The problems clients face on a day-to-day basis are usually similar. In 2019, the questions were about the implications of IFRS 16 and the FCA’s commission reform review. This year, we have seen an increased focus on deals origination, international structuring and taxation, writes PwC senior manager Michael Staunton.
As advisers who work across the asset finance and leasing industry, with family-owned SME lenders to multinational financial institutions and everything in between, we are often faced with two types of question.
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Firstly, a client may ask us for a solution to a problem they are facing, and secondly, we are always asked what we are seeing in market.
For an often UK-centric industry, the past two years have seen a number of our clients expand overseas, and they are finding managing the tax and regulatory burden of doing so difficult. Not only are they expanding into new territories with new cultures and legal requirements, but they are doing so at a time when tax transparency is high on the global agenda.
DAC 6 imposes mandatory reporting of cross-border arrangements involving at least one EU member state that fall within one of a number of “hallmarks”. These are broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning, and can include cross-border leasing and corporate funding structures, even where a tax benefit was not the motivation. How firms manage this on a go-forward is important, especially with penalties of up to £1m (€1.17m) for each non-disclosure.
Closer to home, we are quickly seeing IR35 become an issue. These off-payroll working rules apply if a worker provides their services through an intermediary, usually a personal service company. The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
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By GlobalDataIn particular, the importance of collecting data, analytics and providing technology-focused solutions to lessees has seen a large influx of contingent workers across the industry. As such, organisations are having to be proactive in determining efficient employment models and making changes now if they wish to implement IR35 on a cost-neutral basis. Many clients are combining this with a review of their research and development tax credit position to ensure that all eligible costs are being captured where technology spending is being used to develop a new process, product or service, or to improve on an existing one.
Continuing Trends
The last year has continued the trend of large banks seeing their leasing activities and loan books as ‘non-core’. This has had two distinct consequences: first, the large banks are running-off and selling their leasing portfolios, and secondly, new entrants have entered the market in sectors where banks have stepped back.
New and existing entrants that have focused on niche markets, exceptional product knowledge and customer service have done well, as have those who can compete on price where margins have squeezed. Private equity has also stepped up to the mark in the aviation and shipping space with an increasing number of funds focused solely on these assets. For smaller, specialised assets – think HGVs and trailers – we have seen lenders struggle to grow and often the barrier has been the availability of finance rather than appetite for new deals.
That being said, we have seen a change in some areas. Rolling stock – railway vehicles, including both powered locomotives and carriages – were seen as a relatively risky asset. The debt finance behind the rolling stock for the Great Northern Route was provided by a sole lender, and at a much higher rate than would be today, where multiple lenders now compete with the long-established rolling stock companies. The story with rolling stock can be replicated with other assets such as electric vehicles, where the market is expecting rapid growth and governments are looking at how to finance the necessary infrastructure.
Looking forward, the current oversaturation to leasing, lack of opportunity, and low or negative interest rates in Japan mean we are expecting an uptick in interest of the Japanese mega-banks to emerge, and the expectation is that the UK will remain an attractive place for them to invest.
by Michael Staunton
