Ask the Expert with Steve Plaskitt: North East tech corporate deals

In October 2009, North East Finance backed by One NorthEast presented to the European Union with plans for a £120m fund to invest in regional businesses.

The plan was called JEREMIE and aimed to plug the funding gap created by North East businesses being ignored by private equity funds which then focused on London and the South East. Furthermore, start-ups and tech businesses would not get bank support and this worsened the funding gap in this sector.

More than ten years on, and with the original plan followed by a second tranche of funding, JEREMIE 2, it’s fair to say that the original plan has worked, and the North East is now seen as a hotbed for tech businesses.

Last year saw US private equity backed business MRI acquire Newcastle based Orchard Information Systems and the investment by Livingbridge in Visualsoft in Stockton.

Including the Orchard transaction, we have advised on one technology deal per month for the last 18 months and this rate shows no sign of slowing – partly because Software as a Service business models are proving resilient during the Covid 19 pandemic.

How have valuations been impacted by the pandemic?

In general, across the whole of the UK M&A average valuation multiples have been broadly static in the last four years. Median enterprise valuations when compared to earnings before interest tax depreciation and amortisation have fluctuated between 7.5 and 8 times since 2017.

For the UK technology sector, the median valuation multiples are higher and increased from 10.4 times to 11.4 times in 2020 – which is evidence of the attractiveness of tech businesses.

But as with all statistics the average can shed light on some trends but does not explain all circumstances. We have seen tech deals successfully valued at over 20 times multiple and other tech deals fall over at valuations of 12 times.

Why is there such a wide difference and what are the critical success factors in getting deals away in the tech sector?

In simple terms, the tech sector is unlike many other sectors and has its own key valuation metrics, including:

  • Cost of acquiring customers
  • Lifetime value of customers
  • Churn rate, or rate of loss of annual customers
  • Average transaction value
  • Average revenue per customer
  • Viral rate, representing the rate of growth in customer numbers (and broadly equivalent to the dreaded R rate that is used to assess the virality of the pandemic)

Furthermore, risks such as the level of technical debt, which represents the future amount of programming that is required to deliver the project or planned software upgrades, need to be assessed and evaluated and will impact valuation.

Overall, the biggest critical success factor is the credibility of the forecasts.

These forecasts must be very detailed and robust – they should be evidenced by recent performances and existing data, supported by management’s planned changes be able to withstand the scrutiny of private equity due diligence.

At MHA Tait Walker we have invested heavily in data analytics and financial due diligence which means that we review many deals on behalf of private equity firms, comparing the key metrics to their benchmarks and to the averages seen in other similar tech start-ups and deals. This knowledge also allows us to advise management teams to develop the right strategies that would support forecasts attractive to investors.

Currently, there seems no slow down in the tech sector. Regional and national private equity firms, US private equity buyers and family offices are all keen to look at North East businesses. In theory, some investors may eventually start to look away from the sector to rebalance their portfolios and to seek better value elsewhere but there is no sign of this yet.

We have all come a long way since 2009!

Contact us

For further information, please contact Steve Plaskitt at steve.plaskitt@taitwalker.co.uk.

Source: Insider

Making Tax Digital – HMRC reminder letters – do not register in error

HMRC have started issuing reminder letters to businesses who they believe may be required to sign up for Making Tax Digital (MTD) and have not done so.

We have received a number of queries from businesses with taxable turnover below the VAT registration threshold who were concerned that the letters/e-mail were an instruction from HMRC to register for MTD.

This is an important reminder that only businesses with a taxable turnover above the VAT registration threshold (£85,000) are mandated for MTD for VAT return periods starting after 01 April 2019 (or 01 October 2019 if in the deferral group – see below).

If you receive a reminder letter from HMRC and your taxable turnover is below the VAT registration threshold, then HMRC’s letter states that you can ignore the e-mail/letter.

Businesses need to carefully consider whether they are mandated to register for MTD and that they do not following receipt of the letter from HMRC mistakenly/inadvertently voluntarily register themselves for MTD unnecessarily where not mandated.

An example of an email sent from HMRC is shown below:

Please get in touch if you’re unsure whether you need to be MTD registered. Contact Hydeam Sulton on 0191 285 0321 or email hydeam.sulton@taitwalker.co.uk.

Deferral Group

Have you received your MTD deferral letter from HMRC? If not, you must act now to benefit from deferral

HMRC announced in October 2018 that for certain VAT registered businesses with more complex MTD requirements HMRC would be deferring mandating MTD for a further 6 months .i.e. for those business within the deferral group MTD would be mandated from to first VAT accounting period starting on or after 1 October 2019.

We are aware that some businesses which fall into the deferral group have still not received confirmation from HMRC that they have been deferred, and a number of MTD deferral letters have not been issued by HMRC in error. 

It is important that any businesses which falls into one of the categories below which has not yet registered for MTD and wishes to take advantage of the deferral and which has not received a formal deferral letter from HMRC contact the HMRC VAT Helpline on 0300 200 370 to request a deferral letter as a priority.

HMRC MTD deferral letters have legal force and therefore any business wishing to rely on the deferral must have a formal deferral letter from HMRC for the deferral to apply.

Who does deferral apply to?

Deferral applies to businesses that fall into one of the following categories:

  • Trusts;
  • ‘not for profit’ organisations that are not set up as a company;
  • VAT divisions;
  • VAT groups;
  • those public sector entities required to provide additional information on their VAT return (such as government departments and NHS trusts);
  • local authorities;
  • public corporations;
  • traders based overseas;
  • businesses required to make payment on account; and
  • annual accounting scheme users.

For more information on MTD or VAT generally, please contact  Hydeam Sulton on 0191 285 0321 or email hydeam.sulton@taitalker.co.uk

For MTD solutions please, contact Graham Dotchin on 0191 285 0321 or email graham.dotchin@taitwalker.co.uk.

Making Tax Digital for VAT

Our new publication on Making Tax Digital for VAT simplifies some of the language and gives examples of businesses you may be able to relate to.

In general the requirements will place different pressures on businesses depending on how complex their VAT position is. For simple VAT structures there are software solutions available that will quickly make you compliant. For more complex VAT profiles and group companies life may not be so straight forward.

HMRC released its latest Making Tax Digital for Business (MTDfB) update on Friday 13th (of July). However, it was not the horror show you might expect and the release has narrowed the level of uncertainty facing businesses in the run up to April 2019.

Key information on Making Tax Digital for VAT

The new process
Some important phrases

   FUNCTIONAL COMPATIBLE SOFTWARE
This is a software program, or set of programs, that can record and preserve digital records and communicate directly with HMRC. Packages like Sage (v 24 or later), Xero and Quickbooks for example, are classed as functional compatible software. If you are already using them to file your VAT return direct to HMRC then you are MTDfB compliant as long as you adhere to the rules of processing and retaining data.

   DIGITAL RECORDS
These are software programs that are capable of recording and preserving digital information but do not have all the attributes of functional compatible software like communicating directly to HMRC. For many businesses this may be a combination of bespoke accounting ledgers, legacy accounting systems and spreadsheets. To be MTDfB compliant, the information stored in these digital records needs to be shared using Digital Links.

      API (APPLICATION PROGRAMMING INTERFACE)
This is like a pipe between two software solutions that allows data to pass between them both without human intervention. It is via this ‘pipe’ that HMRC require you to share your VAT information with them from April 19 onwards. If your accounting system is not API compatible you can use Bridging Software.

View publication

Tait Walker helps IT firm to create new jobs with expansion of data centre

IT Professional Services (ITPS) is expanding its data centre in County Durham after securing a £3m financial package from HSBC.

ITPS specialises in information and communication technologies. They will use the funding to meet customer demand by adding a second data hall to its existing data centre.

The new data hall is in ITPS’ high security, ISO27001-certified data centre. It will include over 3,000 sq ft of fully-serviced rack space and sit alongside its onsite dedicated workspace recovery centre. The expansion is expected to generate new jobs across the company, from engineering to administration roles.

We worked on improving ITPS’ information management ahead of its deal with HSBC.

Graham Dotchin, associate at Tait Walker, commented:

“It has been fantastic helping ITPS shape its significant volumes of data into manageable insights. We are sure this investment will allow them to continue its impressive growth story.”

Michael Jopling, ITPS finance director, said:

“Building the new data hall underpins our second stage of ambitious growth, and we could not have done this without the great support we’ve received from HSBC.

“It means we will be able to create new jobs in the North East, and ensure we are competitive for both national and international clients.”

Tony Leech, area director for HSBC North East, added:

“ITPS is a 21st century company looking to meet the exciting opportunities in a quickly evolving industry, and we are very excited to be a part of this next step of its evolution.”

Founded in 2000, ITPS provides a full range of strategic IT consultancy, implementation, data centre services and unified communications and they also provide support services and workspace and disaster recovery.

Making VAT digital – top tips for businesses

Is your business registered for VAT and does it have a taxable turnover of over £85,000? If yes, from the 1 April 2019 your business must comply with new Making VAT Digital rules or face fines of up to 15% of your annual VAT bill.

As yet, HMRC hasn’t announced any further penalties for non-compliance. The main issue will be when taxpayers continue to submit their returns using the old system. Unfortunately, as the VAT return will not be properly “furnished” this may mean that the default late payment surcharge regime applies even though the taxpayer thinks they have done the right thing and paid their VAT on time.

What does it mean for businesses?

1. Electronic Filing of VAT returns

Businesses must move to a new system which allows them to report VAT return information directly to HMRC. For any return commencing on or after 1 April 2019 they can no longer submit a VAT return through their government gateway account. Instead, they must use software which is able to communicate with HMRC via an Application Programming Interface (API). If this is not in place, HMRC’s system may prevent them from submitting their VAT return in the traditional way. The penalties can be as high as 15% of VAT due.

2. Digitised Record-Keeping

VAT registered taxpayers covered by Making VAT Digital will no longer be able to maintain manual records in any part of their accounting system. For those who use software and spreadsheets, digital links must be in place by 1 April 2020 to transfer data between each function. It will no longer be acceptable to manually re-key data from one system to another.

What do we know from HMRC and software providers?

Unfortunately there isn’t as much certainty and guidance as we would like. HMRC has drafted a public notice which sets out the changes to legislation, a timetable and what will be expected. HMRC has a small pilot trial and about 60 of the main software providers are involved. Businesses should be able to elect to be included in a further trial this October.

There is some movement from software suppliers. Some have created API enabled spreadsheets that will allow a “bridge” to be made between the businesses records and HMRC VAT return system. However, this is a first fix. The largest providers have confirmed that Making VAT Digital is being treated as a priority and a patch will be available in good time.  All providers involved in the trial have performed tests and submissions. It’s understood that from July tests will be carried out on the more complicated aspects such as partial exemption and VAT group reporting.

What can you do now?

While the lack of detail can make it feel like there’s little to be done ahead of the deadline, it’s worth ticking off the following steps to get yourself in a good position for when HMRC release further clarification:

  1. Ensure you understand how MTD affects you. Make sure your team is trained so they also fully comprehend the requirements.
  2. Ensure that the software you use to produce your VAT return figures is API-enabled in time for April 2019. Your software provider will be able to update you. Alternatively, you can acquire an API enabled spreadsheet to bolt on as an interim measure. These are coming to market now and should develop and improve in the next few months.
  3. Digitise all parts of your record-keeping and ensure that the VAT return can be created from those digital records. For businesses using a basic spreadsheet approach or manual records, it’s time to look at software options.

What exemptions are available?

While exemptions  will apply to a minority of businesses, the extent of Making VAT Digital means it’s vital to evaluate whether your business falls outside the regime. Charities and academies for example may well be exempt.

The key is that exemptions apply to VAT registered businesses where the taxable turnover is £85,000 and above. Many will be registered for VAT but will be under this threshold. They should therefore be able to opt out and continue as they are now. Unfortunately, how the opt out process works is still unknown and we await further guidance from HMRC.

Contact us

If you have any concerns or need advice on how to ensure compliance with the new regime, please contact our team on 0191 285 0321 or email advice@taitwalker.co.uk.

This article originally appeared on the blog of MHA MacIntre Hudson.

5 minutes with… Pete Watson, CEO of Atlas Cloud

We caught up with Atlas Cloud CEO, Pete Watson

1.  Tell us a little about Atlas Cloud

We provide a range of Managed Services such as Hosted Desktops and cloud-based services, mainly with SME businesses. We are passionate about letting business owners focus on building their business and strategy without being distracted and concerned about IT; they can leave it to us and focus on growth.

All of our services are scalable and flexible. Our agile business model and technical expertise enable us to deliver quickly as to their business and industry demands. We pride ourselves on high quality support, services, and being innovative with new solutions. Therefore, our customers can take advantage of new technology that drives productivity, security and compliance around areas such as GDPR without using a huge amount of budget.

2.  How do you see the future for your business? Where will the next 5 years take you?

Most of our customers are North East based, but we do work in other parts of the UK too, including the South East, Yorkshire and the North West. We have grown by over 100% in the last 12 months and we’re hoping to continue on this path and expand our expertise.  We will be focusing on our core business solutions and our partnerships, with the likes of Microsoft, Citrix and Sage as we are the cloud partner for the UK and Ireland.

3.  What would be your top tip for someone setting up their own business?

My advice would be specifically to owners of fast growing companies who are looking to raise finance. I’d say ‘give yourself more time to execute’. Having been in the position of raising finance, I would recommend giving yourself 18+ months runway to actually take the cash in to your business and execute your plans. It’s difficult trying to grow the business if you’re constantly raising money. Things always take longer than your best guess.

4.  What do you think are the biggest challenges for fast growing businesses?

It’s definitely people and culture. Getting the right people at the outset is a challenge for all businesses, but keeping those people as you grow (especially if it’s fast paced growth) has to be the top priority. You want people that you have good working chemistry with. People are the heartbeat of the organisation.  You need to maintain the ‘small business, innovative culture’ that they joined you for, even as your business scales up and changes. You want to be the employer of choice, in fact, you have to be the employer of choice to get the right people in your business.

It’s easier said than done. For us, we try not to be a ‘stereotypical IT firm’. We like to do things differently. We give our team members the scope to be creative and entrepreneurial, to make sure they always know how they fit in the business, how valued they are and how they can help the business succeed and also meet their own ambitions. We offer unlimited holidays, regular incentives and our team can wear whatever they want to work. We find this builds great teamwork and people work as many hours as it takes to get the job done when things are a little more flexible. They don’t even need to come in to the office if they don’t have to, but the work is always done and our team are always finding new and better ways to work together.

I guess my last bit of advice would be to harness the talent and energy of all generations. I think there is a fair bit of stigma around the flexible working preference of millennials. I find that their enthusiasm and talent is great for business, especially one like ours where they already understand what we do and why it’s important to business growth. Be a little flexible and be the employer they choose to grow with.

5.  If you could be anything or could have had any job – what would it be?

I’ve always wanted to build a business, be an entrepreneur and do something different. Even when I was at school, from around the age of 8. I used to get my mum to buy me toys at the Quayside market and then I’d sell them at school. 100% profit! This was maybe not quite business reality, but it was a fun start.

I love the industry I work in. Cloud IT services are growing at a rate of over 20% a year and the managed service market is forecast to grow by 26%. It’s a great environment to stay creative and innovative, which is what I enjoy.

HMRC MTD Pilot 2018

Making Tax Digital for VAT comes into effect from 1st April 2019. However, a HMRC pilot commences April 2018.

Businesses with a taxable turnover above the VAT registration threshold will be required to preserve digital records and provide VAT returns using compatible software. Software is the biggest challenge in moving to a digital VAT system. Businesses will have to use functional compatible software. This is software that connects to HMRC systems via an Application Programming Interface (API). HMRC want to pilot the changes in advance of April 2019.

There are many benefits of taking part in the pilot, for example; learning how to submit online at your own pace with increased HMRC support, influencing the digital system moving forward and providing feedback and immediate access to check if you’re completing the return correctly. This comes with the added security of no additional compliance checks or scrutiny.

Regardless of whether your business decides to participate in the HMRC pilot you should still be beginning to prepare for the digital changes. Businesses should be contacting their accounting software provider/internal teams to ensure they are aware of the changes and establish whether the existing software is adequate and prepared for the changes.

For further information, please contact our VAT specialist, Hydeam Sulton.

HMRC continue with their MTD plans for April 2019

HMRC had their latest consultation on Making Tax Digital for VAT on 18th December 2018, which consisted of draft regulations and set out the plans in more detail. The changes will come into effect from April 2019.

Businesses with a taxable turnover above the VAT registration threshold will be required to preserve digital records and provide VAT returns using compatible software. In an addendum to the original draft, businesses will be allowed to use compatible and approved software alongside spreadsheets to provide VAT returns.

The good news is that HMRC are willing to listen to business’ concerns and software providers are working on suitable solutions. The bad news is the implementation of these major changes in April 2019 are still scheduled to clash with the looming Brexit date. Interesting times ahead!

For further information, please contact our VAT specialist, Hydeam Sulton.