by Government has been aimed at smaller and family businesses. It is likely that this is the group who may suffer the greatest burden of any future tax changes whether it is directly through increases in tax rates, perhaps through corporation tax or income tax rates, or through more targeted HMRC enquiries into their affairs and possible increases in penalty regimes..
HMRC already has a number of enforcement powers to apply penalties where it discovers any tax errors. In the last few years, we have seen several additional requirements for businesses to consider:
- Corporate Criminal Offences legislation, requiring all companies and LLPs to have procedures in place to prevent the facilitation of tax evasion;
- Requirement to Correct and DAC6 reporting regimes in relation to historic and future offshore matters;
- ’Notification of uncertain tax treatment by large businesses’: a proposed measure under consultation for large companies to notify HMRC in advance of some proposed tax controversial tax interpretations.
These will provide HMRC with both additional data, on businesses’ commercial and tax plans, and additional teeth to invoke fines and other sanctions. Enquiries and subsequent penalties will be among HMRC’s tools to plug the deficit. Businesses should prepare themselves for even greater levels of scrutiny.
All of this means that now may be the most appropriate time for families to look up and consider what are its values, and what course of action should they take?
Some families will take the view that they want to ‘give back’ to the community, over and above any increases in tax. There may be an increase in philanthropic giving, either personally of through the company. Normally, any qualifying giving would attract tax relief, but would it be appropriate to claim in these circumstances where, for example, the business has availed itself of Government assistance such as furloughing?
Other families may want to protect themselves from the short-term impact of any changes to tax rates. Indeed. directors have a fiduciary responsibility to protect the value of the company for the benefit of the shareholders, which would require the company to minimise costs - such as tax, where possible, but a putative social responsibility to contribute to the Exchequer. For example, to preserve and protect the company, directors could look at measures, such as changing the timing of planned expenditure or dividends to pre-empt rate changes. But how would such measures be perceived by the wider public and at what cost to their reputation?
Finally, there may be long-standing corporate structures, perfectly legitimate and commercial, but which may suffer under the glare of the public spotlight, especially if the business had benefitted from government support during the crisis. How would a Jersey group entity be perceived by the wider public, for example, and would the ‘cost’ of that negative perception be sufficient to consider changing things around?
Conclusion
The world is changing around us; while we can see a change in the direction of travel, no one can yet see the exact destination. What we do know is that some businesses will not withstand these current challenges, and those that do will need to keep pace with the changing world.
The questions we ask above are not exhaustive, but they are somewhat universal, while the answers will vary across all businesses. Businesses and the families that own them will need to think about where their business is now and where it needs to be. Only this way will they be able to hit the ground running when the world returns to some semblance of ‘business as usual.’
Some questions for business-owning families to consider:
Leadership | 'Social Contract' |
|
|
|
|
|
|
|
|
|
|
DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Ref: NTAJ14062076
Disclaimer
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.