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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Down Pompeii

Late tax payments in your AIM companies?  Then titter ye not.

Well, after last month’s article about the loss of independence of the great British brand Cadbury, this month another, admittedly not so large, brand is in the news.

Last week, the directors of Portsmouth FC called in the administrator. This was prompted by the fact that in March Her Majesty’s Revenue and Customs were due to file a winding up petition at the High Court which would have been full time for Portsmouth; no extra time, no penalties and no more Portsmouth FC. By going into administration the club does at least continue to survive for the time being and has a chance of being salvaged by a new owner unencumbered by the debt built up by the previous five owners, although relegation down to the Championship is inevitable.

In the football world this has sent all the commentators scurrying back to look at who might be next to succumb to a mountain of debt. The combination of price inflation in the transfer market and increasing wage levels has meant that many clubs with lofty ambitions have overspent and have little to show for it. In Portsmouth’s case that meant, even after selling £100 million worth of players over the last year, they still had debt of £70 million and more pertinently unpaid taxes to HMRC of £6 million, as well as lying bottom of the Premier League.

Football is big business but prone to big egos who don’t always have football clubs and supporters as their priority. So whilst mega-clubs have mega-debts (Manchester United has debts of £716 million, Arsenal has £297 million and Liverpool has £261 million) this isn’t necessarily a problem if the debts are manageable and long term. All the more so if as a mega-club you have steady income from stadia which are always full and debts with fixed interest rates.

                                  Ash Mehta  

The Tax Man Cometh

What has caused football clubs to come unstuck is the pesky tax man. As well as threatening Portsmouth with a winding up order, HMRC has recently given Cardiff City and Southend United 28 days to settle their bills with HMRC or face the same fate.

Can this be the same HMRC which last year was advertising to companies that they should ask for timeline extensions to their tax payments? Yes, the one and the same. In December 2008, HMRC launched a business payment support service which allowed struggling firms to defer their business tax bills. This was intended to reduce the number of companies going under at a politically sensitive time amidst the banking crisis and the worsening recession; 215,000 companies were granted this extension to their tax payments.

Indeed, the official statistics show that whilst company winding up petitions were up 13% year on year in the first quarter of 2009 to nearly 3,500, by the fourth quarter of 2009 this number had fallen to just under 2,700, no doubt as a result of HMRC stepping back from the fatal deed.

Now, that the recession is over, if you believe government figures showing that the economy grew by 0.3% last period, then things are looking up. This also means that the tax man is quickly becoming less understanding about unpaid tax bills and will not hesitate to pull the plug on companies. Although, football clubs are getting special attention, at Orchard Growth Partners we have seen this hardening attitude across the board amongst companies in all sectors.

The hardening attitude will be strengthened after the general election later this spring when, whichever party is in power, the government will have to put more pressure on HMRC to maximise tax take to get closer to balancing the country’s books.

In my article in February 2009, I spoke about going concern as an issue for many AIM companies and at that time the primary threat came from banks withdrawing facilities at renewal time or for a breach, even a technical breach, of bank covenants. This year that threat continues, but it is accompanied by the increasing risk of HMRC losing patience with companies which are not up to date with their tax payments.

HMRC losing patience

Late VAT and PAYE

As any good finance director knows, one of the main tasks in the role is managing your cash efficiently. Therefore there will be companies which have utilised the taxman’s cash and only paid it when absolutely necessary. That can be good cash management especially when the interest on late payments is 4.75%; better than most companies can get from the bank if they can get a bank loan at all. That’s fine for large payments such as corporation tax, but if a company is persistently late with its VAT or PAYE payments then that’s usually not a good sign. In Portsmouth’s case all of the amounts due to HMRC were VAT, PAYE and National Insurance contributions, and it is these outstanding payments which have led to a winding up order.

So, as you head off to AGM’s this year, as well as referring to my questions about going concern and bank borrowings from last year, you might also want to ask the boards of companies you invest in whether they are overdue on any of their VAT or PAYE tax payments. If so then as the late, great Frankie Howerd used to say, “Titter ye not” as the tax man may be knocking on their door any minute.

"Titter ye not"

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

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