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Emerging issues in due diligence

Lucy Graham looks at a number of questions that should be considered when preparing your business for due diligence.

As businesses continue to recover from the Covid-19 pandemic we have seen a number of issues arising in the course of our due diligence projects which are either a direct or indirect result of the impact of Covid-19 on target businesses and the measures taken by those businesses during the pandemic.

The following are some areas buyers and investors are focusing on at present where a number of questions should be considered when preparing your business for due diligence:

Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans

Many companies took out CBILS and Bounce Back Loans during 2020 and the start of 2021 and have now either come to, or are approaching, the end of the interest-free period. Once the first year has passed, can the company meet its capital repayment and interest obligations and is there a cashflow forecast to support this? Companies should also be aware that the interest covered by the Government during the first year ‘interest free’ should actually be disclosed as grant income.

We have found that the interest rate on CBILS loans after the first year is relatively high; is the interest rate the best the company can find or should it now be considering alternative financing arrangements?

Is the company complying with the terms of its loans? Were the funds used to genuinely support trading in the UK? The terms and conditions of CBILS and Bounce Back loans are clear about how the funds should be used and any breaches in the terms and conditions could potentially result in the loans being immediately repayable.

Use of the Coronavirus Job Retention Scheme aka ‘Furlough’

The furlough scheme was invaluable in supporting companies during lockdowns when staff were unable to work, but there were stringent rules to observe and complex calculations to file.

Did the company comply with all of the legal requirements relating to notifying their employees and ensuring that they did not work for the company during the period where furlough was claimed, and can the company demonstrate this with copies of signed agreements, etc? Conversely, when staff were furloughed and therefore not working, can the company show who was still working and how the company continued to function in the absence of the furloughed staff?

Are the claim calculations correct? Mistakes can often arise around hourly paid employees and holidays in particular. Did the company take advantage of the ‘flexi-furlough’ when employees returned part-time and if so, were the calculations done correctly?

Does the company claim Research and Development (R&D) relief? If so, the staff costs for the furloughed period should be excluded from R&D claims. Some companies may have furloughed staff without claiming the Job Retention Scheme (JRS) support from HM Revenue & Customs (HMRC) – if this is the case then no R&D claim should be made for periods employees were not actively engaged in R&D activities. There is specific guidance available from HMRC around sick pay, holiday pay and flexible furlough periods and how these interact with R&D relief.

Mistakes can often arise around hourly paid employees and holidays in particular.

Supporting Cashflow

During 2020 and early 2021 many businesses entered into arrangement with HMRC, customers, landlords or suppliers to support cashflow, agreeing revised payment terms and deferrals. Many such arrangement were informal and have now come to an end.

As a result of agreeing revised terms with customers’ debtors’ balances and debtor payment days may be higher than previously seen – is there evidence that these older debts are still recoverable or are bad debt provisions now required when previously it was believed that delays in payment were due to the impact of Covid?

If the company entered into revised rent terms with its landlord or has even chosen to downsize or move premises, has the impact of any changes been fully considered? Are any provisions for dilapidations required if vacating premises and have any relevant rent-free periods been properly adjusted for and reflected in the company’s accounts to ensure that the underlying ongoing costs are clear to third parties?

If the company took advantage of deferring its VAT liability between March 2020 and June 2020, has it now either paid the balance over in full or entered into the scheme to repay over interest free instalments by June 2021? If it did neither of these then penalties and interest may now be due.

How we can help

As is clear from the above there are lots of questions to be answered and we can help you answer them all.

  • Specific advice could be sought to cover, for example, a review of your furlough claims or R&D calculations.
  • We can also assist with the preparation of cashflow forecasts and advise you on a wide range of financing options which might be available to your business.
  • Our financial reporting experts are able to provide bespoke advice on suitable accounting policies and any necessary disclosures arising out of any of the areas mentioned above.

Would you like to know more?

If you would like to discuss this further, please contact Lucy Graham using the details on this page.

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