Operational and Business Review

Summary

The underlying profit before tax of £1.88 million for the financial year ended 31 March 2021 ("the year") was a significant improvement on the £0.25 million recorded for the prior year. However, the year was defined by the coronavirus pandemic ("covid-19") which had a material impact on the business, starting in March 2020 and continuing, in one form or another, throughout the entire year. Full year turnover fell by 16% to £165.1 million (2020: £195.8 million), predominantly from significantly lower levels of new and used car deliveries. Aftersales revenues were also adversely impacted by covid-19. Margins improved, largely from very buoyant trading in the period from June to October 2020 as the business re-opened from the first lockdown in April and May 2020. The Company also implemented a cost-savings programme and, in addition, received significant furlough and grant support from the Government and from local Councils in the areas in which it operates.

Our statutory profit before tax for the year was £1.4 million (2020: £0.1 million). Basic earnings per share for the year were 52.4 pence (2020: loss per share of 9.4 pence due to a high tax charge in excess of the pre-tax profit).

Underlying earnings per share for the year were 66.0 pence (2020: loss per share of 4.9 pence).

The Company's defined-benefit pension scheme deficit, calculated in accordance with the requirements of IAS 19 Pensions, remained unchanged at £9.4 million (2020: £9.4 million). Investment gains in the Scheme's investments were offset by increases to the net present value of the Scheme's liabilities.

The Company continues to own all but two of the freeholds of the properties from which it operates, and this provides the dual strengths of a strong asset base and minimal exposure to rent reviews.

In the light of the scale of Government support made available to the Company in the year, and continuing uncertainty over the future path of covid-19, the board is not proposing a final dividend for the year (2020: nil pence per ordinary share). No interim dividend for the year was declared, against a 7.5 pence interim dividend in the comparative year.

Net bank debt at 31 March 2021 was £10.3 million (2020: £16.2 million) with the substantial improvement reflecting actions taken by management to control both working capital and costs, as well as the significant covid-19 support received by the Company from the Coronavirus Job Retention Scheme and the business rates holiday.

Covid-19

The Company faced an unprecedented situation when it was required to temporarily close all its car showrooms and most of its aftersales operations on 24 March 2020, following Government restrictions implemented to deal with the nationwide covid-19 pandemic. With our showrooms closed in April and May 2020, only online and telephone sales operations were able to continue, alongside three aftersales operations which provided essential support for NHS and other key workers only.

By the middle of May 2020, we were satisfied that we could provide a safe environment for our staff and customers and restarted our aftersales operations at all sites. Our showrooms reopened on 1 June 2020, as Government restrictions were eased. Our showrooms and workshops were able to continue operating throughout the summer and into the autumn, albeit with social-distancing and significant restrictions around access. However, Government restrictions returned in November 2020 when we were again required to close to customers and were able to operate only a "click-and-collect" service. We reopened in December 2020 but our Kent-based showrooms were required to close again before Christmas, with the remainder of our showrooms then having to close to customers in early January 2021. In all, our showrooms were closed to customers for six of the twelve months in the year and were not able to reopen again until after the end of the year, on 12 April 2021.

The first "hard" lockdown of the business in April and May 2020 resulted in a very substantial loss, despite the receipt of grants in that period of £1.3 million under the Government's Coronavirus Job Retention Scheme, which allowed us to maintain employment levels. In response to the adverse financial impact of covid-19, the Company implemented numerous cash preservation and cost saving measures across many areas of the business. Approximately 80% of the Company's employees were furloughed in April 2020, although this number began to reduce from May 2020 as our aftersales operations returned to more normal activity levels, and then reduced further in June 2020 as we were given permission to reopen our showrooms. As part of our cost savings exercise, an annual salary ceiling of £37,500 was implemented for all active employees, including the executive directors and the chairman of the Company. The non-executive directors of the Company also agreed a significant reduction to their fees. These salary reductions were then reduced in stages, with all non-furloughed employees, including the board, being returned to their full contractual salaries from 1 July 2020. After assessing the performance of the business over the ten months of the year post the initial lockdown, the board decided to repay these savings to employees (excluding the board) in recognition of their excellent efforts over that period.

The year has presented our stakeholders with significant challenges: many of our employees have continued to work throughout the pandemic in difficult conditions whilst others have had to face the implications of furlough; our shareholders have seen no dividend income this year; and our manufacturers have seen significantly reduced activity levels. For these reasons, the salary repayments excluded members of the board. In addition, the executive directors have declined their bonuses for the year that, ordinarily, would have been payable based on the achievement of financial targets set for the year.

Trading over the summer and autumn of 2020 was buoyant but showroom closures returned in November 2020 and across the whole of the first quarter of 2021. As a result, the Company was forced to return a number of employees to furlough. However, at the year-end in March 2021, under a fifth of employees still remained on furlough, and this has since fallen further as we have been able to welcome employees back to work as showrooms again reopened in April 2021. Across the year, the Company received total grants of £2.4 million from the Government's Coronavirus Job Retention Scheme.

Omni-channel retailing

Our omni-channel offering allows customers to interact with us in a way that suits them best, from the traditional showroom discussion through to a fully online sales process, and any combination in between. We have learnt a great deal during the last year and the new options we have introduced have significantly advanced our on-line selling capabilities. We are now able to provide our customers with this omni-channel approach to selling, and we will continue to invest and develop this further in the future.

Our People

I am very grateful for the dedication of our employees and the effort they continue to apply to provide our customers with a first-class experience. Their response to the covid-19 pandemic has been outstanding and the board would like to particularly thank those that remained active throughout the initial lockdown period. This ensured that we were able to offer an emergency aftersales response to NHS and other key workers. We have been, and remain, very focused on the health and safety of our employees and customers. Our showroom and workshop activities have been undertaken in a responsible and socially distanced way throughout the year. As a result of the hard work and professionalism shown by everyone involved, we have managed the lockdown periods well and were able to reopen our showrooms in April 2021 in a strong position.

The Company has a long tradition of investing in apprenticeship programmes. Despite the pressures on the business, we have kept our apprenticeship numbers at a high level and continue to see the benefits flow through the business as more apprentices complete their training and become fully qualified. Due to our apprentice numbers, we continue to fully utilise our Government apprenticeship levy payments within the stipulated time limits.

We remain firmly committed to the long-term benefits of apprenticeships and our recruitment programme continues with the aim of maintaining a healthy complement in the coming year to assist the Company to grow.

New and used car sales

Total UK new car registrations in the year declined by 25% as a result of the covid-19 pandemic and, within this total, new car registrations in the private and small business sector in which we principally operate fell by 24%. However, we were very pleased that our own new unit sales fell by only 10% on a like-for-like basis, despite our showrooms having operated under covid-19 restrictions for six of the twelve months in the year, with only a click-and-collect service allowed during closure periods.

Volumes of sold used cars also fell, by 19% on a like-for-like basis, although we were reassured by the resilience in unit margins. Significant efforts have been made over the last twelve months to enhance and develop our omni-channel offering for our customers and we continue to see this element of our business providing a major opportunity for further growth. The number of used cars sold again exceeded the number of new cars sold in the year.

Aftersales

Despite the impact of covid-19 on our aftersales business, we were encouraged that our service revenues in the year fell by only 10% on a like-for-like basis. We continue to place great emphasis on our customer retention programmes and in growing sales of service plans. Our parts business also reported lower sales, down by 12% on a like-for-like basis from the previous year.

Operations

Our Audi businesses produced an exceptional performance in the year, significantly growing their new car deliveries despite the backdrop of a falling UK market.

Our Volvo business in Eastbourne traded profitably in the year and we were delighted to extend our representation by signing a new dealer agreement for a territory in Worthing, West Sussex. The new business was scheduled to open at the end of the previous financial year, in March 2020, but the Government-mandated temporary showroom closures meant the business was unable to begin trading until June 2020. We were extremely pleased that, once opened, the business traded profitably in the year. It continues to reap the benefits of an excellent model range of cars, which are being positively received by customers.

The performance of our Volkswagen businesses improved in the year and we remain confident that the strength of the brand, the excellent model range, and exciting new products will help to boost future trading performance.

In Tunbridge Wells, our SEAT business continued to perform well although the adjacent Skoda business found the year more challenging. Our Skoda business in Ashford performed satisfactorily, after allowing for the impact of the covid-19 temporary closures. Our Vauxhall business in Ashford performed satisfactorily in the year.

Trading at Caffyns Motorstore, our used car business in Ashford, remained subdued as the business suffered from covid-19 temporary closures. However, the performance of the business improved in the year and we remain reassured that the concept has been very well received by our customers, who particularly value the reassurance of the Caffyns brand.

Groupwide projects

We remain focused on generating further improvements in used car sales, used car finance and service labour sales. These three areas will be key to achieving increases in profitability in the coming years. In addition, we continue to make very good progress utilising technology to enhance the customer-buying experiences from their first point of contact right through to the buying process, as well as improving aftersales retention.

New brands and models

We continue to invest in enhanced facilities to allow us to sell and service our manufacturers' ever-increasing range of electric and hybrid vehicles. During the year we also added three new brands to our portfolio, all of which offer excellent electric product. In Eastbourne we have added LEVC, based in premises adjacent to our Volvo business. LEVC, alongside Volvo, is part of the Zhejiang Geely group and supply battery-powered taxis and vans. In Ashford we are adding two new franchises in Lotus, also part of the Zhejiang Geely group, and MG, a subsidiary of SAIC. Both of these brands have battery-powered electric products and MG offers outstanding value for money in this field.

Property

We operate primarily from freehold sites and our property portfolio provides additional stability to our business model. As in previous years, our freehold premises were revalued at the balance sheet date by chartered surveyors CBRE Limited based on an existing use valuation. The excess of the valuation over net book value of our freehold properties at 31 March 2021 was £12.3 million (2020: £11.8 million). This is after an impairment of the carrying value of a single property by £0.2 million, which was charged to administrative expenses as a non-underlying expense. In accordance with our accounting policies (which reflect those generally utilised throughout the motor retail industry), the surplus has not been incorporated into our accounts.

During the year, we incurred capital expenditure of £0.4 million (2020: £1.0 million). There were no major property development projects in the year and the spend reflected a mixture of the further installation of electric charging points and replacement spend on existing assets.

Our freehold premises in Lewes remain leased until 9 June 2021, to the purchaser of our former Land Rover business, which was sold in April 2016. The board continues to evaluate future opportunities for the site.

Bank facilities

The Company's banking facilities with HSBC comprise a term loan, originally of £7.5 million, repayable by instalments over a twenty-year period to 2038 and a revolving-credit facility of £7.5 million, both of which will next become renewable in March 2023. HSBC also provides an overdraft facility of £3.5 million, renewable annually. The Company enjoys a supportive relationship with HSBC and, following the outbreak of the covid-19 pandemic in March 2020, the Company temporarily increased its overdraft facility limit from £3.5 million to £6.0 million. In September 2020, the Company reduced its overdraft facility back down to £3.5 million.

In addition to its facilities with HSBC, the Company also has an overdraft facility of £7.0 million provided by Volkswagen Bank, renewable annually, together with a term loan, originally of £5.0 million, which is repayable by instalments over the ten years to November 2023.

In order to assist in the conservation of cash balances, HSBC granted capital repayment holidays on our term loans, for the March and June 2020 quarters, each being a repayment of £94,000. Similar concessions were granted by Volkswagen Bank, for the months of April May and June 2020, each being a repayment of £42,000.

The term loan and revolving credit facilities provided by HSBC include certain covenant tests which were comfortably passed at the previous year-end, 31 March 2020. During the year, HSBC agreed to a relaxation in the covenant tests for September 2020 and March 2021 although neither relaxation was ultimately required with the original covenant tests being passed on both those dates. The failure of a covenant test would render these facilities repayable on demand at the option of the lender.

Bank borrowings, net of cash balances, at 31 March 2021 were £10.3 million (2020: £16.2 million) and as a proportion of shareholders' funds at 31 March 2021 were 37% (2020: 62%). This substantial reduction reflected the strengthened controls over working capital and cost savings implemented during the year, as well as the significant covid-19 support received by the Company from the Coronavirus Job Retention Scheme and the business rates holiday. Gearing at the prior year-end was substantially higher than usual as a result of the initial effects of the covid-19 pandemic. Available but undrawn facilities with HSBC and Volkswagen Bank at 31 March 2021 were some £16 million (2020: £10 million).

Taxation

The year ended 31 March 2021 resulted in a tax charge of £0.01 million (2020: £0.36 million). The effective tax rate was lower than the standard rate of corporation tax in force for the year of 19%, mainly due to the reversal of an impairment provision against the carrying value of an Advanced Corporation Tax asset. This impairment was made in the year ended 31 March 2019 at which time management did not recognise an overall deferred tax asset due to the inherent uncertainty at that date. This approach remained unchanged at 31 March 2020, being immediately after the start of the first covid-19 lockdown and at the height of the accompanying economic uncertainty, but was altered at the half-year, in September 2020. Management have prepared forecasts extending across the next five years which have provided sufficient comfort to allow the previously held view to be revised and the impairment reversed, given management's judgement of a higher level of certainty that the available Advanced Corporation Tax and other deferred tax assets will be utilised in future years.

The Company has no current outstanding trading losses awaiting relief (2020: £0.1 million). There are also no capital losses awaiting relief. Capital gains which remain unrealised, where potentially taxable gains arising from the sale of properties and goodwill have been rolled over into replacement assets, amount to £8.3 million (2020: £8.9 million) which could equate to a future potential tax liability of £1.6 million (2020: £1.7 million). The Company also has an amount of £1.1 million (2020: £1.1 million) of recoverable Advanced Corporation Tax ("ACT") and £0.4 million (2020: £0.8 million) of shadow ACT. The board remains confident in the recoverability of the ACT, although the shadow ACT must first be fully absorbed before the ACT balance itself can become available to be utilised.

Pension Scheme

The Company's defined benefit scheme was closed to future accrual in 2010. In common with many companies, the board has little control over the key assumptions in the valuation calculations as required by accounting standards and the low yields of gilts and bonds continues to have a significant impact on the net funding position of the scheme. At 31 March 2021 the deficit was £9.4 million (2020: £9.4 million). The deficit, net of deferred tax, was £7.6 million (2020: £7.6 million).

The Scheme operates with a fiduciary manager and the board, together with the independent pension fund trustees, continues to review options to reduce the cost of operation and its deficit. Actions that could further reduce the risk profile of the assets and more closely match the nature of the Scheme's assets to its liabilities continue to be considered.

The pension cost under IAS 19 is charged as a non-underlying cost and amounted to £0.2 million in the year (2020: £0.2 million).

During the year, the Company made deficit-reduction contributions into the Scheme under the 2017 recovery plan of £0.5 million (2020: £0.5 million). Since the year-end, the latest formal triennial valuation of the Scheme, effective 31 March 2020, has been completed. This valuation will be formally submitted to the Pensions Regulator prior to the requisite deadline of 30 June 2021. A recovery plan to address the Scheme deficit identified from this triennial valuation has been agreed with the trustees, pending approval from the Pensions Regulator, under which the annual recovery plan payment for the coming year will increase to £0.8 million, with an additional one-off £1.0 million contribution to be paid in June 2021. The recurring annual recovery plan payment for each subsequent year will then increase by 2.25%, until superseded by any future new recovery plan to be agreed between the Company and the trustees.

Dividend

The Company has a strong balance sheet and the board remains confident in its future prospects. However, in the light of the scale of the covid-19 support received from Government by the Company in the year, to conserve cash resources, and to be mindful of the continued ongoing uncertainty over covid-19, the board has decided not to declare a final dividend in relation to the year ended 31 March 2021.

For the same reasons, no interim dividend was declared (2020: 7.5 pence per Ordinary share) during the year. The total dividend for the year was therefore nil pence per ordinary share (2020: 7.5 pence). However, the board remains committed to restarting the payment of dividends to shareholders as soon as it deems it is appropriate to do so.

Strategy

Our continuing strategy is to focus on representing premium and premium-volume franchises as well as maximising opportunities for premium used cars. We recognise that we operate in a rapidly changing environment and continue to carefully monitor the appropriateness of this strategy. We continue to seek opportunities to invest in the future growth of our businesses.

We are concentrating on business opportunities in stronger markets to deliver higher returns from fewer but bigger sites. We continue to seek to deliver performance improvement, in particular in our used car and aftersales operations.

Annual General Meeting

The Annual General Meeting will be held on 3 August 2021. It is anticipated that social-distancing restrictions will have been largely lifted by the date of this meeting, and therefore it is intended that the Annual General Meeting will revert to an open meeting, to which shareholders will be invited to attend in person.

Outlook

Our showrooms were allowed to reopen in mid-April 2021 so we have started the new financial year with a sense of optimism, although we are mindful that the future course of the covid-19 pandemic remains uncertain. We continue to enjoy supportive relationships with our banking partners, HSBC and Volkswagen Bank with available but undrawn facilities in excess of £16 million at the year-end. Our manufacturer partners also continue to be very supportive. Therefore, the board is confident that the Company has sufficient liquidity to allow it to effectively navigate the coming year and to capitalise on the trading and investment opportunities which are expected to arise as markets return to more normal levels of activity.

S G M Caffyn

Chief Executive

1 June 2021

Group Income Statement

for the year ended 31 March 2021

Group Statement of Comprehensive Income

for the year ended 31 March 2021

Group Statement of Financial Position

at 31 March 2021

Group Statement of Changes in Equity

for the year ended 31 March 2021

for the year ended 31 March 2020

Group Cash Flow Statement

for the year ended 31 March 2021

Notes

for the year ended 31 March 2021

1.   GENERAL INFORMATION

Caffyns plc is a company domiciled in the United Kingdom. The address of the registered office is Saffrons Rooms, Meads Road, Eastbourne BN20 7DR. The registered number of the Company is 105664.

This financial information has been extracted from the consolidated financial statements which were approved by the directors on 1 June 2021.

2.   ACCOUNTING POLICIES

The financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards ("IFRS") adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Whilst the financial information included in this announcement has been computed in accordance with IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information set out does not constitute the Company's statutory accounts for the year ended 31 March 2021, but is derived from those accounts. Statutory accounts for the year ended 31 March 2020 have been delivered to the Registrar of Companies and those for the year ended 31 March 2021 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under section 498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

A copy of the annual report for the year ended 31 March 2021 will be available at www.caffynsplc.co.uk and will be posted to shareholders by 28 June 2021.

Prior year reclassifications

Revenue and cost of sales for the prior period have been restated and each reduced by £2,067,000 to remove certain vehicle sales transactions which should have been classified as leases. The correction has no impact on either the previously stated gross profit or the profit for the year.

Inventories and trade payables for the prior year have been restated to increase each by £1,731,000, also to reflect the reclassification of certain vehicle transactions which were originally recorded as sales but which have now been recorded as lease transactions. There was no impact on either cash and cash equivalents or net assets in the prior year.

Finally, the prior year cash flow amounts have been restated to correct an error to separately identify the receipt from the Company's investment in a lease of £185,000. This receipt has now been presented within cashflows from investing activities rather than being offset against the repayments of lease liabilities within financing activities.

A third balance sheet as at 31 March 2019 has not been presented because any correction would not have impacted net current asset or net assets.  The only correction would have been to increase inventories and trade payables at that date by £776,000.

3.   GOING CONCERN

The financial statements have been prepared on a going concern basis which the directors consider appropriate for the reasons set out below.

The directors have considered the going concern basis and have undertaken a detailed review of trading and cash flow forecasts for a period in excess of one year from the date of approval of this Annual Report.  This has focused primarily on the achievement of the banking covenants. Both banking covenants have been achieved for the year under review. Under the Company's first covenant test, it is required to make an underlying profit before interest for the rolling twelve-month period to September 2021, and to March 2022, which is at least double the level of interest payable on bank borrowings to HSBC and Volkswagen Bank. The covenant test at 31 March 2022 will be the final test to be carried out within the twelve-month period from the anniversary of the signing of these financial statements. The Company has modelled these periods and conclude that there is headroom that would allow for an approximate 20% reduction in expected new and used units over this period.  External market commentary provided by the Society of Motor Manufacturers and Traders ("SMMT") indicate that new car registrations are forecast to show a year-on-year increase of 14% in 2021 to 1.86 million, with a further 14% increase into 2022 to 2.12 million registrations. The used car market has remained stable over the five years from 2015 to 2019, at between 7.6 and 8.2 million transactions and dropped by only 15% in 2020 due to the effects of the covid-19 pandemic, compared to a comparable 29% fall in new car registrations. Since showrooms reopened on the 12 April 2021, demand and financial results have both been stronger than had been anticipated and the current new car order take for June and beyond is at healthy levels.

The Company's second covenant test requires that the level of its bank borrowings do not exceed 70% of the independently assessed value of its charged freehold properties. Property values would need to reduce by some two-thirds before this covenant test became at risk of failure.

The directors have also considered the Company's working capital requirements. The Company meets its day-to-day working capital requirements through short-term stocking loans and bank overdraft and medium-term revolving credit facilities and term loans. At the year-end, the medium-term banking facilities included a term loan with an outstanding balance of £6.6 million and a revolving credit facility of £7.5 million from HSBC, its primary bankers, with both facilities being renewable in March 2023. HSBC also make available a short-term overdraft facility of £3.5 million, which is renewed annually in August. The Company also has a ten-year term loan from Volkswagen Bank with a balance outstanding at 31 March 2021 of £1.5 million, which is repayable to November 2023, and a short-term overdraft facility of £7.0 million, which is renewed annually in August. In the opinion of the directors, there is a reasonable expectation that all facilities will be renewed at their scheduled expiry dates. The failure of a covenant test would render these facilities repayable on demand at the option of the lender.

Information concerning the Company's liquidity and financing risk are set out in note 21 to the financial statements.

The directors have a reasonable expectation that the Company has adequate resources and headroom against the covenant test to be able continue in operational existence for the foreseeable future and for at least twelve months from the date of approval of the Annual Report. For those reasons, they continue to adopt the going concern basis in preparing this Annual Report.

4.    CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

These judgements and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Certain critical accounting estimates in applying the Company's accounting policies are listed below.

Retirement benefit obligation

The Company has a defined-benefit pension scheme. The obligations under this scheme are recognised in the balance sheet and represent the present value of the obligation calculated by independent actuaries, with input from management. These actuarial valuations include assumptions such as discount rates, return on assets and mortality rates. These assumptions vary from time to time depending on prevailing economic conditions. Details of the assumptions used are provided in note 23 to the consolidated financial statements for the year ended 31 March 2021. At 31 March 2021, the net liability included in the Statement of Financial Position was £9.4 million (2020: £9.4 million).

Impairment

The carrying value of property, plant and equipment and goodwill are tested annually for impairment as described in notes 10, 11, 12, and 14 to these condensed financial information. For the purposes of the annual impairment testing, the directors recognise Cash Generating Units ("CGUs") to be those assets attributable to an individual dealership, which represents the smallest group of assets which generate cash inflows that are independent from other assets or CGUs. The recoverable amount of each CGU is based on the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell of each CGU is based upon the market value of any property contained within it and is determined by an independent valuer, and its value in use is determined through discounting future cash inflows (as described in detail in note 12). As a result of this review the directors considered that an impairment of £0.2 million was required to the carrying value of a single property assets (2020: no impairment charges required) (see notes 10, 11, 12 and 14).

Surplus ACT recoverable

The Company carries a balance of surplus unrelieved advanced corporation tax ("ACT") which can be utilised to reduce corporation tax payable subject to a restriction to 19% of taxable profits less shadow ACT calculated at 25% of dividends. Shadow ACT has no effect on the corporation tax payable itself but any surplus ACT on dividends must be fully absorbed before surplus unrelieved ACT can be utilised. At 31 March 2021, the carrying value of surplus ACT is £835,000 (2020: £835,000) and shadow ACT is £376,000 (2020: £845,000). Uncertainty arises due to the estimation of future levels of profitability, levels of dividends payable and the reversal of deferred tax liabilities in respect of accelerated capital allowances and on unrealised capital gains. For example, a reduction in the Company's profitability could result in a delay in the utilisation of surplus unrelieved ACT. However, based on the Company's current projections, the directors have a reasonable expectation that the surplus ACT will be fully relieved against future corporation tax liabilities by 31 March 2026.

Support arrangements

On occasion, the Company can be assisted in the relocation, development and support of certain of its businesses. On receipt of these payments the Company forms a judgement whether the payment is capital in nature, in which case the payment is deducted from the capital cost of the development in question, or revenue in nature, in which case the payment is amortised over a two-year period from the date or relocation.

In November 2018, the Company received a contribution of £255,000 from a brand partner towards the cost of developing its Angmering dealership. The contribution agreement was not specific as to whether the amount contributed was in respect of the capital expenditure incurred by the Company, or in respect of other operating activities (such as marketing) that the Company was required to undertake as part of the relocation. Consequently, the directors needed to apply judgement in determining the appropriate accounting treatment. Having considered all information available, including the contribution agreement and past correspondence with the brand partner, the directors determined it appropriate to account for the contribution as capital in nature, and deducted the amount received from the carrying amount of property, plant and equipment assets associated with the Angmering dealership.

The directors considered an alternative treatment, including recognising the amount received over the rolling two-year term of the franchise agreement. This would have resulted in an increase in profit of £96,000 during the year ended 31 March 2019 and an increase in net assets of the same amount as at 31 March 2019, with the remaining £159,000 standing to be recognised over the remaining contractual period as follows: year ended 31 March 2020: £127,500, year ending 31 March 2021: £31,500.

In December 2019, the Company separately received a contribution of £225,000 from a brand partner as support for establishing a new franchise business. In the judgement of the directors, and having considered all information available, the directors determined it appropriate to account for the contribution as revenue in nature, with the support to be allocated on a straight-line basis over the first 24 months of operation of the new business. The launch of the new business was delayed by the covid-19 pandemic with the business unable to commence trading until car showrooms were allowed to re-open in June 2020. As a result, £93,750 of the £225,000 support package has been recognised in the Income Statement for the current year. It is expected that a further £112,500 will be recognised in the Income Statement for the year ending 31 March 2022, with the remaining £18,750 to be recognised in the Income Statement for the year ending 31 March 2023.

5.   Non-underlying items

The following amounts have been presented as non-underlying items in these financial statements:

The following amounts have been presented as non-underlying items in these financial statements:

·    redundancy and restructuring costs of £40,000 were incurred in the year as a result of changes necessitated by the covid-19 pandemic;

·    the carrying value of a freehold property was impaired by a total of £184,000 following advice from the Company's independent valuer, CBRE Limited (see notes 11 and 12).

In the prior period, the following items were recorded as non-underlying items:

·    a periodic VAT inspection from HM Revenue & Customs carried out in a prior period identified certain items of non-compliance with relevant legislation. In the current period, a sum of £44,000 was credited to profit to release a surplus provision that was no longer deemed required;

·    a sum of £22,000 was received from the liquidators of MG Rover Group Limited.

6.   Finance expense

No interest was capitalised in either the current or prior period.

7.   Tax

The charge for the year can be reconciled to the profit per the Income Statement as follows:

During the year an impairment provision against the carrying value of an Advanced Corporation Tax asset was reversed. This impairment was made in the year ended 31 March 2019 at which time management did not recognise an overall deferred tax asset due to the inherent uncertainty at that date. This approach remained unchanged at the previous year end, with 31 March 2020 being immediately after the start of the first covid-19 lockdown, and at the height of the accompanying economic uncertainty, but was altered at the half-year, at 30 September 2020. Management have prepared forecasts extending across the next five years, which reflect an improvement to the levels of profits. These forecasts have allowed the previously held view to be revised and the impairment has been reversed, given management's judgement of a higher level of certainty that the available Advanced Corporation Tax and other deferred tax assets will be utilised in future years.

The total tax credit/(charge) for the year is made up as follows:

Factors affecting the future tax charge

The Company has unrelieved advance corporation tax of £1.4 million (2020: £1.4 million) which is available to be utilised against future mainstream corporation tax liabilities and is accounted for in deferred tax (see note 17).

The tax charge is impacted by the effect of non-deductible expenses which included the impairment of property, plant and equipment and non-qualifying depreciation.

8.   Earnings per ordinary share

The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

Treasury shares are treated as cancelled for the purposes of this calculation.

The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of shares and the pots-tax effect of dividends and/or interest on the assumed conversion of all dilutive options and other dilutive potential ordinary shares.

Reconciliations of earnings and weighted average number of shares used in the calculations are set out below:

The number of fully paid ordinary shares in circulation at the year-end was 2,695,376 (2020: 2,694,790). The weighted average number of shares in issue for the purposes of the earnings per share calculation were 2,694,846 (2020: 2,694,790). The shares granted in the year under the Company's SAYE scheme have been treated as dilutive. For the purposes of this calculation, the weighted average number of shares in issue for the purposes of the earnings per share calculation were 2,707,660 (2020: 2,694,790).

9.   Dividends

No final dividend was declared in respect of either the year ended 31 March 2021, or the year ended 31 March 2020.

10.   Right-of-use assets

The right-of-use assets above represent two long term property leases for premises from which the Company operates a Volkswagen dealership in Brighton and a Volvo dealership in Worthing.

Depreciation charges of £315,000 (2020: £256,000) in respect of right-of-use assets has been recognised within administration expenses in the Income Statement.

The interest expense on the associated lease liability of £21,000 (2020: £24,000) is disclosed is note 6.

Payments made in the year on the above leases were £335,000 (2020: £261,000).

11.   Property, plant and equipment

Short-term leasehold property for both the Company and the Group comprises £147,000 at net book value in the Statement of Financial Position (2020: £221,000).

Depreciation charges of £1,550,000 (2020: £1,420,000) in respect of Property, plant and equipment was recognised within Administration Expenses in the Income Statement.

The Company valued its portfolio of freehold premises and investment properties as at 31 March 2021. The valuation was carried out by CBRE Limited, Chartered Surveyors, in accordance with the Royal Institution of Chartered Surveyors valuation - global and professional standards requirements. The valuation is based on existing use value which has been calculated by applying various assumptions as to tenure, letting, town planning, and the condition and repair of buildings and sites including ground and groundwater contamination. The valuation report supplied by CBRE included a 'material valuation uncertainty' as set out in VPS 3 and VPGA 10 of the RICS Valuation - Global Standards as it was not possible for them to carry out physical attendance at three properties which were due for internal inspections in 2021. As a result, these three properties were valued remotely, relying on physical inspections carried out in previous periods. Consequently, CBRE noted that less certainty - and a higher degree of caution - should be attached to their valuation than would normally be the case. CBRE noted in their report, for the avoidance of doubt, that the inclusion of their 'material valuation uncertainty' declaration above did not mean that the valuation could not be relied upon. Rather, the declaration was included to ensure transparency of the fact that - in the current extraordinary circumstances - less certainty could be attached to the valuation than would otherwise be the case. CBRE noted that the material uncertainty clause was to serve as a precaution and did not invalidate the valuation. Other than in relation to the caveat noted above, management are satisfied that this valuation is materially accurate. The excess of the valuation over net book value as at 31 March 2021 of those sites was £12.3 million (2020: £11.8 million). In accordance with the Company's accounting policies, this surplus has not been incorporated into these financial statements.

12.   Investment properties

Depreciation and impairment charges of £301,000 (2020: £117,000) in respect of Investment properties have been recognised within administration expenses in the Income Statement.

The Company owns a freehold property that is leased out to a third-party motor retail group, and accordingly accounts for the property as an investment property. In the year under review, based on an independent valuation of the property carried out by CBRE, an impairment charge of £184,000 was recognised in the Income Statement, as part of administration expenses. This investment property represents the only asset included in that CGU. In assessing this property for impairment, the directors based their assessment of the recoverable amount on fair value less selling costs.

The fair value measurement of the CGU in its entirety was categorised as a Level 3 within the hierarchy set out in IFRS 13 Fair Measurement. The valuation technique that is used to measure the fair value less costs of disposal is consistent with that applied in respect of the Company's property, plant and equipment, which is set out in note 12. The following are key assumptions on which the directors based their determination of fair value less costs of disposal in respect of that CGU:

·    Market value of buildings per square foot: £195

·    Market value of site per acre: £2,472,000

·    Initial and reversionary yields: 6.7% and 7.0% respectively

·    Costs of disposal: 1.5% of fair value

As described in note 12, the total excess of the valuation of all of the Company's freehold properties over net book value as at 31 March 2021 was £12.3 million (2020: £11.8 million). Investment properties accounted for £0.6 million (2020: £0.7 million) of this surplus.

13.   Net investment in lease

The premises shown above are sub-let to a third-party under a lease which has the same terms and duration as the Company's own lease.

14.   Goodwill

For the purposes of the annual impairment testing, goodwill is allocated to a CGU. Each CGU is allocated against the lowest level within the entity at which goodwill is monitored for management purposes. Consequently, the directors recognise CGUs to be those assets attributable to individual dealerships and the table above sets out the allocation of goodwill into the individual dealership CGUs. The carrying amount of goodwill allocated to the Volkswagen, Brighton CGU is the only amount considered significant in comparison with the Group's total carrying amount of goodwill.

Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable and a potential impairment may be required. Impairment reviews have been performed for all CGUs for the years ended 31 March 2021 and 2020.

Valuation basis

The recoverable amount of each CGU is based on the higher of its fair value less selling costs and value in use. The fair value less selling costs of each CGU is based initially upon the market value of any property contained within it and is determined by an independent valuer as described in note 11. Where the fair value less selling costs of a CGU indicates that an impairment may have occurred, a discounted cash flow calculation is prepared in order to assess the value in use of that CGU, involving the application of a pre-tax discount rate to the projected, risk-adjusted pre-tax cash inflows and terminal value.

Period of specific projected cash flows (Volkswagen, Brighton CGU)

The recoverable amount of the Volkswagen, Brighton CGU is based on value in use. Value in use is calculated using cash flow projections for a five-year period from 1 April 2021 to 31 March 2026. These projections are based on the most recent budget which has been approved by the board being the budget for the year ending 31 March 2022. The key assumptions in the most recent annual budget on which the cash flow projections are based relate to expectations of sales volumes and margins, and expectations around changes in the operating cost base. These assumptions are based on past experience, adjusted to expected changes, and on external sources of information. The cash flows include ongoing capital expenditure required to maintain the dealership but exclude any growth capital expenditure projects to which the Group was not committed at the reporting date.

Growth rates, ranging from -1% (2020: -25%) to 176% (2020: 131%) have been used to forecast cash flows for a further four years beyond the budget period, through to 31 March 2026. These growth rates reflect the products and markets in which the CGU operates. These growth rates do not give rise to an impairment. Growth rates are internal forecasts based on a combination of internal and external information. Based on these forecasts, the headroom available on the total future profits is £2.4 million before an impairment would be necessary.

Period of specific projected cash flows (Volvo, Worthing CGU)

The recoverable amount of the Volvo, Worthing CGU is based on value in use. Value in use is calculated using cash flow projections for a five-year period from 1 April 2021 to 31 March 2026. These projections are based on the most recent budget which has been approved by the board being the budget for the year ending 31 March 2022. The key assumptions in the most recent annual budget on which the cash flow projections are based relate to expectations of sales volumes and margins, and expectations around changes in the operating cost base. These assumptions are based on past experience, adjusted to expected changes, and on external sources of information. The cash flows include ongoing capital expenditure required to maintain the dealership but exclude any growth capital expenditure projects to which the Group was not committed at the reporting date.

Growth rates, ranging from -25% to 8% have been used to forecast cash flows for a further four years beyond the budget period, through to 31 March 2026. These growth rates reflect the products and markets in which the CGU operates. These growth rates do not give rise to an impairment. Growth rates are internal forecasts based on a combination of internal and external information. Based on these forecasts, the headroom available on the total future profits is £1.7 million before an impairment would be necessary.

Discount rate

The cash flow projections have been discounted using a rate derived from the Group's pre-tax weighted average cost of capital, adjusted for industry and market risk. The discount rate used was 12.4% (2020: 12.4%).

Terminal growth rate

The cash flows subsequent to the forecast period are extrapolated into the future over the useful economic life of the CGU using a steady or declining growth rate that is consistent with that of the product and industry. These cash flows form the basis of what is referred to as the terminal value. The growth rate to perpetuity beyond the initial budgeted cash flows used in the value in use calculations to arrive at a terminal value is 0.5% (2020: 0.5%). Terminal growth rates are based on management's estimate of future long-term average growth rates.

Conclusion

At 31 March 2021, no impairment charge in respect of goodwill was identified (2020: no impairment charge).

Sensitivity to changes in key assumptions

Impairment testing is dependent on estimates and judgements, particularly as they relate to the forecasting of future cash flows. The outcome of the impairment test is not sensitive to reasonably possible changes in respect of the projected cash flows, the discount rate applied, nor in respect of the terminal growth rate assumed.

15. Inventories

All vehicle inventories held under consignment stocking arrangements are deemed to be assets of the Group and are included on the Statement of Financial Position from the date of consignment. The corresponding liabilities to the manufacturers are included within trade and other payables. Inventories can be held on consignment for a maximum consignment period set by the manufacturer, which is generally between 180 and 365 days. Interest is payable in certain cases for part of the consignment period, at various rates indirectly linked to the Bank of England base rate.

During the year, £37,000 was recognised in respect of the write-down of inventories of spare parts due to general obsolescence (2020: 39,000).

The value of vehicle inventories for the prior year was restated and increased by £1,731,000 to reflect the reclassification of certain vehicle transactions which were originally recorded as sales but which have now been recorded as lease transactions.

16. Trade and other payables

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for these trade-related purchases was 33 days (2020: 25 days).

The directors consider that the carrying amount of trade payables approximates to fair value.

The Group finances the purchases of new car inventory through the use of consignment funding facilities provided by its manufacturer partners and which are shown above as Obligations relating to consignment stock. Vehicles are physically supplied by the manufacturers with payment deferred until the earlier of the registration of the vehicle or the end of the consignment period, generally 180 days. In certain circumstances consignment periods can be extended with the agreement of the manufacturer. The consignment funding facilities attract interest at a commercial rate.

The Group utilises vehicle stocking loans to assist with the purchase of certain used car inventory. Facilities are available from both its manufacturer partners and a third-party finance provider and are generally available for a period of 90 days from the date of purchase. These vehicle stocking loans attract interest at a commercial rate.

Interest charges on consignment stocking loans and vehicle stocking loans described above for the year ended 31 March 2020 were £681,000 (2020: £741,000).

The obligations relating to consignment stock are all subject to retention of title clauses for the vehicles to which they relate. Obligations for used and demonstrator cars which have been funded are secured on the vehicles to which they relate and are shown above as vehicle stocking loans. From a risk perspective, the Company's funding is split between manufacturers through their related finance arms and that funded by the Company through bank borrowings.

The Company deferred payments of VAT of £440,000 under the covid-19 payment deferral scheme operated by HMRC. This VAT is to be settled by eleven equal monthly instalments, with payments having commenced in April 2021. At 31 March 2021, an outstanding balance of £400,000 has been included in within Social security and other taxes.

The movements in deferred income in the year were as follows:

17.   Deferred tax

The following are the major deferred tax assets and liabilities recognised and the movements thereon during the current and prior reporting period.

The Company carries a balance of surplus unrelieved advanced corporation tax ("ACT") which can be utilised to reduce corporation tax payable subject to a restriction of 19% of taxable profits less shadow ACT calculated at 25% of shareholder ordinary dividends. Shadow ACT has no effect on the corporation tax payable itself but any surplus shadow ACT on dividends must be fully absorbed before surplus unrelieved ACT can be utilised. The value of surplus ACT is £1,136,000 (2019: £1,136,000) and shadow ACT is £376,000 (2020: £845,000).

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and it is considered that this requirement is fulfilled. The offset amounts are as follows:

The unrealised capital gains include deferred tax on gains recognised on revaluing the land and buildings in 1995 and where potentially taxable gains arising from the sale of properties have been rolled over into replacement assets. Such tax would become payable only if such properties were sold without it being possible to claim rollover relief.

There are no trading losses available for use in future periods (2020: £147,000).

18.   Notes to the cash flow statement

All interest payments are treated as operating cash movements as they arise from movements in working capital.

Reconciliation of debt

19.   Legal contingent liability

In September 2015, Volkswagen Aktiengesellschaft announced that certain diesel vehicles manufactured by Volkswagen, Skoda, SEAT and Audi, which contain 1.2, 1.6 and 2.0 litre EA 189 diesel engines, were fitted with software which is thought to have operated such that when the vehicles were experiencing test conditions, the characteristics of nitrogen oxides ("NOx") were affected. The vehicles remain safe and roadworthy.

Technical measures have been approved by the German type approval authority, the Kraftfahrt-Bundesamt (the "KBA") in respect of Volkswagen and Audi branded vehicles, by the UK type approval authority, the Vehicle Certification Agency (the "VCA") in respect of Skoda branded vehicles, and by the Ministerio de Industria, Energía y Turismo (the "MDI") in respect of SEAT branded vehicles. The KBA and VCA have confirmed for all affected vehicles that the implementation of all technical measures does not adversely impact fuel consumption figures, CO₂ emissions figures, engine output, maximum torque and noise emissions. The MDI is also content that the technical measures be applied to those SEAT vehicles for which they are the relevant approval authority.

Notwithstanding the above, claims on behalf of multiple claimants, arising out of or in relation to their purchase or acquisition on finance of a Volkswagen Group vehicle affected by the NOx issue, have been brought against a number of Volkswagen entities and dealers, including Caffyns. Caffyns has been named as a Defendant on fourteen claim forms alleging fraudulent misrepresentation, breach of contract, breach of statutory duty, breach of the Consumer Credit Act 1974 and a breach of the Consumer Protection from Unfair Trading Regulations 2008. In total, there are 314 claims being jointly brought against Caffyns.

In December 2019, a hearing took place in the High Court of England and Wales on two preliminary issues:

(i)            "Is the High Court of England and Wales bound by the finding of the competent EU type approval authority that a vehicle contains a defeat device in circumstances where that finding could have been, but has not been, appealed by the manufacturer; and/or is it an abuse of process for the Defendants to seek collaterally to attack the KBA's reasoning or conclusions by denying that the affected vehicles contain defeat devices ?"; and

(ii)           "Where a vehicle's engine control unit is capable of identifying the New European Driving Cycle test and operates in a different mode during the test by altering the rate of exhaust gas recirculation to reduce NOx emissions, does the vehicle contain a "defeat device" within the meaning of Article 3(10) of Regulation 715/2007/EC ?"

Judgment was received on 30 March 2020. On the first preliminary issue, the Court found that it was bound by the KBA's ordinance that the software was a defeat device. The same was not true in relation to the VCA. On the second preliminary issue, the court found that the software was a prohibited defeat device. Permission to appeal this judgment has been denied by the Court of Appeal.

At a case management conference on 13 November 2020, the claimants amended their pleadings, in part to plead that the technical measures of affected vehicles contained a prohibited defeat device due to the presence of a "thermal window". The claimants alleged that such a thermal window increases the level of damages recoverable in their claim. Volkswagen Group denies that the thermal windows in question constitute a prohibited defeat device in the affected vehicles and filed an amended pleading in response on 26 February 2021.

At present, no timetable has been set for the remainder of the case; the relevant issues of liability, loss and causation are not yet decided. It is therefore too early to assess reliably the merit of any claim and so we cannot confirm that any future outflow of resources is probable. 

Volkswagen Group has agreed to indemnify the Company for the reasonable legal costs of defending the litigation and any damages and adverse legal costs that the Company may be liable to pay to the claimants as a result of the litigation and the conduct of the Volkswagen Group. The possibility, therefore, of an economic cost to the Company resulting from the defence of the litigation is remote.

Accordingly, no provision for liability has been made in these condensed financial statements.