2021 Automotive Sector Outlook - Predictions for the year ahead from our specialist automotive team - Ross Brooke
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2021
Automotive
Sector Outlook
Predictions for the
year ahead from our
specialist automotive
team.
Helping you prosper
Contents
02 04 06
Current and
prospective Motor retail proves
State of the market transactions market its resilience
08 12 16
Guest opinion: the
immediate future
for car dealership
Beyond Brexit property The future of tax
18 20 22
What effects will
the temporary
enhanced What lies ahead
incentives have on for the sector:
the cost of a new Fraud and the the experts’
car dealership? automotive sector perspectives
25
Our national
automotive
specialists
1
State of the market
When we published our 2020 continued to grow throughout the year, We also hear from Bill Bexson, Managing
Outlook in February last year, we with the UK’s biggest auction operators Director at Automotive Property
could not begin to comprehend the reporting the average values were Consultants, on page 12 who shares his
year that lay ahead. Yet, just one significantly outstripping guide prices views about the immediate future for car
across auction sites. dealership property and discusses why he
month later, the UK had entered
Turning to the financial position, again thinks the reports of the demise of bricks
its first lockdown and dealerships
the picture is overwhelmingly positive. Of and mortar are greatly exaggerated.
across the country were forced to
course, the profits have turned into cash It is fair to say dealers have had more
close their doors.
helping the position but, more importantly, than enough to worry about over the last
Lockdown relaxation in summer saw a high much improved working capital levels 12 months. However, when economic
level of pent up demand with automotive and a freeze on most capital investment survival is threatened, unfortunately new
businesses enjoying a strong period but, projects has turbo charged the cash threats emerge and, in our experience,
as the year drew to a close, uncertainty positions to record levels. the occurrence of fraud increases – and
was once again rife. Despite a brief respite 2021 has clearly been challenging so the effects are so damaging they may last
following a last minute announcement far given the lockdown situation, but for years. On page 20, we have outlined a
that a Brexit deal had been done, the the results we are seeing do not show brief overview of the main types of fraud
excitement was short lived as 2021 any major casualties. The typical result in the automotive sector and provide some
began with border delays, Covid-19 cases is a breakeven position to the end of tips about what you can do to protect your
rocketing and a third, stricter lockdown February and the expectation of a small dealership.
upon us. profit in March, before the post lockdown
Despite Covid-19 dominating all recent
demand returns again in Q2 to boost the
At the time of going to press, the return conversations, we can’t publish our 2021
position and bring results more closely into
to some sort of normality appears to be in Outlook without mentioning Brexit. On
alignment with dealer budgets.
sight. The Government’s roadmap out of page 8 we take a look at the new border
lockdown has been shared and dealerships As we move towards the longed for return formalities and outline the key areas that
opened their doors once again on 12 April to normality, care must be taken to ensure will impact on the automotive sector going
2021. sufficient reserves are held as increases in forward.
volumes, manufacturer pressure, slower
2020 trading performance and turning stock and VAT repayments to And of course, the vast number of
2021 prospects HMRC are all likely to come with the return Government support measures need to
to normality. However, if the cost savings be recouped somewhere. The Chancellor
We are now in a position where we have has already announced a £20bn “stealth
achieved in 2020 can remain embedded
good visibility of 2020 results. Whilst tax” freeze on protections against income,
within businesses and margins retained,
turnover is down in the region of 10% to capital gains and inheritance duties to
there appears to be a solid platform to
20%, profits have remained healthy and, “support the public finances”, as well as
build 2021 into another good trading year,
in many cases, exceeded 2019. an increase to the rate of corporation tax
proving yet again the inherent resilience of
Looking firstly at the profit and loss, this sector. to 25pc from 19pc by 2023. On page 16
over 97% of the groups we work with we share our tax predications and look at
had a profitable result in 2020. This is Roadmap to our Outlook what the recent Budget announcements
an exceptional result and the best we In our 2021 Automotive Outlook, we could mean for you and your business.
have seen since the unusual year of 2009 take a look back at an extraordinary
(another year when used vehicle prices 2020 and share our predictions for 2021 Finally, we once again have asked a panel
rose strongly). For the five months to May and beyond. The prolonged disruption of automotive experts for their views on
2020, we estimate the reverse was in fact of Covid-19 brought with it a need how the landscape is likely to look for
true, with the vast majority of dealerships for enhanced business resilience and the sector through the rest of 2021 and
in a loss making position due to a weak flexibility. It has been remarkable how well beyond. Commenting on the market were
March and losses in the total lockdown dealerships have reacted to the challenges UHY automotive experts, David Kendrick
months of April and May. The closing of Covid-19, embracing the necessary and Paul Daly, Swansway Group Director,
results are therefore truly remarkable, changes head on. On page 6 we take Peter Smyth, Big Motoring World CEO,
demonstrating the robustness of the a look at how the industry has come Peter Waddell, and Head of Research at
sector with some incredible performances, together to navigate the unknown. Zeus Capital, Mike Allen. Read our Experts
particularly in the bounce back months Panel debate on page 22.
Market uncertainty is perhaps the biggest
over the summer. We hope you find real food for thought in
hard-hitting factor when it comes to M&A
The combination of reduced manufacturer deal volumes and values, but has the this, our 5th Automotive Outlook. If any of
pressure, impressive cost saving measures, pandemic triggered opportunity for some? the topics covered prompt any questions,
strong customer demand and Government We explore the reasons that deals are still you will find our contact details on page
support became intoxicating and many being completed despite the economic 25 – our specialists will be pleased to assist
noted all-time record performances climate and share our predictions for 2021 and we look forward to hearing from you.
between June and October. Customer on page 4.
demand for vans is worth a particular
mention. Due to an increased requirement
for home delivery, the demand for vans
2 Automotive outlook 2021 | uhy-uk.com
State of the market 3
Current and prospective transactions market
It’s difficult for businesses to plan for the unexpected, and 2020 was impossible to predict. Throughout 2020,
automotive retail M&A activity was down considerably from previous years, heavily impacted by the significant
uncertainty stemming from the Covid-19 pandemic. However, despite a slow in activity, deals did complete and
UHY continued to be at the forefront of the activity that took place, being involved in 42% of the completed
transactions in 2020. In this article, we share some of our key findings about the 2020 market and look forward
to the prospects of 2021 and beyond.
The headlines
2020 at a glance
• Transactional activity remained steady but, with many deals ‘slow walking’ due to Covid-19, completed transactions
were down 40%, with 14 deals completed in 2020, compared to 24 deals completed in 2019, 44 in 2018 and 38 in
2017
• Strong international interest remains with international owners involved in 22.5% of transactions in the last two years
• No ‘mega’ deals were reported with substantial goodwill sums, and there was a general drop in the average deal
value
Outlook to 2021
• Potential for distressed opportunities later in 2021, once Covid-19 funding repayments are required
• De-consolidation from the larger groups a real possibility, with smaller players likely to consider increasing scale
• Manufacturer site consolidation anticipated to increase with non-core locations under review
• Continued activity within the auto tech market likely, with Covid-19 accelerating the tech journey
Deal volumes and values trends
Number of deals completed
Year
4 Automotive outlook 2021 | uhy-uk.com
Deal activity was down substantially in The tech opportunity Distressed opportunities
2019 and 2020, with few ‘mega’ deals We are seeing significant activity within We believe that values will remain stable
reported and a general drop in the average this area, with Covid-19 accelerating during 2021, however, it is likely that
deal value. We have observed this falling the tech journey for many dealerships. distressed opportunities will come to the
deal value to be primarily attributable to Not only has there been progress within market as we head into 2022. Government
a softening of the underlying profitability dealerships, but the software and tech support will need repaying and high levels
that drives the valuation. In addition, providers themselves have become hugely of unemployment are likely, therefore the
multiples which had escalated for certain attractive assets. We have already seen the market may become more challenging
brands to extremely high levels (witness likes of Codeweavers, enquiryMAX and for those businesses without appropriate
the JLR goodwill levels in 2016 for Rapid RTC purchased in the first couple controls in place. We are, however,
example, as well as other premium brands) of months of this year and are aware of a confident that strategic, well prepared
have now returned back to levels more number of other transactions currently in businesses can still achieve good value in
consistent with prior historical trends. progress, with interest from private equity 2022.
For the transactions that did complete as well as larger consolidators.
Lack of banking support to remain an
during 2020, there was a noticeable issue
Recurring revenue and growth opportunity
lengthening of the timeframes for
is certainly driving the multiples for these The lack of mainstream banking support
completion of these deals, with many
businesses through the roof, with Covid-19 for the sector remains a real brake on
slow walked due to Covid-19 uncertainty.
perhaps limiting the number of viable both the organic and acquisitive growth
We saw a definite increase in the time
investment opportunities available. Exciting prospects. Motor retail businesses continue
taken from initial instruction to market a
times in this space for sure. to be placed in the general retail basket
business through to achieving a firm offer
and we see no change to this outlook
and completion. This is partly the result of Property values in the near future. Fortunately, the
a more cautious approach from buyers,
With property values coming under manufacturers’ captive finance companies
but property value discrepancies are also
scrutiny during 2020 due to the significant have been helpful in addressing some of
having a real impact. We anticipate this
uncertainty, we were seeing up to 15% these issues, particularly BMWFS, TFS and
returning to a more normal position as
variance in current value versus historic VW Bank.
Covid-19 gains stability in 2021 and the
valuations. This was highly frustrating as,
vaccine is successfully rolled out.
fundamentally, nothing within the business
The other notable positive from 2020 or property had changed. It certainly posed The road ahead
was the significant pent up demand and a challenge in the transactions we advised Although transaction numbers have
profitability dealers enjoyed from June on in 2020, with substantial variances reduced considerably, this is no surprise
onwards. This has led to many businesses from industry professionals. However, on given the uncertainty that engulfed 2020
having substantial cash reserves around the back of strong trading performances and has followed us into 2021.
them, which can provide collateral to fund and with the release of the Government’s
potential acquisitions. roadmap out of lockdown, property values Looking to the latter parts of 2021, we see
have recovered and industry commentators a return to a more normal level of market
appear much more comfortable in their volumes and indeed the potential for some
The outlook for 2021 valuations, which is pleasing to see. degree of pent up demand, particularly if
the financial performance of the average
Strong international interest to remain Brands of the moment motor retailer continues at the strong
The interest of international investors in Having been through a period over the levels seen in 2020.
the UK automotive market has continued, past five years where premium brands
following the boom in overseas activity We expect to continue seeing strong
such as Mercedes, Audi, JLR and BMW
a few years ago. International owners demand for the right business, however,
have been top of people’s shopping lists,
were involved in 22.5% of transactions it is critical to identify the strategic buyer
we have seen a marked change in this
in the last two years. While they are more early in a process to deliver maximum
area. Whilst premium businesses are
cautious in their outlook as a result of shareholder return. Opportunities will
undoubtedly still attractive, there has
Covid-19, based on our recent discussions continue to become available as larger
been much more focus on the likes of
we envisage activity to increase, particularly groups trim their portfolios and smaller
Kia, Toyota and Lexus, with substantial
whilst exchange rates are so attractive. dealer groups come under greater financial
goodwill payments being tabled for
Buyers from the UAE, USA and East Asia pressure and scrutiny, therefore looking to
these opportunities. The ever increasing
remain extremely focused on the UK as a exit. The de-consolidation of the PLCs will
focus on EV technology is also becoming
robust economy to make an investment. bring opportunities for those well placed
a consideration for businesses when
privately owned businesses with funds in
contemplating an acquisition, which again
place to make strategic acquisitions.
suggests a slight mind set shift to the
medium/long term outlook for the sector.
Current and prospective transactions market 5
Motor retail proves its resilience
Our 2020 Automotive Outlook, Reinventing the business model - walk around videos of vehicles. Simple
released in February 2020, talked the online element of the customer things like checking how mobile friendly
of the Brexit storm on the horizon journey is the new hot topic a website is or dealing with incoming
and the damage a no deal Brexit email enquiries on a timely basis became
The outbreak of Covid-19 and the
essential.
could have on the industry. subsequent social distancing and stay at
home orders have forced dealers to get The sale of new cars proved more
However, none of us predicted that a year creative. Even before the lockdowns, the challenging. But by embracing digital
later we would have spent much of the last number of dealer visits was on the decline. software solutions, such as online car
12 months in lockdown, with showrooms Many dealers were already readying retail platform SilverBullet, and ensuring
closed to the public. Yet, despite an themselves for the growing demand for all vehicles are marketed on car sales sites
extremely challenging 2020, a significant contactless transactions. However, no one such as Autotrader, dealers have been
proportion of the dealership network expected the speed at which this became able to provide a robust online presence.
reported profit and, in some instances, essential. Businesses that performed the Effective prospecting from the dealer
record breaking year end results. Indeed, best in 2020 already had solutions to hand database also became all the more vital,
our intelligence shows that profits were or were quick to refocus their efforts into particularly for new car sales with an
at least as high as 2019, despite average this area, ensuring that the showroom increased focus on renewals business,
performance turnovers being down. window and used car forecourts were well enticing end of term customers or those
How have so many dealerships weathered represented online. on a monthly payment scheme to upgrade.
this particular storm so well, despite Our panel of experts address the online
The focus shifted from state of the art
absolutely no time to plan? In this article, shift in more detail on page 22.
showrooms to improving the quality of
we look at how the industry has come photography, producing high quality videos
together to navigate the unknown. with detailed commentary, using FaceTime
to interact with customers and providing
6 Automotive outlook 2021 | uhy-uk.com
Cash is king Government support Sharing best practice
Most will remember the 2008-9 crash Whilst the Government has announced a At the start of the first lockdown, UHY
and the businesses with more cash were number of measures to support businesses launched a Covid-19 WhatsApp Group for
the ones that came out stronger. Once during the pandemic, we are aware of dealership owners and Finance Directors.
again, the common theme throughout this only a small proportion of dealerships This group brought together peers from
period is that ‘cash is king’. As we went that have taken the Coronavirus Business across the industry who have used it to
into the first lockdown, with no idea about Interruption Loans (CBILS) – either because share up-to-the-minute advice and current
what was ahead, many businesses didn’t they couldn’t demonstrate need for cash at thinking, allowing members to navigate
realise what their monthly cost burn was, one end of the spectrum, or affordability the unchartered waters together.
making short term cash flow a real issue. of repayments at the other. However, most
It has been fantastic to see how everyone
Who would have expected then that a have taken advantage of the VAT deferral
has worked together to support one
combination of Government support, scheme, despite sitting on healthy cash
another, from discussing different
extended manufacturer stocking terms, positions.
interpretations about Government
reduced volumes and material
Of more wholesale benefit has been both initiatives, to whether or not commission
de-stocking would leave the cash position
the Coronavirus Job Retention Scheme should be included in furlough payments,
in a materially strengthened position by the
(CJRS) and the rates relief for retailers, to brand support and even vehicle cleaning
end of 2020.
with these payments proving to be a well regimes. The group has been extensively
Of course, this has been instrumental in judged form of assistance on the part of used by members as a sounding board
helping all stakeholders sleep at night. the Government, ensuring as many jobs as and the insight and knowledge shared has
Let’s just hope complacency doesn’t creep possible have been retained. provided a lifeline for many.
in as these factors will not be around
forever and could catch out the unwary
when, inevitably, things return back to a It has been remarkable how well those in
welcome normality. the industry have reacted to the challenges
of Covid-19, embracing the necessary
changes head on. Strong management
has resulted in many in the dealer network
starting 2021 in a good position, and
we believe the experiences and lessons
learnt during 2020 will result in greater
operational efficiencies going forward.
Simply put, whilst the in-person experience
cannot be replicated, the dealership model
has proved its resilience and ability to
adapt and evolve.
Motor retail proves its resilience 7
Beyond Brexit
The deal has been done. Despite However, the automotive sector would For most products, ‘origin’ determines if
the building ‘odds against’ and have faced tariffs of 10% on exported and a trade tariff is applied. Within the TCA,
a backdrop of doubt at the imported vehicles in the event of a no deal materials qualify for free trade by meeting
end of last year, the UK and EU Brexit, as well as 2-4% on their individual the rules of origin criteria.
components, amounting to an estimated
have negotiated a Trade and Essentially, this means goods sold in the
£1,900 premium on an EU-built car for
Cooperation Agreement (TCA), EU by UK businesses must now originate
UK buyers (with electric cars expected
signed one week ahead of the end to become on average £2,800 more from the UK or EU to benefit from the
of the Brexit transition period. expensive). Under the terms of the deal, preferential tariff rates. Historically, origin
tariffs are imposed only on products that has been less important to EU and UK
There was a collective sigh of relief as
fail to meet ‘rules of origin’ requirements manufacturers because once the part is
news of the deal and ongoing trading
and no quotas have been imposed. imported to the EU it can move around
relationship with the EU finally provided
freely. Since agreeing the TCA, the rules
some unexpected stability for the UK. Mike
There is no doubt, however, that the of origin mean that parts imported to the
Hawes, Society of Motor Manufacturers
new agreement will result in increased EU or UK now cross a border, resulting in
and Traders (SMMT) Chief Executive
paperwork, processes and border checks potential tariffs if the origin criteria are not
announced “For automotive, Brexit has
for manufacturers. met.
always been about damage limitation, and
the draft Trade Cooperation Agreement, In this article, we look at the new border Crucially for the automotive industry, the
while no substitute for the completely formalities and outline the key areas that trade deal allows for a 12-month grace
free and frictionless trade with Europe we will impact on the automotive sector. period for manufacturers to produce
formerly enjoyed, will address immediate evidence of the origin of their products.
concerns.” Rules of origin
But even for UK built cars, with more than
The ‘rules of origin’ is the biggest half the 30,000 components in an average
On announcing the deal, Prime Minister
post-Brexit change for automotive British-made car coming from somewhere
Boris Johnson declared that UK industry
manufacturers, and confusion surrounding else, asking manufactures to prove the
would face “no non-tariff barriers” when
the clause is rife. origin of each is some task.
trading with the EU. However, deal or no
deal, in reality there were always going to A product’s country of origin is its
be obstacles to post-Brexit trade with the ‘economic nationality’, which is not
UK now outside of the Single Market and necessarily the country that it was shipped
Customs Union. from.
8 Automotive outlook 2021 | uhy-uk.comThe country of origin for a product Exports the UK from the rest of the world,
changes when a suitable amount of and then shipped to the EU, it is likely
processing has been completed. • If you are importing into and Customs tariffs will apply. If import
exporting from the UK, you will duties are payable in the destination
Government guidance states that once a need to obtain a European Union country, in most cases these will be
product has gained originating status, it is registration and identification (EORI) payable when the goods arrive in that
considered 100% originating. This means number, which starts with a GB country.
an engine comprising 30% EU-derived followed by your VAT number. If
components, if used in the production of a you do not have one, you may have • You must retain proof that the goods
UK-built car, would count as 100% locally increased costs and delays. You can have been physically moved to
assembled. The SMMT has estimated that apply for an EORI at https://www.gov. another country and this must be kept
41% of the content of cars built in the UK uk/eori. for six years.
is sourced from within the country, with
between an additional 20% and 50% • You will need to complete all relevant • Where you have proof of export,
sourced from the EU. customs administrations declarations. and goods are exported within three
These declarations are complex months, the sale of the goods is zero
These rules are very complex and we and require specialist knowledge to rated for VAT purposes. The proof
recommend that advice is sought from a complete, so if you are not confident of export must show the physical
Customs adviser in situations where the that you have the capabilities movement of the goods.
rules of origin can not be applied simply. internally, we would recommend
appointing an external agent. • You will no longer be required to
New border formalities complete an EC Sales list (unless you
• While the trade agreement allows for are an NI business).
Goods entering the EU from Great Britain tariff free trade between the UK and
(GB) face large amounts of new paperwork EU, there are important exceptions.
• Intrastat declarations are no longer
and checks. We have provided the headline required for dispatches (unless you are
As outlined above, tariffs apply if
import and export considerations below: an NI business).
the country of origin of the goods is
outside the UK. This means if goods
are shipped into free circulation into
Beyond Brexit 9• The VAT411 form that was used when a Ongoing confusion with Northern
customer in another EC Member State Ireland
bought a new vehicle in the UK and took
it back to their EC Member State will As a result of Brexit, the way in which
no longer be required unless you are an businesses move goods between GB and
NI business. This is likely to be replaced Northern Ireland (NI) has changed.
with an updated version in the future. From a VAT perspective, nothing has
These transactions are now treated as changed in that VAT is chargeable on the
an export, therefore if the customer transaction. The changes are related to
collects the vehicle, a suggestion would Customs duty, so where a vehicle has been
be to charge VAT upfront until you are imported from within the EU and then
satisfied that the goods arrived in the EU subsequently sold to a customer located
and they have been registered there. As in NI, the vehicle imported into NI may
with all export evidence, it must show be subject to import duty at 10%. These
the physical movement of the goods rules apply to new and used vehicles, cash
and customs clearance in the destination or financed sales and contract hire or hire
country. purchase transactions.
Imports Where a GB based business is the
• As with exports, you must apply for an importer/declarant into NI, it is essential
EORI number that starts with GB in order that they register with the Trader Support
to import goods. You can apply for an Service (TSS) who will facilitate the import
EORI at https://www.gov.uk/eori. into NI and arrange the payment of the
duty required under the NI Protocol.
• As with export declarations, you will
need to identify whether there is the This can be done at https://www.gov.uk/
required skillset within your organisation guidance/trader-support-service.
to process formal import declarations or
whether to appoint an external agent to If the declarant can evidence that the
assist if you do not. vehicle sold is not at risk of crossing the
border into Republic of Ireland, the import
• If import duties are payable, you will duty may not be payable.
need to decide whether you are going
to pay the import duty on arrival or In any event, we recommend any GB
set up a duty deferment account. The business selling into NI registers with the
duty deferment account allows goods new UK Trader Scheme which will help
to clear into the UK seamlessly, then ensure that you don’t pay import duty
a payment for the import duty due is when moving goods into NI from GB,
collected by direct debit on the 15th where those goods will remain in the UK.
day of the following month. Normally,
This can be done at https://www.gov.
the deferment account requires a bank
uk/government/news/uk-trader-scheme-
guarantee which is costly, however, this
launched-to-support-businesses-moving-
is only likely to be required for the duty
goods-from-great-britain-to-northern-
element of the import taxes.
ireland.
• Import VAT will not be payable on arrival.
We are here to help
HMRC have introduced postponed VAT
accounting (PVA) for goods imported With almost 1,500 pages of the Brexit
from the EU to enable businesses to agreement to sift through, our teams have
account for import VAT on their VAT been working hard to ensure we are fully
return - paying it and reclaiming it in the briefed on the implications of the deal.
same period. Postponed VAT accounting Our dedicated VAT experts are on hand to
is available for all imports from 1 January provide support and advice. If you would
2021, not just for goods brought in from like to know more about how the rules of
the EU. origin apply to the automotive sector, or
about any other aspects of the TCA, please
get in touch.
10 Automotive outlook 2021 | uhy-uk.comBeyond Brexit 11
11Guest opinion: the immediate future
for car dealership property
Property values came under scrutiny of origin regulations which, in particular, spaces that car dealerships are able to offer,
during 2020 due to the significant affect battery production. This is resulting in both externally and internally, can easily
uncertainty and nervousness about many European countries, including the UK, satisfy social distancing requirements. Overall,
the future of retail generally. However, looking to establish their own battery giga- we see that the pandemic has effectively
according to Bill Bexson, Managing factories to address future supply problems. acted as an accelerator of structural changes
Director at franchised motor retail We can expect weak economic growth as we sweeping through the motor industry.
specialists Automotive Property move out of the lockdowns, there are already
Consultancy (APC), reports of the demise significant border control issues restricting This leads on to the core CASE dynamic,
of bricks and mortar car dealerships are imports and exports, and Brexit implications as outlined by Mike Allen at Zeus Capital
greatly exaggerated. In this article, Bill have squeezed the availability of finance for (Connectively, Autonomy, Shared/Subscription
shares his views about the future for car dealers. and Electric). There are around 100 electric
dealership property and looks at some vehicle offerings available now or shortly
of the driving forces behind the current Brexit though has been occluded by the which has stimulated significant growth in EV
trends. Covid-19 pandemic. However, with the sales and adaption. Covid-19 has accelerated
significant impact of vaccines we are starting EV take-up and OEMs are going electric in a
Bill explains, car dealerships, both in function to see hope for the freedom to travel and, big way, for example, Jaguar have recently
and location, can readily evolve; witness with that, expected rises in consumer announced plans to go all electric.
Tesla and Cazoo transitioning into former confidence and subsequent rises in consumer
dealerships, and on top of that other uses are spending, which in turn feeds into economic The emissions benefits are well publicised,
biting at the heels. recovery. The Bank of England’s Chief however, enormous investment in
Economist, Andy Haldane, back in February infrastructure is required to provide the
Volvo have been reported to want to move talked about the economic “coiled spring”, necessary charging points. The Government
to selling new cars entirely online, but on ready to bounce back strongly when the has announced bold plans for the ban of
closer investigation what they intend is pandemic is over. Household balance sheets petrol and diesel cars by 2030 and hybrids
to originate sales online and close them are strong with low debt. Consumers, by 2035. This does not mean that of the
at the dealerships. Original Equipment therefore, have cash to spend. With limited approximately 39.7 million vehicles on the
Manufacturers (OEMs) are wedded to dealers foreign travel opportunities in the immediate road that by 2030, or indeed 2035, they
remaining the principal distribution conduit, future, their attention could well turn to cars.will all be electric vehicles. Take-up over the
and that is the key word, distribution, as last year or so has improved significantly
dealers move away from conventional Supply of new vehicles has proven and, considering the extended range of EVs
‘retailing’ and morph into distribution and challenging during lockdown and further available, we have adjusted our January 2018
tech companies. For example, Inchcape accentuated by a semiconductor chip projections for the number of AFV sales in
have relisted on the London Stock Exchange shortage. New car pricing has effectively risen 2030 from 24% to 58% and by 2035, from
and are now classified as ‘Business Support as dealers have been able to secure fuller 54% to 93%. This means that in 2030, 26%
Service’, having previously been ‘Speciality margins and across various segments within of vehicles on the road will be AFVs and by
Retail’, and Cazoo are expected to move to the used car markets, pricing has actually 2035, 49%. We think it will take until 2040
an IPO, rated as a tech stock. at times increased. This is all indicative of a to achieve 100% new car AFV sales but even
supply-side squeeze, rather than any lack of then, 22% of vehicles on the road will be
What are the implications for the demand. The pandemic has seen cars become combustion engines. While take-up now is
future? more important to consumers wanting to expected to be quick, within a relatively short
have their own space and, in the short term, period of a year or two, we expect the pace
Dealing firstly with Brexit, we are seeing increases in stay-vacations and car journeys to slow down to allow the infrastructure
impending problems with satisfying the Rules is a reasonable expectation. The large open provision to catch up.
AVF UPTAKE & CFV DECLINE
100%
90% CFVs as a % of total sales
80% AFVs as a % of vehicles in the UK
70%
60%
AFV sales as a % of total sales
50%
40% CFVs as a % of vehicles in the UK
30%
20%
10%
0%
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
12 Automotive outlook 2021 | uhy-uk.comWhat does this all mean for car index, MSCI. Car dealerships offer a strong obstacles, when compared to the freedom
dealerships’ property? Industrial functionality and as the CASE- of the internet. Nonetheless, the two work
motivated structural changes permeate in harmony together.
Turning to the bricks and mortar story: throughout the industry, the distribution
dealers have paid their rents and, as a function of dealers and their real estate Albeit we are living in uncertain times,
result, investors have developed a new assets will only be enhanced. the property market moves in a typical
respect for the industry, albeit the investor peak and trough fashion. The diagram
profile has shifted towards private investors Dealership property is flexible and we are below measures GDP from almost the turn
and property companies who have the already seeing an increase in the aftersales of the last century and shows the peak
dexterity and responsiveness to recognise and distribution utilisation of real estate and and troughs of economic performance,
the robust distribution credentials of the a shrinking of the traditional showroom. reflecting dramatic events such as the world
sector. The larger financial institutions are Whilst the buildings’ adaptability is often wars and the Spanish flu pandemic, which
hampered by the reported classification not an impediment, this does need to lasted almost 36 months from January
of car dealerships as retail assets by the be amalgamated with changing OEM 1918 to December 1920.
world’s leading property performance standards, and overcoming town planning
GDP (office for budget responsibility)
15
10
5
0
-5
-10
-15
1908
1913
1918
1923
1928
1933
1938
1943
1948
1953
1958
1963
1968
1974
1979
1984
1989
1994
1999
2004
2009
2014
2019
2024
Guest opinion: the immediate future for car dealership property 13The graph below demonstrates that from past performance analysis, property does not
directly follow GDP movements, but is rather a GDP multiplier. Property performance over
the last 50 years has tracked the direction of GDP movement, but more aggressively ie.
there are deeper troughs and higher peaks. As such, property is more volatile than GDP.
Total Return is a measurement of capital growth and income (rent).
In the graph below, we have used APC’s investment yield (capitalisation rate) as a proxy
for car dealership pricing and plotted the direction of travel alongside the Government’s
own GDP projections.
Car dealership investments’ solid Customers will still demand the
performance during the pandemic dealership experience
has seen robust value retention easing
only 4% when compared to the wider Car dealerships are uniquely characterised
commercial property pricing declines of by their ability to combine ‘ecommerce’
7% - 10%. Since summer 2020, we have and ‘bricks and mortar’ and it remains
seen noticeable improvements in pricing important to disengage their association
and more investor interest in the sector, with the performance of the Retail Property
which we expect to result in further Market and unlock value through their
pricing compression for what can be distribution characteristics. In the next 12
best described as survivor stock. When months, we expect dealerships continue to
compared to broader economic uncertainty, expand their digital journey between dealer
its comparative attractive Yield makes the and customer with physical dealerships
right dealership investment a good place evolving in function and location over time,
for investors to be. particularly as consideration is given to
how moving to EVs will affect the usage of
space.
14 Automotive outlook 2021 | uhy-uk.comAbout Bill Bexson
Bill is Managing Director at Automotive This data allows APC to extensively analyse
Property Consultants and a RICS Registered the national car dealership market; for
Valuer. APC is a specialist property advisory example to determine average rents per Bill Bexson
business dedicated to the franchised motor region, average lease lengths per region, Managing Director,
retail property sector. The company’s and property availability regionally. Automotive Property
focus on the franchised dealer market has Consultants
enabled APC to develop market leading If you would like to speak to Bill about how
sector knowledge and provide clients with he can help you with property matters, you
a bespoke motor retail property service. can contact him at
They hold an extensive database of car bbexson@automotive-property.com or call Disclaimer
dealership transaction comparables, dealer 07831 827442
The views expressed in this article are those of Bill
and manufacturer ‘open points’, and Bexson and are from personal research and experience
properties available in the market. and intended as opinion only.
Guest opinion: the immediate future for car dealership property 15
Staff costs, numbers and teaching staff to pupil ratios 15The future of tax
Chancellor Rishi Sunak presented There are two specific types of disposal A change to the relief ensures that Gift
his second Budget on Wednesday 3 which potentially qualify for a 10% rate up Hold Over Relief is not available where a
March 2021. to a lifetime limit for each individual: non-UK resident disposes of an asset to
a foreign-controlled company, controlled
The Chancellor’s announcement • Business Asset Disposal Relief (BADR) either by themselves or another non-UK
stayed light on tax increases, but (formerly known as Entrepreneurs’ resident with whom they are connected.
he did announce a string of real Relief). This is targeted at directors This measure affects disposals made on or
terms tax increases by freezing and employees of companies who after 6 April 2021.
various allowances and thresholds: own at least 5% of the ordinary share
capital in the company, provided Super-deduction
• Personal allowance frozen at £12,570
other minimum criteria are also met,
until April 2026 The headline-grabbing super-deduction
and the owners of unincorporated
• Capital Gains Tax annual exemption at businesses. allows companies to deduct 130% of a
qualifying asset’s cost from pre-tax profits
£12,300 until April 2026 • Investors’ Relief. The main without limit; a 24.7p reduction in tax
• Inheritance tax allowances (all until beneficiaries of this relief are external liability for each £1 invested.
April 2026): investors in unquoted trading
companies who have To qualify for the super-deduction,
• Nil rate band at £325,000 newly-subscribed shares. expenditure must be incurred:
• Residence nil rate band at £175,000
The lifetime limit for BADR was reduced • on or after 1 April 2021 but before
• Means testing threshold at £2m from £10 million to £1 million for BADR 1 April 2023 (contracts entered into
• Pensions lifetime allowance at qualifying disposals made on or after 11 on or before 3 March 2021 cannot
£1.073m March 2020. Investors’ Relief continues to qualify); and
have a lifetime limit of £10 million.
• VAT registration threshold at £85,000 • on new and unused, not
until April 2024 Business assets and Gift Hold-Over second-hand, plant and machinery.
Relief
Capital Gains Tax Specifically excluded from the deduction is
Gift Hold-Over Relief operates by deferring expenditure on:
The Capital Gains Tax (CGT) rate remains the chargeable gain on the disposal when
at 10%, to the extent that any income a person gives away business assets. The • cars;
tax basic rate band is available, and 20% gain then comes into charge when the • long-life assets; and
thereafter. Higher rates of 18% and 28% recipient disposes of the gifted asset. The
apply for certain gains; mainly chargeable recipient is treated as though they acquired • the provision of plant and machinery
gains on residential properties with the the asset for the same cost as the person for leasing.
exception of any element that qualifies for who gave them the asset.
Private Residence Relief.
16 Automotive outlook 2021 | uhy-uk.comSR Allowance Timely payment This consultation is seeking views on the
following areas, with the notification
The ‘SR allowance’ allows companies to One consultation considers ‘timely requirement proposed to become effective
deduct 50% of expenditure on special rate payment of tax’. Most companies (99% from April 2022:
assets from pre-tax profits without limit; a according to HMRC literature) pay their
9.5p reduction in tax liability for each £1 corporation tax 9 months and 1 day after • the definition of uncertain tax treatment
invested. the end of the accounting period. Large
companies are already obliged to pay • the threshold for notification
Similarly to the super-deduction, quarterly on account. The consultation • exclusions from the requirement to
expenditure must be incurred on or after 1 is seeking views as to the benefits and notify
April 2021 but before 1 April 2023 on new challenges of this current arrangement,
plant and machinery other than cars, including whether a move towards the • the proposed penalty for
long-life assets, and leased plant and Government’s avowed aim of bringing non-compliance.
machinery. the payment of taxation arising out
of transactions closer to the date the
On the following page, we look at the transaction takes place will be of any What next?
impact these temporary measures could benefit to a business. Any change would
have on the cost of a new dealership build. have to be accompanied by some sort Whilst the 2021 Budget announced
of digital record keeping and filing, but incentives for business, it also clearly
Corporation Tax HMRC have stated that ‘Making tax signposts the need for an increase in taxes,
Digital’ for corporation tax will not become with the freezing of allowances and bands
The rate of corporation tax will remain at mandatory until 2026, at the earliest. and the future increase in corporation tax on
19% for the next couple of years, but will the horizon. The consultations also appear
rise to 25% from 1 April 2023. This rise Notification of uncertain tax treatment to show the direction of travel, from HMRC’s
will only impact companies with profits in by large businesses perspective, towards paying tax sooner and
excess of £250,000, as companies whose also having more dialogue with HMRC.
profits remain at or below £50,000 will Another consultation impacting on larger
continue to pay 19%. A sliding scale businesses outlines a new policy which The world of tax can be a challenging
of rates will apply on profits between will require a business to notify HMRC and ever-evolving minefield of
£50,000 and £250,000. where they have adopted an uncertain tax information. Smart advice on corporate
treatment. This requirement, according to tax planning can help you achieve very
Tax reforms on the horizon? HMRC’s introduction of the consultation, substantial benefits. If you would like
‘‘will help to identify and reduce tax to speak to one of our tax specialists,
Despite having got off relatively lightly
losses caused by delays in identifying please get in touch using the contact
in the Chancellor’s Budget, HM Treasury
and resolving disagreements in how the details on page 25.
unveiled a number of documents and
law should be interpreted. This proposal
consultations on future tax policies on
is not intended to suggest that HMRC’s
March 23, dubbed ‘tax day’. Most of these
interpretation is always correct or that
consultations hinge on the administration
a difference in legal interpretation is
of tax. So, whilst not specifically aimed at
avoidance or evasion.’’
the automotive industry, if implemented
they will have an impact on all businesses.
The future of tax 17What effect will the temporary enhanced
incentives have on the cost of a new car
dealership?
Between 1 April 2021 and 31 March These incentives are, therefore, potentially The SR Allowance compares favourably to
2023, companies investing in valuable, but given the current business the 6% special rate which might otherwise
qualifying new plant and machinery environment care should still be taken apply, although with the AIA limit currently
will benefit from new first year capital before accelerating capital expenditure. at £1m it appears of greatest benefit to
allowances. those companies spending more than £1m
Before any expenditure you should ensure on special rate assets. The £1m AIA limit
These changes mean a new build that the enhanced reliefs are applicable to is temporary and expected to return to its
dealership costing £2.5 million (excluding your situation as there are exclusions, as previous level of £200k after 31 December
land) could benefit from tax savings of outlined in our tax article on page 16. 2021.
£239,110. And the full amount could This example is also indicative only of a
potentially be made available immediately new build project. The typical rates will be Planning Capital Expenditure
if sufficient use is made of the Annual different for refurbishments, extensions
Investment Allowance (AIA), which is etc. Given the varying rates of relief for
currently set at £1 million. In this article, different expenditure, and that some
we look at example calculations to In considering the enhanced reliefs, it is substantial costs remain outside the
illustrate the cash effects of the recent important to consider carefully the typical scope of capital allowances (including
changes. level of allowances at the outset if there land, buildings, doors/shutters and mains
is debate on bringing forward capital water systems), costs associated with, for
The calculations example, a workshop extension, could
expenditures.
A typical new build car dealership in the quickly have complex tax treatment.
UK may have plant of around 43% of the The UHY view Careful planning should therefore be
build cost. Of course, this amount varies undertaken if the tax position is to be
by design, brand and the particulars of Super-deduction budgeted for.
individual procurement, including the
quantum of direct works, but the figure is The super-deduction should apply to ‘main Losses
useful for illustrative purposes. pool’ expenditure such as car lifts, tools,
equipment and other items used in the An extension of loss carry back was
In this example, the total allowances would business, as well as alterations to buildings also announced so that losses made in
typically be split 35% main pool and 65% to install other plant and machinery. 2020/21 and/or 2021/22 will be available
special rate pool. Based on these rates and to offset taxable profits for the three prior
splits, the example dealership would have The super-deduction compares favourably years on a ‘last in first out’ basis. The
£376,350 of main pool allowances and to the 100% deduction of up to £1m extension applies to a maximum of £2m
£698,750 in special rate pool allowances. expenditure under the AIA, returning 19p for each company, corporate group or
The new temporary super-deduction of for each £1 invested. This may encourage unincorporated business per loss-making
130% would be applied to the main lower value items to be capitalised as well year, and each company within a group is
pool, giving a £489,125 reduction. The as careful reflection on whether other limited to a cap of £200k per loss-making
£698,750 would also benefit from a expenditure could be capitalised (eg. staff year. The ability to carry back to the
50% first year deduction under the SR costs installing plant). previous 12 months remains unlimited and
Allowance, with the balance being written capital allowances can generate losses.
down at 6% per year. Therefore, £349,375 However, with the main rate of corporation The cashflow benefit of refunding tax paid
should be written off under the 50% rate tax scheduled to increase to 25% from 1 at 19% now must be weighed up against
and £20,962 under the 6% rate. April 2023, there may be limited benefit in carrying the loss forward into years with a
bringing forward capital expenditure from higher main rate of tax of 25%.
The balance of the special rate pool that period, depending on the level of
£328,412 would be carried forward into expenditure and the AIA limit at the time. If you would like to discuss a potential
future years and written down at a rate of Further, the Treasury will recover some of capital project and obtain a guide
6% per annum. the tax benefit given by taxing balancing to the likely level of relief available
charges on end of life assets at the within the project, please contact one
Even ignoring the AIA in its entirety, there increased 25% rate. of our advisers on page 25 to discuss
should be an immediate cash benefit of your specific circumstances.
£163,297 if sufficient tax is paid using SR Allowance
this illustrative example. Though in reality
many dealers will be able to obtain the full The SR Allowance is applicable in the
cash benefit, £239,110 in this example, by main to integral features of a building
appropriate use of the AIA. such as the heating, ventilation and air
conditioning (HVAC) systems and electrical
and power systems.
18 Automotive outlook 2021 | uhy-uk.comWhat effect will the temporary enhanced incentives have on the cost of a new car dealership? 19
Fraud and the automotive sector
Over the years, we have unearthed many Teeming and lading
different types of fraud, ranging from teeming
Teeming and lading is one of the most common types of
and lading, back handers, profit manipulation
fraud and will often start with just a small amount of money.
and issues surrounding cash sales. If the fraudster finds that they get away with ‘borrowing’
the money, the amounts will escalate. Teeming and lading
In April 2020, it was announced that Lookers was can either be a cash fraud or a way of covering over errors.
expanding its internal fraud investigations to its entire If a cash fraud, it can be perpetrated by any staff member
business after initial findings from one of its operating with access to cash, so sales staff taking deposits as well as
divisions resulted in an expected one-off charge of over service and parts advisers who can take cash. Most solutions
£4 million in its 2019 financial results. At the end of the rely on robust initial controls, through strong policies and
year, after eight months of delay, Lookers released its segregation of duties. For larger businesses, the use of
long-awaited annual report for 2019, detailing enormous an internal audit function can provide some independent
losses as well as a cash fraud of £327k. This example verification.
just illustrates how allegations of fraud, previously
undetected, can emerge from the shadows with a Kick back/backhanders
devastating impact on the results.
One of the hardest frauds to identify, this is where an
A high percentage of frauds in the automotive retail employee is being paid by a supplier or customer to source or
sector are committed by insiders, so ensuring you give them business. The sales and purchases still take place
have strong financial controls in place is essential. You and are recorded and paid for in the usual way. The impact
may wonder why, at your pre year-end audit planning being that the price paid for goods may be high compared
meeting, your auditor queries whether there have been to a competitive quote, or sales price achieved too low. The
any instances of fraud during the year. It might seem a business, therefore, loses out through reduced profit. We still
completely irrelevant question and one that has nothing hear of instances where owners accept that such practices
to do with the audit but ask yourself, are your systems are part of the ‘normal’ motor trade practice and that this
and controls robust enough to deter fraud? Would you will always happen to some extent. However, if you take the
know if your employees were pulling a fast one, or your view, as we do, that this is not acceptable, it is important to
supplier was really who they said they were? In this put safeguards in place.
article, we have provided a brief overview of the main
types of fraud in the automotive sector and provide some Supplier fraud
tips about what you can do to protect your dealership.
This particular fraud occurs when weaknesses within the
Profit manipulation financial controls process present an opportunity for a
fraudster to extract cash from the business via the initiation
Not all fraud needs to be about cash. Sometimes, it can of unauthorised payments or via the creation of a legitimate
be about hiding the truth from more senior management, expectation of payment based on fraudulent invoices. This
giving the impression that the results are not as bad as type of fraud can have a devastating impact as it is generally
they really are. We have seen financial losses through undertaken by determined, informed and methodical
profit manipulation build up into the £m’s on balance individuals over a protracted period of time, ultimately
sheets. Often the pressure is borne on the accounts depriving the business of cash whilst the management
team member rather than the manager who instigated struggle to comprehend reasons for such lack of cash
the fraud. Any obvious pressure or stress exhibited by availability.
an accountant should prompt a cause for concern and a
review of the balance sheet reconciliations instigated by Generally, financial systems and controls tend to reflect the
a relevant internal or external party with the appropriate size and nature of a company. The occurrence of this type
accountancy training. of fraud is, therefore, more notable in smaller businesses
where control processes are reliant on a limited number of
Cash and credit card sales individuals or in larger businesses where the sophistication of
a control process does not match the size of the company, or
Members of staff are often trusted that they will give the where key mitigation controls are implemented sporadically,
cash on sale of an asset to the company; unfortunately if at all. Essentially, this fraud is mitigated by robust system
this does not always happen. This type of fraud is difficult and control processes. At a minimum, we recommend
to detect if the fraudster is modest in their ambitions. ensuring a suitable level of segregation of responsibilities
However, this is rarely the case and a lack of detection across finance teams.
emboldens the individual until eventually the scale of
their fraud is detected. Nevertheless, to protect yourself
from this type of fraud, it makes sense to discourage the
use of physical cash within the customer base wherever
possible.
20 Automotive outlook 2021 | uhy-uk.comYou can also read
