To every business riding the retail sector rollercoaster, we salute you.
Even at the best of times, retail businesses face twists, turns and predictable unpredictability. That’s why we love working with them so much. And we’re proud to say we work with a number of fantastic retailers and suppliers into the retail supply chain – from entrepreneurial, family-owned business, all the way up to the biggest high street names.
Right now, these aren’t the best of times. So, we thought it would be useful to share our insights into some of the things we’re seeing across our portfolio, and what you should take away from them.
Navigating the new normal (whatever that means)
Understandably, we’ve had a few questions about getting to grips with the new rules and reliefs, particularly around:
- Furlough and the Job Retention Scheme
- Helping clients access emergency funding
- And making sense of the daily updates and terms.
There’s a lot to navigate, including new terms such as EBITDAC – earnings before interest, tax, depreciation, amortisation and the impact of coronavirus – which is a customised metric to demonstrate what underlying earnings would have been without the impact of the pandemic.
Now that the government has announced non-essential retail stores may be able to open from 15 June, businesses are picking through the bones of the new rules and guidance around safer working. Next PLC usefully set out the actions they’re taking to adapt their operational environment, and the impact it will have on their trading, in this statement.
Our COVID-19 Taskforce continues to prepare, review and submit furlough claims. And the feedback is that employers’ NI is often being underclaimed – particularly where employers are topping up pay.
Salary sacrifice is another area causing challenges, or situations where the employee is receiving other benefits paid in cash, such as car allowances.
Holiday pay throws up some interesting scenarios, as does anyone paid on a variable basis with different shifts/hours each week – which will affect much of retail.
Many of our clients are accessing the various funding, grants and reliefs available – including CBILS, Bounce Back, Rates Relief and VAT payment reliefs.
Stepping up to the challenge
With lots of businesses struggling, here are some of the areas we’re seeing activity:
- Accelerated decisions around the viability of store locations, product streams and/or revenue lines. Expected to result in some permanent store closures.
- Restructuring for risk management or to protect certain assets – for example property or profitable divisions.
- Non-essential asset sales – Frasers Group and Next PLC have both announced sale and leaseback transactions for their warehousing and head office operations, freeing up cash. Interestingly, these moves also indicate that the sector might need to think about whether large, centralised head office and warehouse spaces will be necessary in the future as we move to more agile, remote forms of working and changing expectations around delivery and fulfilment.
- Tax planning to crystallise expected tax losses sooner and generate a cashflow advantage.
Audit and financial reporting implications
We’re pleased to say that the actual day-to-day of doing an audit is pretty seamless – even down to the physical asset verification and attending a stocktake – and it can be done largely remotely. That means it really is business as usual for us, and you can read more about remote audits here.
Inevitably, however, from an audit and financial reporting perspective, the current uncertainty means there is lots to talk about. You can read about a number of audit and financial reporting implications here, including an in-depth look at what this means when assessing your companies ability to continue as a going concern.
Operational financial issues
Checks and balances
As companies start to ease their lockdown restrictions and implement safer working practices, it’s important they also consider how their existing controls can be adapted to fit the new operations.
As an example, where warehouses have had to be adapted to allowing picking and fulfilment of customer orders in a safe working environment, it can be the normal checks and balances – such as stock checks, perpetual inventory counts or full year end stocktakes – which fall by the wayside.
Often, this happens for understandable reasons – HO staff responsible for coordinating this may be furloughed, third party stock checkers may be unable to visit site, or the warehouse teams can’t get access or time to undertake counts because they’re busy picking in an environment with increased online sales volumes, whilst maintaining social distancing.
In the current environment, we’d recommend adapting existing processes and controls around stock management (rather than suspending them) to avoid the risk of increasing fraud or misappropriation, audit qualifications due to lack of evidence, and an increased workload for your finance and warehouse teams down the line.
Backlogs may also be starting to mount up in other areas under the finance team’s remit. For example, in bank reconciliation and treasury management, management reporting and accounts payable.
We have tons of experience in helping our clients get back on top of backlogs of work when times were more ‘normal’. The causes are varied, but often changing systems, standards and controls being relaxed due to other business priorities, and staff absence play a major part. Which is exactly where we find ourselves now, with staff potentially unavailable due to furlough decisions, childcare or self-isolation, coupled with businesses finding their feet with remote working, often implementing new systems and ways of working ‘on the hoof’.
The sheer volume of transactions created daily in a retail environment makes it clear to see how quickly a backlog of processing can be created. We’re already getting enquiries into our availability to help clients get back on top when the time is right.
Innovation and Adaptation
On a cheerier note, we’re loving all the innovation going on and how well our clients are adapting – be it to new technology, new revenue streams or new ways of working.
We’re seeing activity in:
- Development of IT apps and augmented reality to support online sales.
- Innovative ways to bring the store experience to the home (e.g. Halfords service of delivery and fitting of new lights, wiper blades etc. at home).
- Companies turning to payment providers such as Klarna to enhance their selling experience for the buyer by offering extended credit, with the added benefit of mitigating credit risk.
- Collaborations – Aldi have announced a collaboration with Deliveroo, with 150 essential products available for delivery within 30 minutes. Sainsburys are trialling a similar thing with their ‘Chop Chop’ service, and when you think about their Argos offering, you can see the possibilities of the product range and speed of delivery that might be available in the future.
- Store environments are being redesigned to maintain safe social distancing, and the changes are being integrated seamlessly, without ruining the brand feel or aesthetic.
- Developments in protective equipment. Fashion retailer Baukjen has recently started to sell non-medical masks made with their surplus fabric, coated with antibacterial treatment. If the government encourage the wearing of face masks in public, we could see this from a lot more brands too.
What does this mean for our clients?
Research & Development (R&D) tax credits
Research & Development tax credits can generate cash repayments for any business that spends money on qualifying R&D – a definition that is much wider than you’d think.
We’re seeing a surge in clients wanting to get claims done or have their old claims reviewed because they’re realising it’s another source of much-needed cash. And this applies across all industries including retail.
That’s because the current environment is driving innovation. Businesses with limited e-commerce presence are shifting their businesses online, quickly. Existing e-commerce retailers are adapting to deal, almost overnight, with Black Friday style volumes, every single day. Ocado, Boots, Next and Homebase customers have been having to virtually “queue” just to access their sites. And we’re seeing increasing agility on delivery slots and returns options.
Software underpins all of this and often can’t be developed or adapted with ease – hence requiring a degree of R&D.
If the work involved meets the R&D definition, an SME can effectively get the government to pay for 25% (10% for Large Co’s) of their IT development. That’s why it’s important to factor the scheme into business case considerations regarding IT investment from a cost/benefit/viability perspective.
25% of all our R&D claims are purely software-based, and we have members of our team who specialise in exactly that – looking at your IT development and the adaptations you’ve had to make, and maximising the tax relief.
Over the last three years we’ve put £3m back in the hands of businesses by uplifting sub-optimal claims done by other advisers. So, it’s always worth revisiting historic claims as a potential source of extra cash because you can go back two years.
There are some complexities if you have CBILS loans to fund an R&D project, so care and guidance are needed in some areas.
But thankfully, HMRC have acknowledged the importance of these claims to businesses right now. They’re working hard to clear repayment claims within 28 days and are being more lenient on late claims. To hear the latest insights from our R&D Partner, Chris Knott, click here.
Capital allowances are a form of tax relief for capital expenditure incurred on property, plant and equipment. When it comes to commercial property, we can help to make sure you’ve claimed all the relief you’re entitled to on current and historic projects – whether they’re a purchase, a new build, refurbishment or fit out. And there’s often no time limit to making historic claims.
On recent projects we’ve secured repayments of corporation tax for many businesses that have underclaimed capital allowances in the past.
Are your processes and policies still fit for purpose?
Some businesses are using this as a time to pause, reflect and think about the future.
You might be thinking about how you can reward and motivate your staff. Benefits like a company car might not have the same pull when they can’t go anywhere. There may be cash pressure on salaries and bonuses too, so it’s worth considering things like introducing share incentives, especially while company share valuations are lower, to retain and incentivise key individuals that will play a big part in the next phase of growth.
We’re receiving more enquiries about process and controls reviews. Where businesses have already had to adapt practices to this ‘new normal’, they’re now thinking about how they can shift from ‘make do’ to streamlined, efficient methods – while still robustly protecting the business from fraud or error.
So, where should you start?
We recommend revisiting your risk register, replotting your heat map and making sure you’re focusing on the right things.
Then, look at your process mapping – how do your current systems and operations work? Be it the finance function, stock returns or warehouse deliveries. And once you fully understand that, you can start to see how it can be redesigned effectively. For more info on process mapping, click here.
It’s also worth thinking about the quality of your management information (MI). Existing measures and KPIs to assess return on investment and financial results may need to be tweaked to stay relevant.
Things are moving quickly, which highlights the importance of real-time data to support the automation of your day-to-day reporting and workflows, so you’re making well-informed decisions, on a timely basis.
There you have it
Plenty to digest, but hopefully, plenty of food for thought, too. And if you’d like more information on anything, I’d love to chat.
Head of Retail and Partner