With the start of what surely will prove an eventful year, Chris Bond, tax partner and head of motor retail at BDO UK, takes a look at the key issues motor retailers should focus on during 2024.

1. Check banking covenants

Banking covenants, the rules covering finance, could cause some administration headaches in the coming year. As interest rates have risen, along with business costs, and as profits ease – compared to recent years – this could mean the ratios between the two are outside the stated rules of a loan agreement. Banks include these covenants in agreements such as debt service cover as an early warning system. It’s unlikely this will force any business closures, however, being outside the banking covenants could mean banks will take the chance to renegotiate and possibly increase fees.

CFOs should keep a close eye on these ratios. A good management team will be modelling different scenarios up to six or even 12 months out to make sure everything is inline.

2. Prepare for Making Tax Digital

Making Tax Digital is moving to its next stage and will soon extend to corporation tax. It’s likely to significantly impact small to mid-size motor retail businesses as they move on from digital VAT filing. The digital transformation streamlines tax reporting and requires businesses to maintain precise and up-to-date financial records and may change tax payment schedules, possibly bringing them forward and making them more frequent. This will result in cashflow cycle changes.

Retailers should talk to their accountants as soon as possible to plan for the change.

3. Plan for new property accounting rules

All companies will have to report property on their balance sheet starting from the reporting period following January 2025. Currently businesses just report the amount of rent, not the property valuation. All leased properties will have to be recorded on a business’s balance sheet.

For those groups which have lots of leasehold, that’s a significant change. And the balance sheet will look very different as it will increase the asset and liability base of a company.

Business leaders and CFOs will need to assess how the changes will impact profit metrics and the aforementioned banking covenants.

As well as the work calculating the value of the property ready for 2025, accountants will have to work out if businesses will need to restate their 2024, and possibly, 2023 figures.

4. Engage with advisors

Retailers who currently use the same auditor and tax/advisory provider will need to consider upcoming legislation that requires the use of separate entities for each role.

Changes in regulatory limits based on turnover, balance sheet size and staff numbers may require businesses to segregate their audit and advisory services between different providers.

It is likely that this change will impact groups with over £500m turnover and so now is the time to cultivate relationships with a number of different suppliers to ensure best value.

5. Be agile on agency

With the full landslide of manufacturers yet to adopt agency, retailers will need to keep a very close eye on each brand’s plans for their network. Not only should retailers listen to their OEM’s communications on a shift from franchised to agency sales, but to also look further down the line at what a change in agreement could mean to overall network sizes.

Those brands selling agency often counter the lower margins on offer with greater volume and greater efficiency. For the OEM, that can be achieved through fewer retailers and fewer groups running the remaining network points and so retailers should keep all of their options open.

6. The future landscape for the sale of EVs

The ban on new petrol and diesel cars may have been moved back five years to 2035, but the Zero Emission Vehicle Mandate remains in place and stipulates a 22% mix of electric cars in 2024 rising steadily to 80% by 2030. Vans now have a target of 10% in 2024 rising to 70% by 2030. While the penalties, £15,000 per vehicle outside the target, will be lodged against manufacturers, retailers will likely be targeted on EV sales to an even greater extent in future.

While there may be little way round this, retailers will need to make sure they’re not mis-selling EVs to safeguard against future repercussions or challenges.

To view the full report, download the Motor 150 Report 2023