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Counting the cost of Brexit – Operator Licensing

10th November, 2016

Financial Standing – Going Up?

Tim-CulpinIn this article Tim Culpin, Partner and Head of Transport at Aaron & Partners, takes a look at the increased levels of financial reserves operators may have to demonstrate.

We don’t yet know what Brexit is going to look like, the predicted economic crash has not as yet materialised and it remains unclear what the economy is going to do in the coming months.  So far there seems to have been a honeymoon period with the FTSE 100 Index broadly holding its own or better.  The same cannot be said for exchange rates which have nosedived with some record lows being reported against both the US Dollar (US$) and the Euro (€).  While this may be good for exports, it is likely to have an impact on operators in the haulage and PSV industries who have to be able to demonstrate access to adequate “capital and reserves” to meet the financial standing requirements for their operators’ licences.

We don’t yet know what the Government plans, all we know at present is that Article 50 is to be triggered in or by March 2017 which will probably see the UK remaining in the EU until the Spring of 2019.  While the vast majority of legislation governing the operation of commercial vehicles in the UK comes from EU Regulations and it is mainly based on promoting road safety, in my view it is unlikely to change in any material way either before or after we depart the EU.

The requirement to have adequate financial standing is in the main to ensure operators have sufficient funds to keep their vehicles properly maintained, so again in my view, is unlikely to be abandoned post Brexit.  It is one area where traffic commissioners have no discretion.  If an applicant for or the holder of an operator’s licence cannot satisfy this requirement, the traffic commissioners have no choice but to refuse the application or revoke an existing licence.  For an existing licence holder, they can grant a period of grace of not more than 6 months for the operator to demonstrate that financial standing will be met on a permanent basis.

The relevant levels are published in the Senior Traffic Commissioner Statutory Document No. 2 on Finance (“STCGD2”) and while, in this document, they are expressed in Sterling the levels are actually set by Regulation (EC) 1071/2009 (“the Regulations”) as €9,000 for the first vehicle and €5,000 for each additional vehicle.  From 1st January 2016 the £ Sterling equivalents have been set at £6,650 and £3,700 respectively and these levels apply to both standard national and international licence.  Lower rates apply to restricted licences – see below.

The Regulations require member states not participating in monetary union to revise their national conversions every year, using the Euro exchange rate published in the Official Journal of the European Union (“the Journal”) on the first working day of October.   In the UK any changes will come into force on the following 1st January.  The rates from 1st January 2017 have not yet been announced or published, but given the prevalent exchange rates it seems inevitable that the Sterling equivalents will go up and quite significantly.

The Journal of 4th October 2016 published the exchange rate for Monday 3rd October 2016 (there was no exchange rate published in the Journal of 3rd October 2016) and gave the €/£ exchange rate as 0.87318 which rounding to the nearest £50 gives the UK rates as £7,850 for the first vehicle and £4,350 for each additional vehicle; increases of £1,200 and £650 respectively.

While the actual requirement is to demonstrate access to adequate “capital and reserves” in practical terms, unless the operator’s accounts meet the specified criteria (not more than 18 months old, audited and showing a turnover of £6.6m or more) and show a bottom line figure on the balance sheet equal to or in excess of the required sum, then the operator will have to produce bank statements or other financial documents to establish financial standing – see paragraphs 47 to 62 of and the Annexes to STCGD2 (https://www.gov.uk/government/publications/traffic-commissioners-finance-january-2016) for the details.

Authorities have developed such that in real terms operators must be able to effectively, in most cases, demonstrate permanent access to cash in the bank or unused overdraft at the requisite level.  The table below shows just what sort of impact this likely change is going to have:-

No. of Vehicles From 1 Jan 2016 From 1 Jan 2017 Additional £ Required
1 £6,650 £7,850 £1,200
2 £10,350 £12,200 £1,850
3 £14,050 £16,550 £2,500
4 £17,750 £20,900 £3,150
5 £21,450 £25,250 £3,800
10 £39,950 £47,000 £7,050
15 £58,450 £68,750 £10,300
20 £76,950 £90,500 £13,550
25 £95,450 £112,250 £16,800
30 £113,950 £134,000 £20,050
35 £132,450 £155,750 £23,300
40 £150,950 £177,500 £26,550
45 £169,450 £199,250 £29,800
50 £187,950 £221,000 £33,050

 

Applications are considered on a 28 day basis where an average of the day end balances over four dates is taken: most recent, 28 days prior and the two highest in-between.  Where financial standing is considered at other times (e.g. at 5-year licence renewal or if called to a regulatory public inquiry) a three-month period is considered when a ten-day average of day end balances is considered.  In either case the most recent date must not be more than two months old and a “snapshot” (a shorter period than stated above) will not be acceptable.

In these circumstances careful management of cash flow is essential particularly in ensuring that bank deposits stay in overnight to produce the all-important day end balances.  If in January 2017 an operator has a concern he should apply for a period of grace as a failure to notify such a material change is a breach.

The Senior Traffic Commissioner will undoubtedly be aware of the impact this is going to have, but given the present legislation it is not something that can be avoided.  It is hoped that when the official announcement is made some guidance may be issued.

The financial standing levels for restricted licences are not tied to the Euro and are set by the agreement of the traffic commissioners taking into account the financial requirements determined by the Secretary of State. These are also published in STCGD2 and have not changed for a number of years. They currently stand at £3,100 for the first vehicle and £1,700 for each additional vehicle. There is as yet no indication that these will change, but they could.

Please note that the information and opinions expressed in this article are not necessarily comprehensive and do not purport to give professional advice. Specific advice concerning individual situations should be obtained from Tim Culpin at Aaron & Partners LLP.

Tim Culpin

Partner & Head of Transport

Direct dial: 01244 405533

Email: [email protected]

An edited version of this article was published in the 27 October issue of Commercial Motor

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