Accountants
Is a CVA (Company Voluntary Arrangement) the right choice for you?
Do you understand the implications of a CVA? If your business is struggling you may have considered moving forward with a Company Voluntary Arrangement (CVA), this is often a suitable choice for Di ...

Do you understand the implications of a CVA?

If your business is struggling you may have considered moving forward with a Company Voluntary Arrangement (CVA), this is often a suitable choice for Directors and can help a business get out of a sticky situation but sometimes it may not be the best choice for you.

Therefore it is important that you understand all of the implications that come with a CVA and the likely consequences that may affect your future trading capability.

Disadvantages of a CVA…

  • Creditors/ suppliers may begin to require cash upfront
  • Some suppliers may try to increase their prices, or re-negotiate credit terms voiding previous agreed discounts in an attempt to regain debts owed to them.
  • A creditor owed 25% or more of the debt may be able to dictate terms limiting what may be available to you
  • It effects the company’s credit rating
  • It does not bind secured lenders
  • A CVA will only work if the company is inherently profitable
  • It can take time to achieve. CVAs will run for 3-5 years
  • At least 75% by value of creditors have to agree
  • Companies operating under a CVA may be issued a VAT bond by HMRC. This is where VAT has to be paid up-front, causing cash-flow problems for businesses and often leading to the need for specialist loans.
  • Many Directors who had previously paid themselves by way of a dividend payment can no longer do this; thereby significantly impacting on their personal tax liabilities.

Other options that may be available…

At Ideal Corporate Solutions we offer a number of business finance solutions which could provide an alternative solution to a CVA. Depending on your situation you could apply for one of the following:

Invoice Finance
Asset Finance
Business Loans
Bridging Finance & Credit Lines

If you would like more information on CVA’s or other options that may be available to help your business contact the team at ICS today on 0800 731 2466

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Invaluable information for Accountants and Directors on the CVA experience
Many Directors with a struggling business may, after taking professional advice, choose a CVA which allows the business to pay its debts off over a period of time, whilst turning the business around. ...

Many Directors with a struggling business may, after taking professional advice, choose a CVA which allows the business to pay its debts off over a period of time, whilst turning the business around. Having successfully managed a wide range of CVAs ICS have asked Directors operating a business with a CVA how they found the process.

The results are very insightful and helpful to accountants providing advice, and Directors who are either in a CVA or deciding between a CVA and other options; including a pre-pack, a sale of the business or paying off creditors using external funding.

Click here to download the full PDF.

Managing suppliers:
“I expected it to be hard negotiating with existing suppliers who we owe money to; however it’s also been more difficult than I realised to get the best or even ‘on a par’ terms with new suppliers. This hits our pocket through higher prices and our cash fl ow due to shorter or sometimes even advanced payment terms; its tough.”

Understanding the potential impact on supply and planning how to manage this is crucial to the success of many CVAs. Most Directors expected relationships with supplier’s to be harder but the majority didn’t consider the effect on new supplier relationships. Identifying who your most important suppliers are and thinking about ways you can rebuild the business relationship or prove your new credit worthiness is vital. Advanced payments, shorter terms, exclusive supply agreements and longer lead-times can all help.

 

Still Struggling:
“Soon after the CVA began, I knew we were struggling again. I didn’t know what to do and I was unsure about talking to the Supervisor of the CVA so eventually I spoke to my Accountant.”

A common problem is when businesses with a CVA don’t make significant changes and soon run into the same problems that got them into the situation in the fi rst place. Successful CVAs need thorough planning from the client and this ideally involves working closely with an Accountant.

 

Dividend restriction tough for Directors:
“The restriction on company dividend has made a massive diff erence to the Directors. The extra cost and tax implications are signifi cant and initially we didn’t realise how much this could reduce our incomes. When you are trying to transform a struggling business, all of your costs are higher so its more difficult than before and at the end of the day, the return for their income is so much less than it was.”

Most Directors of SMEs will receive a dividend payment which makes up a large proportion of their take home income whilst operating within a CVA, dividends are not payable as creditors must be paid fi rst and in full before any dividends. This increases costs signifi cantly for the business and many Directors end up working in their businesses for a much lower personal income. Calculating new salaries and tax liabilities is recommended so Directors fully understand the options available to them.

 

Proper consideration:
On reflection I don’t think I fully considered the alternatives presented to me because a CVA felt like the ‘right thing to do’. We eventually came out of the CVA and with hindsight it just cost us a lot of time, money and heartache. Through working with our Accountant and Insolvency Practitioner we managed to find external fi nance to get out of the CVA. I realise we were fortunate and whilst we still have debts we aren’t trading with the CVA restrictions which were stopping our business from getting anywhere. This finance arrangement has made a huge diff erence to us, the business, our supplier relationships, price competitiveness, management motivation and more.

 

Conclusion
When considering a CVA and other options, making decisions devoid of emotion and morality is important. Doing something “because it feels right” might not actually result in paying as much back to creditors as other alternative options. Considering all the options is just the starting point; ensuring a real understanding of how each option aff ects individuals and working out the potential impact of key issues, such as Directors pay,
is vital.

Also of significance is the number of businesses that may be struggling in a CVA. In this situation, it is important that the Directors and their Accountants have a good knowledge of the range of options available to companies.

Are you an Accountant with a client struggling in a CVA or a business owner considering your options?

ICS provide a full range of insolvency solutions, we work closely with Accountants and Directors to ensure full consideration of all solutions, including external funding. We have successfully helped businesses at each stage of the process; whether it’s just considering options or those that have already started a CVA.

Click here for more information and full PDF.

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Female First owner bought out of administration
We were recently appointed as administrator for First Active Media, and were able to save jobs by helping the management team buy out the assets. Read about it here http://www.insidermedia.com ...

We were recently appointed as administrator for First Active Media, and were able to save jobs by helping the management team buy out the assets. Read about it here http://www.insidermedia.com

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A Quick Reference Guide for Accountants: Time to Pay Arrangements
HMRC is getting tougher on tax. For any of your clients that are experiencing difficult trading conditions and facing growing tax problems negotiating a Time to Pay (TTP) arrangement with HMRC can hel ...

HMRC is getting tougher on tax. For any of your clients that are experiencing difficult trading conditions and facing growing tax problems negotiating a Time to Pay (TTP) arrangement with HMRC can help.

TTP arrangements help thousands of businesses who are struggling to meet their tax bills to clear these debts and continue trading. Even businesses that have had TTP arrangements in the past can still apply for a new TTP arrangement, as long as there was no default on the original terms and the business has had a good compliance and payment history with HMRC prior to the current tax arrears.
With the right guidance, you can help them put a stop to HMRC debt recovery procedures and agree on a realistic payment plan that will help to clear tax arrears.

Principles & Guidelines of Time to Pay

  • HMRC will not reduce the total amount of taxes due when a TTP arrangement is made.
  • All returns will need to be up-to-date and all future returns must be filed on time.
  • HMRC needs to be satisfied that the applicant is genuinely unable to pay their taxes on time and that the business has explored, but been unable to find, alternative source of funding.
  • The viability of a business must be demonstrated
  • Your clients must make a reasonable proposal in terms of what they can afford over a specific time period. HMRC will review previous accounts to ensure proposals are realistic
  • Plans must show that money isn’t being used elsewhere i.e. for expansion or investment purposes.
  • Proposals must show that instalments are to be over the shortest time period reasonably possible – usually within 12 months.
  • By entering into a Time to Pay agreement in advance of the due date for VAT and income tax, and adhering to the terms of the agreement, your client can avoid VAT late payments penalties and PAYE, income or corporation tax late payment penalties.
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