Caffyns PLC Annual Report 2021

Plain-text annual report

30620 21 June 2021 1:00 pm Proof 5Caffyns plcAnnual Report for the year ended 31 March 2021Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 330620-Caffyns-AR2021.indd 321/06/2021 13:00:1221/06/2021 13:00:1230620 21 June 2021 1:00 pm Proof 5Summary2021£’0002020£’000Revenue (restated, see page 53)165,085 195,787 Underlying EBITDA (see note below and note 3)5,124 3,428 Underlying profit before tax (see note)1,876 251 Profit before tax1,424103 pence penceUnderlying earnings/(deficit) per share (see note 8)66.0 (4.9)Earnings/(deficit) per share52.4 (9.4)Proposed final dividend per ordinary share– – Dividend per ordinary share for the year– 7.50 Note: Underlying results exclude items that have non-trading attributes due to their size, nature or incidence. Non-underlying items for the period totalled a charge of £250,000 (2020: credit of £39,000) and are detailed in Note 2 to these consolidated financial statements. Underlying EBITDA of £5,124,000 (2020: £3,428,000) represents Operating profit before non-underlying items of £3,142,000 (2020: £1,633,000) adding back Depreciation and amortisation of £1,982,000 (2020: £1,795,000). Results at a GlanceContentsOur BusinessResults at a GlanceIFCOperational and Business Review02Strategic Report07GovernanceBoard of Directors14Chairman’s Statement on Corporate Governance15Directors’ Remuneration Report21Report of the Directors33Directors’ Responsibilities Statement38FinancialsReport of the Independent Auditor39Income Statement47Statement of Comprehensive Income48Statement of Financial Position49Statement of Changes in Equity50Cash Flow Statement51Principal Accounting Policies52Notes to the Financial Statements58Other InformationFive-year Review85Visit us onlinewww.caffyns.co.uk30620-Caffyns-AR2021.indd 330620-Caffyns-AR2021.indd 321/06/2021 13:00:1321/06/2021 13:00:13Stock code CFYN O u r i B u s n e s s G o v e r n a n c e i F n a n c a s i l Overview • Revenue down 16% to £165.1 million due to the impact of the covid-19 pandemic • Like-for-like new car unit deliveries down by 10.0% • Like-for-like used car unit sales down by 19.4% • Like-for-like aftersales revenues down 11.5% to £16.2 million • Underlying profit before tax of £1.9 million (2020: £0.3 million) • No final dividend for the year ended 31 March 2021 • Net bank borrowings at 31 March 2021 of £10.3 million (2020: £16.2 million) • Property portfolio revaluation as at 31 March 2021 showing £12.3 million surplus (2020: £11.8 million surplus) to net book value (not recognised in these accounts) Revenue (£’000) Underlying PBT (£’000) 21 20 19 18 17 165,085 195,787 209,246 215,868 212,581 21 20 19 18 17 251 1,876 1,445 1,390 2,051 O t h e r i f n o r m a t i o n Underlying earnings per ordinary share (pence) 21 20 19 18 17 66.0 (4.9) 35.3 45.6 58.0 Like-for-like comparisons exclude from the current year the impact of the Volvo business at Worthing and LEVC in Eastbourne, both of which were opened during the year. All other businesses operated for the full twelve-month period in both the current and prior years. www.caffyns.co.uk 30620-Caffyns-AR2021.indd 1 30620-Caffyns-AR2021.indd 1 30620 21 June 2021 1:00 pm Proof 5 01 21/06/2021 13:00:16 21/06/2021 13:00:16 30620 21 June 2021 1:00 pm Proof 5Operational and Business ReviewSummaryThe 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-19The 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 02Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 230620-Caffyns-AR2021.indd 221/06/2021 13:00:2021/06/2021 13:00:20to 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 Stock code CFYN 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 O u r i B u s n e s s G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 3 30620-Caffyns-AR2021.indd 3 30620 21 June 2021 1:00 pm Proof 5 03 21/06/2021 13:00:22 21/06/2021 13:00:22 30620 21 June 2021 1:00 pm Proof 5Operational and Business Review continuedthat 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 salesTotal 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.AftersalesDespite 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.OperationsOur 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 projectsWe 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 modelsWe 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.PropertyWe 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 04Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 430620-Caffyns-AR2021.indd 421/06/2021 13:00:2221/06/2021 13:00:22throughout 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 www.caffyns.co.uk Stock code CFYN 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. O u r i B u s n e s s G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n 05 21/06/2021 13:00:22 21/06/2021 13:00:22 30620-Caffyns-AR2021.indd 5 30620-Caffyns-AR2021.indd 5 30620 21 June 2021 1:00 pm Proof 5 30620 21 June 2021 1:00 pm Proof 5Operational and Business Review continuedA 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.DividendThe 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.StrategyOur 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 MeetingThe 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.OutlookOur 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 CaffynChief Executive1 June 202106Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 630620-Caffyns-AR2021.indd 621/06/2021 13:00:2221/06/2021 13:00:22Stock code CFYN Strategic Report Business model Caffyns is one of the leading motor retail and aftersales companies in the south-east of England. The Company’s principal activities are the sale and maintenance of motor vehicles, including the sale of tyres, oil, parts and accessories. The Operational and Business Review, which forms part of the Strategic Report, principally covers the development and performance of the business and the external environment and is set out on pages 2 to 6. The main Key Performance Indicators are: Financial Revenue (£ million) (restated) Underlying EBITDA (£ million) Profit for the year before tax (£ million) Underlying earnings/(deficit) per share (pence) Earnings/(deficit) per share (pence) Bank overdrafts and loans (net of cash in hand balances) (£ million) Gearing (%) Note: Underlying results exclude items that have non-trading attributes due to their size, nature or incidence. Other and non-financial UK new car market – total registrations (million) UK new car market – retail and small business sector registrations (million) Caffyns new car sales (‘000) Caffyns used car sales (‘000) Caffyns aftersales revenues (excluding internal sales) (£ million) Company employees (full time equivalents) Source of UK market registrations: Society of Motor Manufacturers and Traders (“SMMT”). Business Performance New and Used Cars Due to the impact of the covid-19 pandemic, our new unit deliveries were down by 10.0% on a like-for-like basis. However, over the twelve-month period, total UK new car registrations fell by 24.9% and, within this, the private and small business sector in which we primarily operate fell by 23.8%. Although a reduction, we were therefore satisfied with the level of new car deliveries achieved for the year. Our used unit sales decreased by 19.4% on a like-for-like basis, again being heavily impacted by the Government’s restrictions on businesses to counter the covid-19 pandemic. As a result of these restrictions, our car showrooms were closed to customers for six of the twelve months in the year, able to operate only online and with a click-and- collect service. Aftersales The significant reductions in new car registrations in the period caused by the covid-19 pandemic acted to further reduce the number of one to three-year- old cars in circulation. Improvements to customer retention rates for many of our marques mitigated the scale of the fall in aftersales revenue to 11.5%, on a like- for-like basis, against the previous year. The actions we have taken to enhance our aftersales marketing and retention procedures, together with our new and used car sales, continue to benefit this area of the business. Business strategy The Company continues to focus on the premium and premium-volume market where it believes that there is greater scope to deliver stronger sales, profits and returns. Representation is held for a strong portfolio of nine franchises being Audi, LEVC, Lotus, MG, SEAT, Skoda, Vauxhall, Volkswagen and Volvo. We generally operate from our own freehold properties, which we believe offers better long-term returns and greater flexibility. Proceeds from disposals of properties are generally reinvested in the property portfolio. O u r i B u s n e s s G o v e r n a n c e i F n a n c a s l i 2021 165.09 5.12 1.42 66.0 52.4 10.33 37 2021 1.57 0.74 3.60 4.43 17.03 402 2020 195.79 3.43 0.10 (4.9) (9.4) 16.24 62 2020 2.09 0.97 3.84 5.31 18.32 419 Principal risks and uncertainties Risk is an accepted part of doing business and the Company has a risk assessment process that facilitates the identification and mitigation of risk. While the risk factors listed on pages 8 and 9 could cause our actual future results to differ materially from expected results, other factors could also adversely affect the Company and they should therefore not be considered to be a complete set of all potential risks and uncertainties. The risk factors should be considered alongside the statement on internal control and risk management included in the Statement on Corporate Governance on page 19 and those in notes 20 and 21 to the financial statements. O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 7 30620-Caffyns-AR2021.indd 7 30620 21 June 2021 1:00 pm Proof 5 07 21/06/2021 13:00:22 21/06/2021 13:00:22 30620 21 June 2021 1:00 pm Proof 5Strategic Report continuedPrincipal risksPotential impact/material riskKey controls and mitigating factorsBusiness conditions and the UK economyThe profitability of the Company could be adversely affected by a worsening of general economic conditions in the United Kingdom, where all of its business is transacted. Other relevant factors would include the on-going covid-19 pandemic, interest rates, unemployment, fuel prices, inflation, indirect taxation, the availability and cost of credit and other factors which affect levels of consumer confidence.Monitoring of key macroeconomic indicators against internal performance leads to anticipation of, and mitigation for, expected volatilities. The Company is not responsible for the importation of new cars into the UK and is not exposed to border frictions.Vehicle manufacturer marketing programmesVehicle manufacturers provide a wide variety of marketing programmes which are used to promote new vehicle sales. A withdrawal or reduction in these programmes would have an adverse impact on our business.By representing multiple marques, the Company believes that this diversity reduces the potential impact on the Company. In addition, the Company continues to develop its own marketing initiatives.Used car pricesThe value of our used car inventory could decline significantly if market prices were to quickly fall. A large proportion of our business comprises used car sales and such declines could have a material impact through reduced profits on sales and write-downs in the value of inventories.Close monitoring of the ageing of vehicle inventories and a firm policy of inventory management help to mitigate this risk. Any impact is also mitigated by revenue streams being balanced between aftersales, new and used car sales.Vehicle manufacturer dependenciesCaffyns operates franchised motor dealerships. These franchises are awarded to the Company by the vehicle manufacturers. For ongoing business, the Company holds franchise agreements for its dealership operations. These agreements can be terminated by giving two years’ notice, or less in the event of a serious unremedied breach including continued under-performance. The Company is not aware of any breach of these agreements. Diversifying through representing multiple marques reduces the potential dependency on any single manufacturer. Revenue streams from other activities (aftersales and used cars) prevent over-reliance on new car sales.Transition to electric vehicle power trainsGovernment announcements have indicated that solus petrol and diesel power trains will no longer be permitted in vehicles sold after 2030. This change may result in disruption to both supply and demand of new cars in the run up to 2030, and to aftersales revenues.Ensuring that our premises and aftersales activities are developed to be able to adapt to the expected future shift towards electric vehicles.Liquidity and financingLiquidity and financing risks relate to our ability to pay for goods and services enabling us to trade. Our principal sources of finance are from our bankers by way of committed borrowing facilities, from manufacturers to fund the purchases of inventories, and trade credit from our suppliers. A withdrawal of facilities, or failure to renew them when due, could lead to a significant reduction in the trading capability of the Company.We work closely with providers of finance to help reduce this risk by managing expectations of trading results and utilisation of facilities. The status of our bank facilities is set out in note 21. These negotiated facilities provide sufficient liquidity and funding. We do not presently hedge against interest rate movements, but the position is kept under regular review.Regulatory complianceThe Company is subject to regulatory compliance risk which could arise from a failure to comply fully with the laws, regulations or codes applicable. Non-compliance could lead to fines, cessation of certain business activities or public reprimand.The direction of new regulatory policy is monitored through close contact with relevant trade and representative bodies and these are carefully considered when developing strategy.08Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 830620-Caffyns-AR2021.indd 821/06/2021 13:00:2221/06/2021 13:00:22Stock code CFYN Principal risks Potential impact/material risk Key controls and mitigating factors Information systems Competition Changes in legislation in relation to the distribution and sale of vehicles Pension scheme Political uncertainties The Company is dependent upon certain business-critical systems which, if interrupted for any considerable length of time, could have a material effect on the efficient running of our businesses. Caffyns competes with other franchised vehicle dealerships, private buyers and sellers, internet- based dealers, independent service and repair shops and manufacturers who have entered the retail market. The sale of new and used cars, the performance of warranty repairs, routine maintenance business and the supply of spare parts operate in highly competitive markets. The principal competitive factors are price, reputation, customer service and knowledge of a manufacturer’s brands and models. We also compete with funders who finance customers’ car purchases directly. Sales agreements are granted by manufacturers based on standards, but agreements are restricted to areas of influence granted by manufacturers, who also determine choice of partner, enabling them to restrict entry into the franchise or the number of outlets any one dealer can hold. Aftersales agreements are legislated by a Block Exemption, dictating that aftersales businesses that meet a manufacturer’s qualitative standards criteria have an entitlement to represent that brand’s aftersales service and parts franchise. Caffyns operates a defined-benefit pension scheme which was closed to new entrants in 2006 and closed to future accrual in 2010. The scheme relies on achieving satisfactory investment returns sufficient to meet the present value of the accrued liabilities. Reduced investment returns or higher liabilities due to increased mortality rates and/or continuing record low interest rates could adversely affect the surplus or deficit of the scheme and may result in increased cash contributions in future. The United Kingdom’s departure from the European Union, coupled with wider global political developments, means that a degree of uncertainty in the United Kingdom economic outlook continues to exist. We believe the main risks to arise from this state of affairs relate to consumer confidence, the potential impact that sterling/euro exchange rates may have on vehicle pricing, the possible imposition of tariffs and/or restrictions on the imports of cars and parts into the United Kingdom. A series of contingency plans are in place that would enable the resumption of operations within a short space of time, thus mitigating the likelihood of material loss. We regularly monitor our competitors’ activities and seek to price our products competitively, optimise customer service, efficiently utilise our customer database and fully understand our manufacturers’ brands and products. O u r i B u s n e s s G o v e r n a n c e By continuing to focus on providing excellent customer facilities, excellent customer service and by providing high-level representation for the Company’s manufacturer partners, current business relationships will be maintained, providing opportunities for selective growth. i F n a n c a s l i The Company reviews the position of the defined-benefit pension scheme through regular meetings of a Pensions sub-Committee, chaired by the Chairman of the Audit and Risk Committee. The Company continues to review possible options to mitigate the risk of underlying volatility causing an increase in the deficit. O t h e r i f n o r m a t i o n We continue to focus on delivering an excellent service to new and existing customers, giving confidence in our operations and building a strong loyalty base and to maintaining our close working relationship with our nine manufacturers. www.caffyns.co.uk 30620-Caffyns-AR2021.indd 9 30620-Caffyns-AR2021.indd 9 30620 21 June 2021 1:00 pm Proof 5 09 21/06/2021 13:00:22 21/06/2021 13:00:22 30620 21 June 2021 1:00 pm Proof 5Strategic Report continuedCorporate Social Responsibility, Human Rights and DiversityCaffyns has a long-standing Corporate and Social Responsibility agenda including its approach to its employees, the environment, and health and safety. We are also conscious of human rights issues within the Company and the key area that would impact our business would be via our supply chain. However, our supply chain is predominantly the major international motor manufacturers who also take these issues very seriously.The UK Corporate Governance Code includes a recommendation that boards should consider the benefits of diversity, including gender, when making board appointments. The board recognises the importance of gender balance and the important requirement to ensure that there is an appropriate range of experience, balance of skills and background on the board. We will continue to make changes to the composition of the board irrespective of gender or any form of discrimination so that the best candidate is appointed.The table below gives the total number of our employees in each category, by gender, as at 31 March 2021.FemaleMaleTotalDirector156Senior management–1111All other employees99326425EmployeesWe recognise that our people are our key asset and are responsible for delivering our strategy. We continue to invest in an enhanced training and development programme, with particular support from our manufacturer partners. The positive approach shown by our employees throughout the Company’s businesses has been key to this success.Employees are encouraged to discuss with management any matters that they are concerned about and factors affecting the Company. In addition, the board takes account of employees’ interests when making decisions. We have a HR director. Suggestions from employees aimed at improving the Company’s performance are welcomed.Good performance from employees is recognised every four months by their peer group who nominate employees for awards and formal company-wide recognition. A significant number of employees are remunerated partly by profit-related bonus schemes.We have a dedicated company intranet which keeps employees up to date with company developments and activities. This platform also includes the Company’s policies and procedures. Long service awards were made during the year to those staff with 25 years’ continuous service. All employment policies remain compliant with current legislation.It is our policy to encourage career development for all employees and to help staff achieve job satisfaction and increase personal motivation.We support the recruitment of disabled people wherever possible. Priority is given to those who become disabled during their employment. Employment by the Company is offered on the basis of the person’s ability to work and not on the basis of race, individual characteristics or political opinion.We have continued to recruit to our apprenticeship programme, and we are seeing the benefits of this investment. We look to further recruit both apprentices and others across the Company’s businesses as we continue to grow.EnvironmentThe Company is aware of its environmental responsibilities arising from its motor retailing and aftersales activities and recognises that some of its activities affect the environment. Our Health, Safety and Environment Officer has received formal training in environmental management and is appropriately experienced in this field. Our policy is to promote and operate processes and procedures which, so far as is reasonably practicable, avoid or minimise the contamination of water, air or the ground.Licences are obtained from the relevant authorities, where required, to operate certain elements of the Company’s business. Waste is disposed of by authorised contractors and is recycled where possible. Special care is taken in the storage of fuels and oils. Through the management of these activities, we seek to minimise any adverse effects of its activities on the environment.We also seek to reduce our energy and water consumption and audit processes are in place to measure usage and make recommendations for improvements. An electrical test monitoring regime is in place throughout the Company’s businesses. Use of the latest building materials is made in the construction of new sites and the refurbishment of existing locations.Future emissions legislative changesDuring the year the Government indicated that the sale of vehicles powered solely by an internal combustion engine will be banned from the end of 2030 onwards. Hybrid vehicles, which are powered by a combination of a battery and an internal combustion engine, will still be allowed to be sold up to the end of 2035. After that time, all vehicles will need to be powered without the use of an internal combustion engine. The implementation of this intended legislation will bring significant change to the motor retail industry and we are working with our manufacturers to more fully develop our transitional plans. We have already installed electric charging points in all our dealerships, although further installations will be required in the coming years. A number of the other actions we have already taken are detailed on page 11 and we anticipate fuller disclosures on our plans, and their possible impact on the business, will be made in future Annual Reports.10Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 1030620-Caffyns-AR2021.indd 1021/06/2021 13:00:2221/06/2021 13:00:22Stock code CFYN Streamlined Energy and Carbon Reporting This section includes our mandatory reporting of greenhouse gas emissions for the period 1 January 2020 to 31 December 2020, the latest annual period for which data is available, and is pursuant to the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. We report our emissions data using an operational control approach taking data for which we deem ourselves responsible, including both energy consumption and vehicle usage for business use. In the 2020 calendar year, our businesses emitted 1,197 tonnes of carbon dioxide (“CO2”) (2019: 1,354 tonnes). Our emissions are principally of CO2 and are from the following sources: Greenhouse gas emissions data Scope 1 Gas consumption Owned transport Water supply Scope 2 Purchased electricity Generated electricity Statutory total Revenue (£million) Scope 1 and Scope 2 energy consumption and greenhouse gas emissions data has been calculated in line with the UK Government environmental reporting guidance. Emission Factor Databases consistent with the UK Government environmental reporting guidance have been used, utilising the current published kWh gross calorific value and CO2e emissions factors relevant for reporting calendar year.We have selected emissions £million of revenues per tonne as our intensity ratio as this, in our view, provides the best comparative measure over time. 2018 intensity ratio: 7.4 tonnes of CO2 per £million of revenue 2019 intensity ratio: 6.6 tonnes of CO2 per £million of revenue 2020 intensity ratio: 6.8 tonnes of CO2 per £million of revenue The Company’s total energy consumption for the period 1 January 2020 to 31 December 2020 was 3.5 million kWh (2019: 4.0 million kWh). The methodology for calculating this annual energy consumption figure was the same as that outlined above for producing the estimate of the Company greenhouse gas emissions. All of the Company’s energy consumption arose in the United Kingdom. Our greenhouse gas emissions associated with waste arise from a number of waste streams generated from our business. For conversion to carbon dioxide equivalent, CO2e, data is not readily available for a number of our waste streams, so we have chosen to report this in weight and percentage of waste recycled compared to waste sent to landfill, as opposed to CO2. Waste in 2020 was 491.8 tonnes (2019: 705.4 tonnes) of which 98% was recycled (2019: 96%). Reducing carbon and waste During the year, we have continued to assess and monitor our energy use and, where practicable, we continue to implement measures in order to reduce the environmental impact of our activities. Tonnes of CO2 2020 Tonnes of CO2 2019 Tonnes of CO2 2018 250.8 27.4 4.4 920.8 (6.3) 1,197.1 176.1 308.8 74.2 4.8 972.6 (6.3) 1,354.1 203.7 308.6 87.4 5.2 995.9 (12.2) 1,384.9 186.3 Climate change influences seasonal energy usage and while, at times, we benefit from milder weather we are aware that any adverse change could affect energy usage. To minimise our energy usage we continue, where practicable, to install LED lighting at our sites as this uses significantly less energy than conventional lighting. In addition, we limit the duration of periods when full lighting is used, using sensors and timers to further reduce the energy we use. We continue to improve our energy use and efficiency by replacing old equipment with new efficient units and ensuring workshop doors are closed when not in use by fitting automatic closing devices. Water use in valeting areas uses recycling facilities, where practicable, and all sites have appropriate water filtration systems. At one dealership we are able to generate electricity through the use of roof-mounted photovoltaic cells, whilst elsewhere, we use air-sourced heat pumps to reduce electricity consumption. We seek to limit our paper consumption and waste through increasingly paperless communications and systems. O u r i B u s n e s s G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 11 30620-Caffyns-AR2021.indd 11 30620 21 June 2021 1:00 pm Proof 5 11 21/06/2021 13:00:23 21/06/2021 13:00:23 30620 21 June 2021 1:00 pm Proof 5Strategic Report continuedHealth and safetyThe board recognises its responsibility to members of staff and others working or visiting our facilities to provide, so far as is reasonably practicable, an environment that is safe and without risk to their health and this is always the first agenda item at each board meeting. The board maintains ultimate responsibility for health and safety issues with a full time Heath, Safety and Environment Officer responsible on a day-to-day basis, supported by all levels of management. The Company’s policy is to identify potential hazards and assess the risks presented by its activities and to provide systems and procedures which allow our staff to take responsible decisions in their work in relation to their own, and others’, safety. We promote awareness of potential risks and hazards and implementation of corresponding preventative or remedial actions through online health and safety systems, operations manuals and monthly communication on topical issues. With clear lines of operating unit responsibility, staff are supported by specialist guidance from the Heath, Safety and Environment Officer. All our staff have access to a detailed health and safety guide.Section 172 statementSection 172 of the Companies Act 2006 requires directors to take into consideration the interests of stakeholders and other matters in their decision making. The directors continue to have regard to the interests of the Company’s employees and other stakeholders, the impact of its activities on the community, the environment and the Company’s reputation for good business conduct, when making decisions. In this context, acting in good faith and fairly, the directors consider what is most likely to promote the success of the Company for its members in the long term. We explain in this Annual Report how the board engages with stakeholders.• Relations with key stakeholders, such as shareholders and suppliers, are considered in more detail on page 20;• The Company’s employees are recognised as vital to its success and employee relations are considered in more detail on pages 3, 4, 10 and 35. The board intends to further enhance its methods of engagement with its employees in the coming financial year with the Chief Executive visiting the Company’s sites regularly for question-and-answer sessions with staff. He will report to the board on the outcome of these sessions. In addition, the board takes account of employees’ interests when making decisions;• The directors are fully aware of their responsibilities to promote the success of the Company in accordance with section 172 of the Companies Act 2006. To ensure the Company operates in line with good corporate practice, all directors receive refresher training annually on the scope and application of section 172. This encourages the board to reflect on how the Company engages with its stakeholders and opportunities for enhancement in the future and was considered at the Company’s Audit and Risk Committee meeting in November 2020. As required, the Company Secretary provides support to the board to help ensure that sufficient consideration is given to issues relating to the matters set out in s172(1)(a)-(f);• The board regularly reviews the Company’s principal stakeholders and how it engages with them.• This is achieved through information provided by management and also by direct engagement with stakeholders themselves;• We aim to work responsibly with our stakeholders, including suppliers. The board has recently reviewed its anti-corruption and anti-bribery, equal opportunities, and whistleblowing policies.During the year under review, ended 31 March 2021, the key decisions taken by the board included:Covid-19 pandemic: On 23 March 2020, the Government announced restrictions on businesses as a result of the growing impact from the worldwide covid-19 pandemic. Car showrooms were classified as non-essential and were required to close and the board reacted swiftly with all showrooms closing in line with this instruction. Car workshops were classified by the Government as essential businesses and were permitted to remain open, but the board was concerned that a safe environment for our staff and customers could not be immediately provided and therefore took the decision that these should also close temporarily. Emergency response teams in three of our then twelve workshops, comprising a skeleton staff of volunteers, remained in post to provide assistance to NHS and other key workers. Over the following weeks, social-distancing procedures, along with physical changes such as perspex screens, enhanced personal protective equipment and additional hygiene measures were put in place and the Company was able to reopen its workshops in a controlled and careful way from mid-May 2020 onwards. In late May 2020, the UK Government announced a relaxation of controls over certain businesses and, from the beginning of June 2020, car showrooms were allowed to reopen. In addition to the measures adopted for our aftersales businesses, the board adopted further measures for car sales, such as appointment-only access to showrooms and unaccompanied test drives, and proactively reviews these measures on a continuing basis. Although both our car showrooms and aftersales workshops were able to operate throughout the summer, our showrooms were returned to operating a click-and-collect only service in November 2020, as covid-19 restrictions on business were once again tightened. Restrictions remained in place throughout 12Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 1230620-Caffyns-AR2021.indd 1221/06/2021 13:00:2321/06/2021 13:00:23between the Company and the Scheme trustees following the previous triennial valuation in 2017. The board has been very mindful of its responsibilities to its current and previous employees who are members of the Scheme and for the need to appropriately deal with the Scheme’s deficit, whilst ensuring that the Company has adequate resources to develop and strengthen its businesses, in order to ensure its future success. The board has worked constructively with the Scheme’s trustees and, since the year-end, has agreed a new recovery plan with the Scheme’s trustees. The formal valuation and associated recovery plan will be submitted to the Pensions Regulator prior to the requisite deadline of 30 June 2021. Additional manufacturer representation: The board continues to seek new opportunities to maximise the effectiveness of its property portfolio, and was pleased to receive in December 2020 the offer from the London EV Company (“LEVC”) for representation for the Kent and East Sussex territory, based in Eastbourne. LEVC, a subsidiary of the Zhejiang Geely group who also own the Volvo brand, is at the forefront of the development of electric taxis and commercial vans and will operate from premises in close proximity to our existing Eastbourne Volvo dealership. This new business commenced trading in May 2021 and we believe these products will experience strong demand from customers as the requirement for “greener delivery” continues to grow. The board has also agreed representation for two additional manufacturer franchises for territories in Kent, both of which will be based at its existing premises on the Orbital Business Park in Ashford. Firstly, MG who are part of the SAIC Motor Corporation and offer customers an excellent range of cars, including excellent value electric and hybrid models. This business is anticipated to commence trading in the summer of 2021. our final quarter, and we finished our financial year with our car showrooms still closed to customer access. Across the year as a whole, our car showrooms were closed to customers for six of the twelve months in the year. Dividends: The Company is aware of its responsibility to shareholders to provide a return on the investment that they have made and has returned over £3.50 in dividends per ordinary share over the last two decades. However, covid-19 has presented a major challenge to the business and has resulted in the Company receiving significant financial support in the year from Government, local Councils and from stakeholders such as its funders and suppliers. The future path of the pandemic still remains uncertain. Therefore, the board decided that it should pause the payment of dividends and accordingly has not declared a dividend since the pandemic started in March 2020. The board remains committed to restarting the payment of dividends to shareholders as soon as it deems it is appropriate to do so. Expansion of Volvo representation: As explained in last year’s Annual Report the board was delighted to receive an offer to extend its representation for Volvo through the provision of a new dealer agreement for a West Sussex territory, based in Worthing. The Government’s imposition of covid-19 social distancing restrictions resulted in a delay to the opening of this new dealership, but we were finally able to fully open the business on 1 June 2020. The directors believe that the investment in expanding its representation of the Volvo brand will provide a return to enhance the long-term sustainability of the Company’s activities. The directors are encouraged that the business has traded well in its first year of operation. Pension scheme triennial valuation: The triennial valuation of the Company’s defined-benefit pension scheme was effective from 31 March 2020, being the start of the current financial year. The Scheme has operated with an actuarial deficit for a number of years with a recovery plan having been agreed www.caffyns.co.uk 30620-Caffyns-AR2021.indd 13 30620-Caffyns-AR2021.indd 13 30620 21 June 2021 1:00 pm Proof 5 Stock code CFYN Secondly, Lotus who are part of the Zhejiang Geely group and are developing several new electric-vehicle models, including the Evija, an electric- powered supercar. We are excited to be representing this venerable British brand and anticipate that we will also commence trading in the summer of 2021. Lewes freehold: The Company leases its freehold property in Lewes to the third-party that, in 2016, acquired the Land Rover business that operated from that site. That lease was originally scheduled to run for two years from the date of sale of the business in April 2016 but has been extended four times and will now expire on 9 June 2021. The board has considered several options for the site to include operating a new motor retail franchise, a used car Caffyns Motorstore and developing the site itself for an alternative non-motor retail use. The board has concluded that the maximum value would be gained through a sale of the freehold and it is negotiating a sale to a third-party, contingent on an appropriate planning consent being obtained by the purchaser. The final sale of the freehold would not be expected to complete until 2023. By order of the board S G M Caffyn Chief Executive 1 June 2021 O u r i B u s n e s s G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n 13 21/06/2021 13:00:23 21/06/2021 13:00:23 30620 21 June 2021 1:00 pm Proof 5DirectorsRICHARD C WRIGHT PG Dip FIMI FCIMChairmanSIMON G M CAFFYN MA FIMIChief ExecutiveMICHAEL WARREN BSc FCAFinance SARAH J CAFFYN BSc FCIPD AICSA FIMIHuman resourcesNIGEL T GOURLAY BScNon-executive and senior independent directorSTEPHEN G BELLAMY BCom CA(NZ)Non-executiveBankersHSBC BANK PLC1st floor, First Point, Buckingham Gate, London Gatwick Airport, West Sussex, RH6 0NTVOLKSWAGEN BANKBrunswick Court, Yeomans Drive, Blakelands, Milton Keynes, MK14 5LRIndependent AuditorBDO LLPStatutory AuditorArcadia House, Maritime Walk, Ocean Village, Southampton, SO14 3TLCompany SecretarySARAH J CAFFYN BSc FCIPD AICSA FIMIRegistered Office4 Meads Road, Eastbourne, East Sussex, BN20 7DRTelephone (01323) 730201Board of Directors14Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 1430620-Caffyns-AR2021.indd 1421/06/2021 13:00:2321/06/2021 13:00:23Chairman’s Statement on Corporate Governance Stock code CFYN This statement explains how the Company has applied the main and supporting principles of corporate governance and describes the Company’s compliance with the provisions of the UK Corporate Governance Code (the “Code”), as published in 2018 by the Financial Reporting Council and available at www.frc.org.uk. The Company fully complied with all provisions of the Code throughout the year ended 31 March 2021, except for Provisions 11, 24, 36, 38 and 39. • Provision 11 requires at least half the board, excluding the Chairman, should consist of independent non-executive directors. The board believes the composition of the board and the committees reflect the compact nature of the board and size of the Company as a whole, and that directors have shown that they are able to work in a collegiate fashion; • Provision 24 requires that the chairman of the board should not be a member of the Audit Committee. The Company believes that an Audit Committee of three non-executive directors operates better than one with just two members and, due to the size of the board, the chairman needs to be a member in order to achieve this; • Provision 36 requires that remuneration schemes for directors should promote long-term shareholdings by executive directors and support alignment with long-term shareholder interests. The Company operates a Save As You Earn scheme for all eligible employees, including directors, but does not operate a Long-Term Incentive Plan (“LTIP”) for directors, primarily due to the volatility in the share price and relative lack of liquidity in the trading of its shares. However, all executive directors are ordinary shareholders and those shareholdings are detailed on page 34; • Provision 38 requires that only directors’ salaries should be pensionable. The Company Secretary is a member of the Company’s defined-contribution pension scheme on the same terms as all other employees and any bonus payments www.caffyns.co.uk made to her are pensionable. This is a long-standing arrangement with which the board is satisfied and has decided that it would not be in the best interests of the Company to change her existing employment contract; • Provision 39 requires that notice periods should be one year or less. The Chief Executive has a service contract which runs for more than twelve months, (see page 25 of the Directors’ Remuneration Report). This also is a long-standing arrangement. The Remuneration Committee reviews the position annually and has decided that it would not be in the best interests of the Company to change his existing contract. • Financial reporting to shareholders; • Dividend policy; • Health and safety policy; • Changes in employee share incentives; • Reviewing the overall corporate governance arrangements; • Appointments to the board and its committees; • Policies relating to directors’ remuneration and service; • Prosecution, defence or settlement of material litigation; • Any alterations to the share capital of the Company; • Approval of all circulars and announcements to shareholders; and O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e • A description of the Company’s • Major changes to the Company’s i F n a n c a s i l O t h e r i f n o r m a t i o n business model and strategy is set out in the Strategic Report on page 7. Structure of the board and its key activities The board is collectively responsible for the long-term success of the Company and for ensuring that it operates to a governance standard, which serves the best interests of the Company. The board sets the strategy of the Company and its individual trading businesses and ensures that the Company has in place the financial and human resources it needs to meet its objectives. There is a written schedule of matters reserved for board decision, which is summarised below. Schedule of matters reserved for decision by the board • Business strategy; • Approval of significant capital projects and investments; • Principal terms of agreements for the Company’s principal banking facilities; • Annual business plan and budget monitoring; • Risk management strategy and internal control and governance arrangements; • Approval of acquisitions and divestments; • Changes to management and control structure; • Significant changes to accounting policies or practices; pension schemes • Insurance cover including directors’ and officers’ liability insurance and indemnification of the directors. The Chairman takes responsibility for ensuring that the directors receive accurate, timely and clear information. Monthly financial information is provided to the directors. Regular and ad-hoc reports and presentations are circulated, with all board and committee papers being issued in advance of meetings by the Company Secretary. In addition to formal board meetings, the Chairman maintains regular contact with the Chief Executive and other directors to discuss specific issues. In furtherance of their duties, the directors have full access to the Company Secretary and may take independent professional advice at the Company’s expense. The board believes that, given the experience and skills of its directors, the identification of training needs is best left to the individual’s discretion. If any developmental need is identified through the board’s formal appraisal process or by an individual director, the Company makes the necessary resources available. As part of their role, the non-executive directors constructively challenge and help develop proposals on strategy. The non-executive directors scrutinise management’s performance in meeting agreed goals and objectives and monitor the reporting of performance. They satisfy themselves on the integrity of financial information and that financial controls F i n a n c i a l s O t h e r i n f o r m a t i o n 15 21/06/2021 13:00:25 21/06/2021 13:00:25 30620-Caffyns-AR2021.indd 15 30620-Caffyns-AR2021.indd 15 30620 21 June 2021 1:00 pm Proof 5 30620 21 June 2021 1:00 pm Proof 5Chairman’s Statement on Corporate Governance continuedand systems of risk management are robust and defensible. They determine appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning. The non-executive directors meet formally, without the executive directors, at least once a year.Operating within prescribed delegated authority, such as capital expenditure limits, the operational running of the Company and its businesses is carried out by the executive directors, led by the Chief Executive.The board delegates certain of its duties to its Audit and Risk, Nomination and Remuneration Committees, each of which operates within prescribed terms of reference. These are set out on the Company’s website. The responsibilities of the board’s committees are set out below and on pages 17 and 18 of this report and in the Directors’ Remuneration Report.The board has evaluated the performance of its Audit & Risk and Remuneration Committees for the year under review. The Chairman and the respective committee chairman take responsibility for carrying out any actions recommended as a result of that evaluation.Performance evaluationThe board has established a procedure to evaluate its performance, as well of its Audit & Risk and Remuneration committees, and its individual directors. Detailed questionnaires are completed by the directors, who then debate any matters arising.Individual director evaluation has shown that each director continues to demonstrate commitment to the role. The non-executive directors, led by the senior independent director, have carried out a performance evaluation of the Chairman after taking account of the views of the executive directors. The Chairman has reviewed the performance of the non-executive directors and the Chief Executive. The Chief Executive has reviewed the other executive directors. The board intends to carry out further performance evaluations but will keep under review the method and frequency.The latest board evaluation process concluded that the board and its committees were operating effectively, with clear demarcation of the respective responsibilities of individual directors and board committees. The board is satisfied that all directors are each able to devote the amount of time required to attend to the Company’s affairs and their duties as a board member. The Chairman discusses with each director any training and development needs.Board composition and independenceAs at 1 June 2021 the board comprised three executive directors and three non-executive directors, one of whom is the Chairman. Mr R C Wright is the non-executive Chairman and Mr S G M Caffyn is the Chief Executive. The Chairman leads the board and the Chief Executive manages the Company and implements the strategy and policies adopted by the board. There is a clear division of responsibility between the role of the non-executive Chairman and the Chief Executive; this is recorded in a written statement which is reviewed and agreed annually by the board. The Chairman is responsible for leadership of the board and ensuring its effectiveness for all aspects of its role.The Company maintains appropriate directors’ and officers’ insurance in respect of legal action against its directors.Directors’ conflict of interestConflicts of interest can include situations where a director has an interest that directly or indirectly conflicts, or may possibly conflict, with the interests of the Company. The board operates a formal system for directors to declare at all board meetings all conflicts of interest. The non-conflicted directors must act in the way they consider, in good faith, would be most likely to promote the success of the Company.Balance and challengeThe non-executive directors complement the skills and experience of the executive directors, providing the requisite degree of judgement and scrutiny to the decision-making process at board and committee level. Mr N T Gourlay is the senior independent director.The board maintains and regularly reviews a register of all interests, offices and appointments that are material to be considered in the assessment of the independence of directors and has concluded that there are not, in relation to any director, any relationships or circumstances regarded by the Company as affecting their exercising independent judgement.Re-election of directorsAll directors will seek re-election annually in accordance with the latest corporate governance recommendations.Meetings and attendanceThe Board is normally scheduled to meet eight times each year but met fifteen times, all via video conferencing calls, in the year under review due to the pressures caused on the business by the covid-19 pandemic. All the directors were in attendance for all the meetings.Nomination CommitteeOur Nomination Committee comprises two non-executive directors, the non-executive Chairman and the Chief Executive. The members are:R C Wright (Chairman)N T GourlayS G BellamyS G M CaffynThe Nomination Committee is responsible for leading the process for appointments to the board and meets at least once a year. The Committee is chaired by Mr R C Wright. The Company Secretary or alternate also attends meetings in her capacity as secretary of the Committee. Where the matters discussed relate to the chairman, such as in the case of selection and appointment of the Company Chairman, the senior independent director chairs the Committee. New directors receive a full, formal and tailored induction on joining the board.The principal responsibilities of the Committee are as follows:• To regularly review the structure, size and composition of the board and make recommendations to the board regarding any adjustments deemed appropriate;16Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 1630620-Caffyns-AR2021.indd 1621/06/2021 13:00:2521/06/2021 13:00:25Stock code CFYN • To prepare the description of the role and capabilities required for a particular board appointment. Executive search consultants may be retained as appropriate to assist in this process; • To identify, and nominate for the approval by the board, candidates to fill board vacancies as and when they arise; • To satisfy itself, with regard to succession planning, that processes are in place regarding both board and senior appointments; and • To undertake an annual performance evaluation to ensure that all members of the board have devoted sufficient time to their duties. The Committee met twice during the year, both by video conferencing call. All members eligible to attend were present at both the meetings. Audit and Risk Committee Our Audit and Risk Committee comprises two non-executive directors and the Chairman. The members are: N T Gourlay (chairman) R C Wright S G Bellamy The Committee is chaired by Mr N T Gourlay. The Company Secretary, or alternate, also attends meetings in her capacity as secretary of the Committee. The chairman of the Committee is considered by the board as having recent and relevant financial experience. The board also remains satisfied that the Committee as a whole has competence relevant to the sectors in which the Company operates. The chairman of the board is on the Committee due to his experience and the small number of non- executive directors on the board. The board are satisfied with this arrangement. The Audit and Risk Committee meets at least three times a year. The meetings are attended by invitation by the executive directors and by the head of the internal audit function and the internal auditor, and by representatives of the Company’s external auditor, at the chairman’s discretion. The Committee’s meetings in quarters one and three coincide with the Company’s reporting timetable for its audited financial statements and unaudited interim condensed financial statements respectively. During these meetings, the Committee: • Reviews the drafts of the financial statements and preliminary and interim results announcements; and • Reviews all published accounts (including interim reports) and post-audit findings before their presentation to the board, focusing in particular on accounting policies, compliance, management judgement and estimates, and considers the reports of the external auditor on the unaudited interim condensed financial statements and the full year audited financial statements. At its second meeting, the Committee reviews the external audit plan. The Committee’s third meeting is primarily concerned with: • Reviewing the Company’s systems of control and their effectiveness; • Significant corporate governance issues, such as those relating to the regulation of financial services; • Reviewing the external auditor’s performance; • Reviewing the risk register and making recommendations to the board on the content and relative importance of the risks identified; • Recommending to the board the reappointment, or not, of the external auditor; and • Reviewing the effectiveness and independence of the external auditor, including monitoring the level of audit and non-audit fees. The Committee normally meets three times in the year but, in the year under review, met four times, with all directors in attendance at all the meetings. All meetings in the year were held by video conferencing call due to the covid-19 pandemic. The Committee reviewed the effectiveness of the Company’s system of internal control and financial risk management during the year, including the review of the Company’s risk register, and including consideration of reports from both the internal and external auditors. The Committee reported the results of its work to the board and the board considered these reports when reviewing the effectiveness of the Company’s system of internal control which forms part of the board’s high-level risk review performed during the year. The effectiveness of the internal audit function was also monitored. The Committee provides advice to the board on whether the annual report is fair, balanced and provides the necessary information shareholders require to assess the Company’s performance, business model and strategy. In doing so, the following issues have been addressed specifically: • Review of key strategic risks: The Committee chairman conducts an annual review of key strategic risks and would normally undertake site visits in order to ensure that the review includes a detailed understanding of the business. These visits could not be made in the year due to covid-19 restrictions. The review highlights the key risks based on a combination of likelihood and impact, and then also considers what appropriate mitigating factors should be implemented (highlights from this work are included in the Strategic Report). • Review of poorly performing dealerships: As part of both the interim and year-end review processes, consideration is given to potential impairments of property, plant and equipment, investment property and goodwill relating to poorly performing locations and that any related impairments are provided for. Management then follow up with detailed action plans to either improve dealership performance or seek an exit solution. The Committee also reviews progress on these plans at the following review. As part of the external audit, the Committee fully discusses with the external auditor the identification of cash generating units (“CGUs”) for the purposes of impairment testing. The Committee is satisfied that only a single material impairment was required in relation to O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 17 30620-Caffyns-AR2021.indd 17 30620 21 June 2021 1:00 pm Proof 5 17 21/06/2021 13:00:25 21/06/2021 13:00:25 30620 21 June 2021 1:00 pm Proof 5Chairman’s Statement on Corporate Governance continuedthe current financial year.• Going concern: The Finance Director provides an assessment of the Company’s ability to continue to trade on a going concern basis for at least the next twelve months. Forecasts are based on financial plans agreed with the board (budgets or forecasts), the Company’s most recent trading results, and include a range of possible downside scenarios including the impact of the ongoing covid-19 pandemic and restrictions placed on business in order to combat its effects. The assumptions that underpin the assessments are considered and discussed in detail when the Committee meets. The conclusion of that review is included in the Going Concern section of this report.• Inventory valuation: The value of new and used cars, as well as the provision for slow-moving and obsolete inventory, can have a significant influence on the inventory valuation in the financial statements. The Committee has considered the Company’s procedures and controls, which are satisfactory, to reduce the risk of misstatement in relation to inventory valuation.• Pensions: The Company operates a defined-benefit pension scheme, closed to future accrual, which has an excess of liabilities over the value of assets owned by the scheme. The assessment of the valuation of the scheme is based on several key assumptions, which can have a significant impact on the valuation of the deficit. The Committee has considered the assumptions used for the valuation of the liabilities of the scheme and is satisfied that these are reasonable.Mr N T Gourlay will attend the 2021 Annual General Meeting and will be available at that meeting to answer any questions regarding the workings of the Audit & Risk Committee that shareholders may wish to raise.Anti-briberyDuring the year, as well as its routine business, the Committee continued to monitor the suitability of the Company’s controls designed to combat bribery so as to satisfy itself of the adequacy of its systems and procedures for the prevention of bribery and corruption, particularly in the light of the Bribery Act 2010. It has reviewed the Company’s anti-bribery policy statement which has been adopted by the board.WhistleblowingThe Committee has reviewed the arrangements for its employees to raise, in confidence, concerns about possible improprieties in relation to financial reporting, suspected fraud and dishonest acts, or other similar matters, commonly known as “whistleblowing”. The Committee reviews any such reported incidences and any improvements to internal procedures that may be required.Non-audit services provided by the external auditorNon-audit services provided by the Company’s auditor are kept under review by the Committee. The Company’s auditor does not provide compliance services in the field of taxation advice.The Committee ensures that the auditor’s objectivity and independence are safeguarded by ensuring that the level of fees is not material to either the Company nor the auditor. The report from BDO LLP confirming their independence and objectivity was reviewed by the chairman of the Audit and Risk Committee and the Finance Director. The level of fees paid to BDO LLP for non-audit services is not regarded to conflict with auditor independence. Fees payable to the auditor are set out in note 3 to the financial statements.Effectiveness and independence of the external auditorThe Committee is responsible for advising the board on the appointment of the auditor, assessing their independence and formulating policy on the award of non-audit work. The current auditor is BDO and the year under review is their second year of tenure. They were appointed as the result of a formal competitive tender process in 2019.Non-audit work is only awarded to the external auditor after due consideration of matters of objectivity, independence, value for money, quality of service and efficiency.At the conclusion of each year’s audit, the performance of the external auditor is reviewed by the Committee, with the executive directors, covering such areas as quality of audit team, business understanding, audit approach and process management. Where appropriate, actions are agreed against the points raised and subsequently monitored for progress.Tax strategy and objectiveAs a responsible taxpayer, the Company is committed to establishing, maintaining and monitoring the implementation of an appropriate tax strategy. Our tax strategy is aligned with our objective of paying the correct amount of tax at the right time. Commercial transactions are therefore structured in the most tax efficient way but without resorting to artificial arrangements that we would regard as abusive. There is an ethical dimension to achieving this objective. The ethical dimension reflects the need to mitigate the risk to the Company’s reputation that would arise from tax strategy that entails aggressive tax planning.A copy of the Company’s tax strategy is available from its corporate website, www.caffynsplc.co.uk.Going concernThe 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 bank covenants have been achieved for the year under review. Under the Company’s covenant tests, 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 18Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 1830620-Caffyns-AR2021.indd 1821/06/2021 13:00:2521/06/2021 13:00:25financial 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 www.caffyns.co.uk Stock code CFYN 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 on page 8 and 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. Viability statement In accordance with provision 31 of the UK Corporate Governance Code, the directors have assessed the viability of the Company over a three-year period to 31 March 2024. The directors believe this period to be appropriate as the Company’s strategic review considered by the board encompasses this period. In making their assessment, the directors have considered the Company’s current financial position and performance and its cash flow projections, including future capital expenditure, in relation to the availability of finance and funding facilities, and have considered these factors in relation to the principal risks and uncertainties which are included in the Report of the Directors. During the year to 31 March 2021, the board carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The directors believe that the Company is well placed to manage its business risks successfully, having considered the principal risks and uncertainties. Accordingly, the board believes that, taking into account the Company’s current position, and subject to the principal risks faced by the business, the Company will be able to continue in operation and to meet its liabilities as they fall due for the period up to 31 March 2024. Risk management and internal controls The board is responsible for maintaining a sound system of internal controls, including financial, operational and compliance controls and risk management, and reviews the effectiveness of the system at least annually in order to safeguard shareholders’ investment and the Company’s assets. The system is designed to manage rather than eliminate risk and can provide only reasonable and not absolute assurance against material misstatement or loss. The board has completed a robust assessment of the Company’s emerging and principal risks, including a description of its principal risks, the procedures that are in place to identify emerging risks, and an explanation of how these risks are being managed or mitigated. The board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks are managed. Management are responsible for the identification and evaluation of significant risks applicable to their areas of business together with the design and operation of suitable internal controls. These risks are assessed on a regular basis and may be associated with a variety of internal or external sources, including control breakdowns, disruption to information systems, competition, natural catastrophe, customer or supplier actions and regulatory requirements. The process used by the board is to review the effectiveness of the system of internal control including a review of legal compliance, health and safety and environmental issues on a six-monthly basis. Insurance and risk management and treasury issues are reviewed annually or more frequently if necessary. In addition, the Audit and Risk Committee reviews the scope of audits, the half- yearly and annual financial statements (including compliance with legal and O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 19 21/06/2021 13:00:25 21/06/2021 13:00:25 30620-Caffyns-AR2021.indd 19 30620-Caffyns-AR2021.indd 19 30620 21 June 2021 1:00 pm Proof 5 30620 21 June 2021 1:00 pm Proof 5Chairman’s Statement on Corporate Governance continuedregulatory requirements) and reports to the board on financial issues raised by both the internal and external audit functions. Financial control is exercised through an organisational structure which has clear management responsibilities with segregation of duties, authorisation procedures and appropriate information systems. The system of annual budgeting with monthly reporting and comparisons to budget is a key control over the business and in the preparation of consolidated accounts.There is an ongoing programme of internal audit visits to monitor financial and operational controls throughout the Company. The executive directors receive regular reports from the internal audit and health and safety monitoring functions which include recommendations for improvement.Financial reportingThe directors consider the annual report and accounts, taken as a whole, to be fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.Relations with shareholdersThe board values the constructive views of its shareholders and recognises their interest in the Company’s strategy and performance, board membership and quality of management. The views of major shareholders are reported back to the board as appropriate. The non-executive directors are available to attend meetings with major shareholders. The principal methods of communication with private investors are the Interim Report, the Annual Report and the Annual General Meeting. Information on the Company is also included on its corporate website www.caffynsplc.co.uk.The Annual General Meeting is used to communicate with investors. The chairmen of the Audit and Risk Committee, Remuneration and Nomination Committees are available to answer questions. Separate resolutions are proposed on each issue so that they can be given proper consideration and there is a resolution to approve the Annual Report and financial statements. The Company counts all proxy votes and, after it has been dealt with by a show of hands, indicates the level of proxies lodged on each resolution.Relations with suppliersThe board maintains close relationships with its suppliers and, in particular, with the nine motor manufacturers for which it currently holds operating franchises: namely Audi, LEVC, Lotus, MG, SEAT, Skoda, Vauxhall, Volkswagen and Volvo. The Chief Executive holds regular meetings with these parties and the Company’s operations are split into three divisions with the head of each division specifically tasked with maintaining a close and mutually beneficial relationship with their manufacturer. For its wider supplier base, the Company ensures that it operates in an ethical manner, ensuring that invoices are settled within agreed terms. The average credit period taken for trade-related purchases in the year under review was thirty-three days (2020: twenty-five days). The lengthening of the payment settlement period arose primarily from payment extensions allowed by many of the Company’s vehicle manufacturers.During the year, the Company has been appointed to represent the London EV Company (“LEVC”) from its existing premises in Eastbourne and, since the year-end, has already commenced trading. The Company has also been separately appointed to represent MG and Lotus and expects to commence trading for these brands from its existing site in Ashford, Kent, in the summer of 2021.By order of the boardR C WrightChairman1 June 202120Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 2030620-Caffyns-AR2021.indd 2021/06/2021 13:00:2521/06/2021 13:00:25Directors’ Remuneration Report Annual Statement from the Chairman of the Remuneration Committee Introduction On behalf of your board, I am pleased to present our Directors’ Remuneration Report for the year ended 31 March 2021. The Directors’ Remuneration Report has been prepared on behalf of the board by the Remuneration Committee in accordance with the requirements of the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendments) Regulations 2013, and is split into two sections: • The directors’ remuneration policy sets out the Company’s policy on remuneration, which was subject to a binding shareholder vote at the Annual General Meeting on 24 September 2020. This remuneration policy will continue to be voted on in the future at least once every three years; and • The annual report on remuneration sets out the payments and awards made to the directors and details the link between company performance and remuneration for the 2021 financial year. The information set out on pages 22 to 32 (the annual report on remuneration) is subject to audit except for the performance graph and table, the change in remuneration of the Chief Executive, the relative importance of the spend on pay, the implementation of remuneration policy in the year, the considerations by the directors of matters relating to directors’ remuneration and the statement of shareholder voting at the 2020 Annual General Meeting. Remuneration outcomes for the 2021 financial year The covid-19 pandemic that started in March 2020 had a significant impact on the business in the year under review and the board recognises that it will have also impacted on our stakeholders. As part of the board’s response, the directors agreed to waive elements of their salary, and did not receive any inflationary increase in salary during the year. Details on the waived salaries can be found on page 28. Annual bonus opportunities for the directors are based on the achievement of underlying profit before tax targets, subject to the discretion of the Remuneration Committee. Although the necessary profit target was achieved in relation to the financial year ended 31 March 2021, the Remuneration Committee, with the full agreement of the executive directors, applied its discretion and did not award any bonuses to the executive directors. This was due to a combination of factors including the level of Government support received by the Company during the year from the Coronavirus Job Retention Scheme and from local Council support grants; the holiday from business rates provided by local Councils in the areas in which the Company operates; and the fact that the Company did not award any dividends to ordinary shareholders during the year. Key remuneration decisions for the coming 2022 financial year Under the Company’s annual salary review, the base salaries for the executive directors were increased by 2.0% with effect from 1 April 2021. Salaries for all employees were increased by an overall average of 2.0% from that date. Stock code CFYN Conclusion The directors’ remuneration policy that follows this annual statement sets out the Committee’s principles on remuneration for the future and the annual report on remuneration provides details of the remuneration for the year ended 31 March 2021. The Committee will continue to be mindful of shareholder views and interests and we believe that our directors’ remuneration policy continues to be aligned with the achievement of the Company’s business objectives. By order of the board S G Bellamy Chairman of the Remuneration Committee 1 June 2021 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 21 30620-Caffyns-AR2021.indd 21 30620 21 June 2021 1:00 pm Proof 5 21 21/06/2021 13:00:26 21/06/2021 13:00:26 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedRemuneration policyThe policy of the Committee is to ensure that the executive directors are fairly rewarded for their individual contributions to the Company’s overall performance and to provide a competitive remuneration package to executive directors to attract, retain and motivate individuals of the calibre required to ensure that the Company is managed successfully in the interests of all stakeholders. In addition, the Committee’s policy is that a substantial proportion of the remuneration of the executive directors should be performance related.The Company’s directors’ remuneration policy is voted on every three years and was last approved by shareholders at the Annual General Meeting held on 24 September 2020, and became effective from that date. The full policy was disclosed in the 2020 Annual Report, which is available on the Caffyns plc website located at www.caffynsplc.co.uk.The main elements of the remuneration package of executive directors are set out below:Purpose and link to strategyOperationMaximum potential valuePerformance metricsBase salaryProvide competitive remuneration that will attract and retain high-calibre executive directors to develop and implement the Company’s strategy, without paying more than necessary, and having regard to the views of shareholders and other stakeholders. Reviewed annually effective from 1 April to reflect role, responsibility and performance of the individual and the Company, and to take account of rates of pay for comparable roles in similar companies. Paid in twelve equal monthly instalments during the year. When selecting comparators, the Committee has regard to the Company’s revenue, market worth and business sector.There is no prescribed maximum increase although the Committee would carefully consider any increases against those awarded to the Company’s employees, taken as a whole. The annual rate of any increase is set out in the Annual Report in the section covering remuneration for the current year and the following year.The Committee considers individual salaries at the appropriate Committee meeting each year taking due account of the factors noted in the operation of the salary policy.BenefitsProvide market competitive benefits consistent with the role.Benefits consist of the provision of a company car, private medical health insurance, business-related and certain other subscriptions, and the opportunity to join any Company savings-related share option scheme.The cost of providing benefits varies from time to time and is borne wholly by the Company except for the cost of private medical health insurance where the Company contributes half of the cost.Not applicable.22Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 2230620-Caffyns-AR2021.indd 2221/06/2021 13:00:2621/06/2021 13:00:26Purpose and link to strategy Annual bonus Incentivises achievement of business objectives by providing a reward for performance against annual targets. Stock code CFYN Operation Maximum potential value Performance metrics Paid in cash after the end of the financial year to which it relates. Up to 100% of salary. Targets based on the underlying profit before tax of the Company. The Committee sets threshold and maximum targets on an annual basis. In general: • A percentage of the maximum bonus is payable for hitting the threshold target; and • 100% of the maximum bonus is payable for meeting or exceeding the maximum target. A sliding scale operates between threshold and maximum performance. Payment of any bonus is subject to the discretion of the Committee and, if deemed appropriate, a bonus of up to 10% of salary may be paid in exceptional circumstances, despite the threshold target not being reached. See page 29 for details. Not applicable. 3% of base salary plus bonus. Not applicable. Long-term incentives Alignment of interests with shareholders by providing long-term incentives delivered in the form of shares. Pension Attract and retain executive directors for the long term by providing funding for retirement. Executive directors are able to apply for maximum entitlement under the rules of any Company savings-related share option scheme. No other long-term incentive scheme is considered appropriate for the Company’s specific circumstances. Executive directors are eligible to join the Company’s defined-contribution pension scheme on the same terms as staff generally. In accordance with the rules of the pension scheme, bonuses are pensionable. As a result of changes in pensions’ legislation effective from 6 April 2006, executive directors can choose to be paid a salary supplement in lieu of the employers’ contribution to the Company’s pension scheme. www.caffyns.co.uk 30620-Caffyns-AR2021.indd 23 30620-Caffyns-AR2021.indd 23 30620 21 June 2021 1:00 pm Proof 5 23 21/06/2021 13:00:26 21/06/2021 13:00:26 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedNotes to the policy tableThe remuneration policy is designed to support the strategy and promote long term sustainable success. There is no link between the levels of remuneration earned by the executive directors and the Company’s share price.The remuneration policy is also linked to company purpose, values and culture.Performance conditionsThe Committee selected the performance conditions as they are central to the Company’s strategy and are key metrics used by the executive directors to oversee the operation of the business. The performance targets for the annual bonus are determined annually by the Committee.The performance targets for any annual bonus in the 2022 financial year will be based on achievement of a pre-set underlying profit before tax for that year, as outlined on page 23. However, in determining whether to award a bonus the Committee would also take into account factors such as dividend cover and year-on-year changes to the net asset value of the Company. The Committee is of the opinion that these performance targets are commercially sensitive and that it would therefore be detrimental to the Company to disclose their details in advance. The targets will be disclosed after the end of the financial year in the Directors’ Remuneration Report in next year’s Annual Report.In exceptional circumstances, the Remuneration Committee would have the discretion to pay a maximum of 10% of salary as a bonus, even if performance were to be below the threshold required.Differences from remuneration policy for all employeesAll employees of the Company are entitled to base salary and benefits. The opportunity to earn commission or a bonus is made available to a high proportion of employees. The maximum opportunity available is based on the seniority and responsibility of the role.Statement of consideration of employment conditions of employees elsewhere in the CompanyThe Committee receives reports on an annual basis on the level of pay rises awarded across the Company and takes these into account when determining salary increases for executive directors. In addition, the Committee receives reports on the structure of remuneration for senior management in the tier below the executive directors and uses this information to ensure a consistency of approach for its most senior managers.The Committee does not specifically invite employees to comment on the directors’ remuneration policy, but it does take note of any comments made by employees.Statement of consideration of shareholder viewsThe board considers shareholder feedback received in relation to the Annual General Meeting each year and any action is built into the Committee’s business for the ensuing period. This, and any additional feedback received from shareholders from time to time, is considered by the Committee as part of the Company’s annual review of remuneration policy.Approach to recruitment remunerationThe Committee’s approach to recruitment remuneration is to offer a market competitive remuneration package sufficient to attract high calibre candidates who are appropriate to the role but without paying any more than is necessary.Any new executive director’s remuneration package would include the same elements and be in line with the policy table set out earlier in the directors’ remuneration policy, including the same limits on performance-related remuneration.Were an internal candidate promoted to the board, the original grant terms and conditions of any bonus or share awards made before that promotion would continue to apply.Reasonable relocation and other similar expenses may be paid if appropriate.24Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 2430620-Caffyns-AR2021.indd 2421/06/2021 13:00:2621/06/2021 13:00:26Directors’ service contracts, notice periods and termination payments Contractual provisions on a change of control of the Company Provision Details Policy Notice periods in executive directors’ service contracts. Twelve months by executive directors and the Company. Executive directors may be required to work during the notice period. Twelve months by executive directors and the Company. Compensation for loss of office. No more than twelve months’ basic salary, bonus and benefits (including Company pension contributions). None. None, except for the Chief Executive. Stock code CFYN Other provisions in specific service contracts S G M Caffyn may give six months’ notice but is entitled to two years’ notice from the Company and an unreduced early retirement pension. M Warren may give six months’ notice and is entitled to six months’ notice from the Company. Termination payment to S G M Caffyn following a change of control comprises a cash amount equal to two years’ basic salary, bonus and benefits (including Company pension contributions). Treatment of annual bonus on termination. Treatment of unvested options from savings-related share option schemes. Bonuses that have already been declared are payable in full. In the event of termination by the Company (except for cause) a prorated bonus to the end of the notice period would also be payable. Good leavers may exercise their options within six months of cessation (one year for death). Options of leavers for fraud, dishonesty or misconduct lapse. Options of other leavers may be exercised within six months of cessation, but only to the extent that they would ordinarily become vested during that time. There is no discretion to treat any such leaver as a “good leaver”. Exercise of discretion. Intended only to be relied upon to provide flexibility in unusual circumstances. None. None. None. Not applicable. The number of options that can be exercised is reduced pro rata to reflect the proportion of the vesting period before cessation. Not applicable. Not applicable. Other than death, “good leaver” circumstances comprise: injury, disability, redundancy, retirement or transfer of employing business outside the Company. The number of options that can be exercised is reduced pro rata to reflect the proportion of the vesting period before cessation. The Committee’s determination would consider the particular circumstances of the executive director’s departure and the recent performance of the Company. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 25 30620-Caffyns-AR2021.indd 25 30620 21 June 2021 1:00 pm Proof 5 25 21/06/2021 13:00:26 21/06/2021 13:00:26 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedProvisionPolicyDetailsContractual provisions on a change of control of the CompanyOther provisions in specific service contractsOutside appointments.Subject to approval.Board approval must be sought.Not applicable.Not applicable.Non-executive directors.Appointed for three-year terms.Compensation of six months’ fees payable if required to stand down.Not applicable.Not applicable.In the event of the negotiation of a compromise or settlement agreement between the Company and a departing director, the Committee may make payments it considers reasonable in settlement of potential legal claims. Such payments may also include reasonable reimbursements of professional fees in connection with such agreements.The Committee may also include the reimbursement of repatriation costs or fees for professional or outplacement advice in the termination package, if it considers it reasonable to do so. It may also allow the continuation of benefits for a limited period.There are no contractual requirements for directors to own shares in the Company although they are encouraged to become shareholders in order to increase the alignment of their interests with those of other shareholders. At 31 March 2021, all directors held a direct interest in the ordinary shares of the Company and their interests are detailed on page 34.Service contractsExecutive directors are appointed under rolling service contracts, whereas non-executive directors each have a fixed-term appointment of three years, renewable upon expiry at the Company’s discretion. When considering the reappointment of a non-executive director, the board reviews their attendance at, and participation in, meetings and their overall performance, and takes into account the balance of skills and experience of the board as a whole.DirectorCommencement of current renewal contractExpiryUnexpired terms at 31 March 2021R C Wright27 July 201826 July 2024*40 monthsN T Gourlay26 September 201925 September 2022*18 monthsS G Bellamy18 June 201917 June 2022*15 months* On 25 March 2021, based on the recommendation of the Nominations Committee, the board extended the contract of Mr R C Wright by a further three years, until 26 July 2024.Copies of directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office.Fees from external directorshipsNone of the executive directors holds office as a non-executive director of other companies other than in a voluntary or honorary (that is, unpaid) capacity. The Company does not have a formal policy on whether an executive director may or may not keep fees gained from holding an external non-executive directorship. This would be decided on a case-by-case basis.26Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 2630620-Caffyns-AR2021.indd 2621/06/2021 13:00:2621/06/2021 13:00:26Stock code CFYN Total remuneration opportunity for the year ending 31 March 2022 The chart below illustrates the remuneration that would be paid to each of the executive directors under three different performance scenarios: (i) below threshold; (ii) on target; and (iii) outperformance. The elements of remuneration have been categorised into two components: (i) fixed; and (ii) annual variable (annual bonus awards). S G M Caffyn M Warren Outperformance 50% 50% £590,000 Outperformance 50% 50% £304,000 Target 80% 20% £369,000 Target 80% 20% £190,000 Below threshold 100% £295,000 Below threshold 100% £152,000 S J C Caffyn Outperformance 50% 50% £96,000 Fixed Annual bonus Target 80% 20% £60,000 Below threshold 100% £48,000 Each element of remuneration is defined in the table below: Element Fixed Annual variable Description Base salary and benefits in kind Annual bonus awards The on-target scenario assumes that for the annual bonus, underlying profit before tax would be 111% of the threshold target. Non-executive directors’ fee policy The policy for the remuneration of the non-executive directors is as set out below. Non-executive directors are not entitled to a bonus, cannot participate in the Company’s savings-related share option scheme and are not eligible for pension arrangements or any other employment benefits. Purpose and link to strategy Operation Non-executive director fees Attract non-executive directors who have a broad range of experience and skills to oversee the implementation of the Company’s strategy. Non-executive directors’ fees are determined by the board within the limits set out in the Articles of Association and are paid in twelve equal, monthly instalments during the year. Maximum potential value Performance metrics None. Reviewed annually to reflect the role, responsibility and performance of the individual and the Company. Annual rate of increase set out in the annual report on remuneration for the current year and the following year. No prescribed maximum annual increase. Annual report on remuneration Save for the performance graph and table, the change in the remuneration of the Chief Executive, the relative importance of the spend on pay, the implementation of remuneration policy for the year ending 31 March 2022, the consideration by the directors of matters relating to directors’ remuneration and the statement of shareholder voting at the 2020 Annual General Meeting, the information set out in this part of the Directors’ Remuneration Report is subject to audit. F i n a n c i a l s O t h e r i n f o r m a t i o n O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 27 30620-Caffyns-AR2021.indd 27 30620 21 June 2021 1:00 pm Proof 5 27 21/06/2021 13:00:26 21/06/2021 13:00:26 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedSingle total figure of remuneration for the year ended 31 March 2021The following table shows a single total figure of remuneration in respect of qualifying services for the year ended 31 March 2021 for each director, together with comparative figures for the year ended 31 March 2020. The information provided in this part of the Directors’ Remuneration Report is subject to audit.Salary and fees£’000Taxable benefits£’000Annual bonus£’000In lieu of pension contributions £’000Single total figure£’000Fixed sums£’000Variable sums£’000202120202021202020212020202120202021202020212021ExecutiveS G M Caffyn2522902120––89281319281–M Warren1130140712––44141156141–S J Caffyn454764––11525252–Total4274773436––1314474527474–Non-executiveR C Wright6167––––––616761–N T Gourlay2830––––––283028–N W Hollingworth2–10–––––––10––S G Bellamy32823––––––282328–Total117130––––––117130117–5446073436––1314591657591–1 The contractual salary of M Warren for both years ended 31 March 2020 and 2021 was £148,569. This was reduced in the prior year under review by a sum equivalent to fifteen days’ unpaid leave2 N W Hollingworth resigned at the Company’s Annual General Meeting on 25 July 20193 S G Bellamy was appointed as a non-executive director on 18 June 2019 As part of the Company’s response to the covid-19 pandemic the executive directors and the Chairman of the Company agreed to reduce their contractual salaries to a rate of £37,500 per annum, for the month of April 2020. The remaining non-executive directors, whose annual fees were already below this level, agreed to a 20% reduction in their fees. These salary and fee reductions were then unwound in stages with the full-time executive directors moving to 50% of their contractual salary from 1 May 2020 and then to 80% of their contractual salary from 1 June 2020. The remuneration of both the Company Secretary and the Chairman remained at the annual ceiling of £37,500 for the month of May and then increased to 80% of their contractual salary and fees for June. All board members returned to their full contractual fee and salary levels from 1 July 2020. The total salary reductions across the three-month period amounted to £68,000 and these savings are reflected in the remuneration table above. In addition, the inflationary pay increase that had been scheduled for implementation from 1 April 2020 was initially deferred and subsequently cancelled.Employment benefits made available to the executive directors include the provision of a company car, a 50% contribution towards the cost of private medical health and the cost of appropriate subscriptions.Annual bonusBonuses are earned by reference to the financial year and paid in May or June following the end of the financial year. Any bonuses accruing to the executive directors in respect of the year ended 31 March 2021 were based on the underlying profit before tax as shown below.Bonus paid as a percentage of base salaryS G M CaffynM WarrenS J CaffynThresholdTargetMaximumActual performanceMaxActualMaxActualMaxActualUnderlying profit before tax (£’million)*£1.50 £1.73£3.47£1.88100%0%100%0%100%0%Bonus receivable15%25%100%31% £0 £0 £0* The underlying profit before tax is calculated after taking account of the cost of such bonus including employer’s National Insurance charges and contributions in lieu of pension contributions.28Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 2830620-Caffyns-AR2021.indd 2821/06/2021 13:00:2721/06/2021 13:00:27Stock code CFYN Although the stipulated profit target was met in relation to the financial year ended 31 March 2021, the Remuneration Committee, with the full agreement of the executive directors, applied its discretion and did not award any bonuses to the executive directors. This was due to a combination of factors, including the level of Government support received by the Company during the year from the Coronavirus Job Retention Scheme and from local Council support grants; the holiday from business rates provided by local Councils in the areas in which the Company operates; and the fact that the Company did not award any dividends to ordinary shareholders during the year. Pension entitlements and cash allowances One executive director, the Company Secretary, was a deferred member of the Company’s closed defined-benefit pension scheme at 31 March 2021 (2020: one). The defined-benefit pension scheme will provide a pension to the Company Secretary of a maximum of two-thirds of final salary in respect of benefits accrued up to 31 March 2006. From 1 April 2006 until 1 April 2010 when the scheme closed to future accrual, the accrued benefits of this director were based on a “career average” basis and based upon earnings in each financial year. Under the rules of the scheme, the Company Secretary is eligible for a pension at normal retirement age of 65. If early retirement is taken before age 65, the accrued pension is discounted by 5% per annum (2020: 5%) simple, except where the Company consents to early retirement between 60 and 65 and then no discount is applied. Pensions paid increase in line with price indexation which may be limited. On death, one-half of the spouse’s pension becomes available. Children’s allowances up to a maximum of 100% of the executive’s pension may be payable, including any spouse’s pension. Allowance is made in transfer value payments for discretionary benefits. The total annual accrued pension excludes transferred-in benefits. S J Caffyn Normal retirement date 12 December 2033 Total annual accrued defined-benefit pension at 31 March 2021 £’000 Total annual accrued defined-benefit pension at 31 March 2020 £’000 36 36 The pension for the Company Secretary for service since 2010 has been provided on a contributory basis through the Company’s defined-contribution pension scheme. In certain years, the Company Secretary elected not to be included in the defined- contribution pension scheme and instead to be paid a salary supplement in lieu of the employer’s contribution to the Company’s defined-contribution pension scheme. In the year to 31 March 2021, one of the executive directors was a member of the Company’s defined-contribution pension scheme (2020: none). The non-executive directors are not members of the Company’s defined-contribution pension scheme (2020: none). Statement of directors’ shareholdings The directors’ shareholdings as at 31 March 2021 are summarised within the Report of the Directors. All-employee share scheme Details of share options held by executive directors under the Company’s savings-related share option schemes, the latest of which were granted in December 2020, are as follows: SGM Caffyn Scheme Date of grant 12/07/2017 ShareSave Earliest exercise date 01/09/2020 Expiry date 28/02/2021 SGM Caffyn ShareSave 23/12/2020 01/04/2024 30/09/2024 M Warren M Warren ShareSave 12/07/2017 01/09/2020 28/02/2021 ShareSave 23/12/2020 01/04/2024 30/09/2024 Exercise price £ 3.99 3.06 3.99 3.06 Number at 1 April 2020 1,434 – 1,434 – Granted/ (lapsed) in the year Number at 31 March 2021 (1,434) 1,211 (1,434) 1,211 – 1,211 – 1,211 The market value of the shares at the date of the grant on 23 December 2020 was £3.85 giving a face value of the awards for each of the directors listed of £957. F i n a n c i a l s O t h e r i n f o r m a t i o n O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 29 30620-Caffyns-AR2021.indd 29 30620 21 June 2021 1:00 pm Proof 5 29 21/06/2021 13:00:27 21/06/2021 13:00:27 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedPerformance graph and tableThe chart below shows the Company’s eight-year annual Total Shareholders Return performance against the FTSE Small-Cap Total Return Index, which is considered an appropriate comparison to other public companies of a similar size.0.050.0100.0150.0200.0250.0FTSE Small Cap TSRCaffyns TSRApr-13Jul-13Oct-13Jan-14Apr-14Jul-14Oct-14Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19Oct-19Jan-20Apr-20Jul-20Oct-20Jan-21Apr-21The table below sets out the total remuneration delivered to the Chief Executive over each of the last eight years, valued using the same methodology as applied to the single total figure of remuneration.Chief Executive: S G M CaffynFinancial years ended 31 March20142015201620172018201920202021Total single remuneration figure (£’000)534389410388302364319281Annual bonus % of maximum opportunity100%39%43%31%0%19%0%0%% reduction in average salary compared to the prior year% increase/(reduction) in benefits in kind compared to the prior year % increase in value of bonus schemes compared to the prior yearS G M Caffyn, Chief Executive(13)4 0 S J Caffyn, HR Director and Company Secretary(5)44 0 M Warren, Finance Director(7)(45)0 R C Wright, Chairman and non-executive director(9)00 N T Gourlay, senior independent non-executive director(5)00 S G Bellamy, non-executive director(5)00 Employees of the Company as a whole(4)1462 As a result of the covid-19 pandemic the directors made voluntary salary reductions in the period April to June 2020. Full details can be found on page 28. Mr S G Bellamy was appointed in the prior year on 18 June 2019. The salary reduction above has been calculated by comparing the period 18 June to 31 March in both the current and prior years. The reduction in salary for the employees of the Company as a whole was a function of the impact from those employees on furlough under the Coronavirus Job Retention Scheme whereby salary was paid at 80%, and subject to a monthly cap of £2,500. The underlying package of benefit in kind for the directors, and for employees in general, remained unchanged in comparison to the prior years although the outcomes were different. Care should be exercised when considering the percentage changes, given the relatively small sums involved in each year.30Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 3030620-Caffyns-AR2021.indd 3021/06/2021 13:00:2721/06/2021 13:00:27Stock code CFYN Single remuneration figure for the Chief Executive Remuneration for the Company’s remaining full time equivalent employees: 25th percentile Median 75th percentile Salary only 2021 £’000 Total earnings 2021 £’000 Ratio 2021 % Salary only 2020 £’000 Total Earnings 2020 £’000 252 281 290 319 32 14 21 42 32 22 7:1 9:1 13:1 28 22 14 40 29 19 Ratio 2020 % 8:1 11:1 17:1 The pay ratio disclosure above complies with Regulation 18 of The Companies (Miscellaneous Reporting) regulations 2018. These ratios have been prepared using Option A in the regulations by ranking the annualised earnings of those employees of the Company in employment on 31 March 2021, the last day of the financial year under review. Earnings includes salary, bonuses, variable elements of pay such as commissions and overtime, holiday and sickness pay, company pension contributions and the taxable value of benefits-in-kind. The Company’s Chairman and non-executive directors have been excluded from the calculation as they receive a fee rather than a salary. Any employees on zero-hour contracts have been included if they worked in the month of March 2021. Change in remuneration of Chief Executive The base salary of the Chief Executive did not change between 31 March 2020 and 31 March 2021, mirroring that for the Company’s Regional Directors and Heads of Business. Neither the Chief Executive nor the comparator group received any changes to their employment benefits during the year. The Chief Executive did not receive a bonus for either the current or prior year. The bonuses earned by the comparator group reduced by 0.6% compared to the prior year. The comparator group comprises Regional Directors and Heads of Business and has been selected on the basis that these managers have direct senior operational management responsibilities. Relative importance of spend on pay The table below sets out the total spend on pay in the two years to 31 March 2021 compared with other disbursements from profit (i.e. distributions to shareholders). These were the most significant outgoings for the Company in the last financial year). Spend on staff pay (including directors) Profit distributed by way of dividend Spend in 2021 £’000 13,614 – Spend in 2020 £’000 13,670 202 Decrease % (0) (100) No final dividend has been declared for the year ended 31 March 2021. The total dividend payable in respect of the year to 31 March 2021 will therefore be £Nil (2020: £202,000). Implementation of remuneration policy for the 2022 financial year The annual salaries and fees to be paid to directors in the 2022 financial year are set out in the table below, together with any increases expressed as a percentage. 2022 salary/fees £’000 2021 salary/fees £’000 Increase % S G M Caffyn M Warren S J Caffyn R C Wright N T Gourlay S G Bellamy 295 152 48 68 30 30 290 149 47 67 30 30 The salaries shown in the table above for the year ended 31 March 2021 are the full contractual salaries and fees for the board members, and not the salaries and fees that were actually received. www.caffyns.co.uk 2 2 2 2 2 2 31 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 30620-Caffyns-AR2021.indd 31 30620-Caffyns-AR2021.indd 31 30620 21 June 2021 1:00 pm Proof 5 21/06/2021 13:00:27 21/06/2021 13:00:27 30620 21 June 2021 1:00 pm Proof 5Director’s Remuneration Report continuedThe basis for determining annual bonus payments for the financial year ending 31 March 2022 is set out in the policy table in the directors’ remuneration report on page 23. The profit targets are considered commercially sensitive because of the information that it could provide to the Company’s competitors and consequently these profit targets will only be disclosed after the end of the financial year, in the Directors’ Remuneration Report in the 2022 Annual Report.Consideration by the directors of matters relating to directors’ remunerationThe CommitteeThe Committee is responsible for reviewing and recommending the framework and policy for remuneration of the executive directors and of senior management. The Committee’s terms of reference are available on the Company’s corporate website. The members of the Committee at 31 March 2021 were Mr S G Bellamy (Chairman), Mr R C Wright and Mr N T Gourlay. Mr S G Bellamy and Mr N T Gourlay were independent non-executive directors throughout the year. The Committee met twice during the year and all members were present.The primary role of the Committee is to set the directors’ remuneration policy and accordingly to:• review, recommend and monitor the level and structure of remuneration for the executive directors and to review and monitor the level and structure of remuneration of other senior executives;• approve the remuneration package for the executive directors;• determine the balance between base pay and performance-related elements of the package to align executive directors’ interests with those of shareholders and other stakeholders; and• approve annual incentive payments for executive directors.Summary of activity during the year ended 31 March 2021During the year the Committee conducted its annual review of all aspects of the remuneration packages of the executive directors to ensure that they continue to reward and motivate achievement of medium and long-term objectives, and align their interests with those of shareholders and other stakeholders. Accordingly, the Committee’s activities during the year included:• reviewing the basic salaries of the executive directors and reviewing and monitoring the level and structure of remuneration of other senior executives;• reviewing the basic salary of the Company’s Chairman. This review was performed by Mr S G Bellamy and Mr N T Gourlay only;• setting the annual performance targets in line with the Company’s plan for the 2022 financial year and determining the amounts that may potentially have been payable for the 2021 financial year.Statement of voting at the 2020 Annual General MeetingAt the last Annual General Meeting, votes to approve the Directors’ Remuneration Report were cast as follows:Votes for%Votes against%Withheld%2,899,27999.951,7000.051000.00A shareholder vote on the directors’ remuneration policy is required at least every third year. The policy was last voted on at the 2020 Annual General Meeting and will be voted on again at the 2023 Annual General Meeting. Votes at the 2020 meeting on the directors’ remuneration policy were cast as follows:Votes for%Votes against%Withheld%2,899,27999.951,7000.051000.00Mr S G Bellamy will attend the 2021 Annual General Meeting and will be available at that meeting to answer any questions that shareholders may wish to raise.By order of the boardS G BellamyChairman of the Remuneration Committee1 June 202132Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 3230620-Caffyns-AR2021.indd 3221/06/2021 13:00:2721/06/2021 13:00:27Stock code CFYN worked at Coopers & Lybrand (now PwC), both in New Zealand and New York. He is currently also a non-executive director and Audit Chair of Advanced Medical Solutions Group plc, an AIM 30 company. Mr S G M Caffyn MA FIMI joined the board on 16 July 1992 and was appointed Chief Executive on 1 May 1998. He graduated from Cambridge in 1983 having read engineering, and subsequently worked for Andersen Consulting. He joined the Company in 1990. Mr M Warren BSc FCA joined the board on 31 May 2016 and was appointed Finance Director on 31 July 2016. He is a Chartered Accountant and spent twenty one years with H.R. Owen plc of which the eight years until April 2015 were as Finance Director. He graduated from Southampton in 1986 having read civil engineering and subsequently worked for PwC. Ms S J Caffyn BSc FCIPD AICSA FIMI has thirty years’ Human Resource experience across several different sectors. She joined the board on 28 April 2003 as Human Resources Director, having previously been Group Personnel Manager and Company Secretary. A Chartered Company Secretary, she has governance experience from several not-for-profit organisations. Report of the Directors The directors present their report and the financial statements for the year ended 31 March 2021. Results and dividends The results of the Company for the year are set out in the financial statements on pages 47 to 84. The board did not declare either an interim or final dividend in respect of the year (2020: 7.5p) due to the impact of the covid-19 pandemic and levels of Government and local Council support it received. Therefore, total ordinary dividends paid in the year amounted to £Nil. Dividends paid in the year to preference shareholders amounted to £72,000 (2020: £72,000) as set out in note 10 to the financial statements. Future developments of the Company are set out in the Operational and Business Review on pages 2 to 6. Financial risk management Consideration of principal risks and uncertainties is included on page 8 and 9 of the Strategic Report, including the management of financial risks. These are also outlined further in note 21 to the financial statements. Appointment and replacement of the Company’s directors The rules for the appointment and replacement of the Company’s directors are detailed in the Company’s Articles of Association. Directors are appointed by ordinary resolution at a general meeting by shareholders entitled to vote or by the board either to fill a vacancy or as an addition to the existing board. The appointment of non-executive directors is on the recommendation of the Nominations Committee; the procedure is detailed in the Chairman’s Statement on Corporate Governance on page 16. Directors Details of the directors who served during the year and who remained in office at 31 March 2021 are set out below. Mr R C Wright PG Dip FIMI FCIM was appointed Chairman on 26 July 2012. He joined the board as a non-executive director and Chairman-elect on 1 November 2011. He has previously held senior executive roles with the Ford Motor Company including: Director, European Operations at Jaguar Cars Limited; Director of Sales, Ford Motor Company Limited; and President/ Managing Director of Ford Belgium NV. He was Chairman of API Group plc from 2001 until 31 October 2014, and sat on the advisory board of Warwick Business School, University of Warwick, for several years. He is the former Chair of the board of National Savings and Investments, part of HM Treasury. He is currently an advisor to a number of privately held companies including being Chairman of Thames River Moorings Limited. Mr N T Gourlay BSc, a Chartered Accountant, joined the board as a non- executive director on 26 September 2013. He spent more than twenty years with the BAT plc group of companies, leaving in 2001. In 2003 Mr Gourlay co-founded Animos LLP, a business consultancy of which he remains a partner. Mr S G Bellamy BCom CA(NZ) joined the board on 18 June 2019 and has been chairman and non-executive director to a wide range of both public and private companies and chairman of, and advisor to, investment committees and capital providers. He was previously Chief Operating Officer and Chief Financial Officer of Sherwood International Plc. Prior to Sherwood, he was a UK Investment Director of Brierley Investments, an active investor in quoted UK companies. He is a New Zealand Chartered Accountant and O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 33 30620-Caffyns-AR2021.indd 33 30620 21 June 2021 1:00 pm Proof 5 33 21/06/2021 13:00:27 21/06/2021 13:00:27 30620 21 June 2021 1:00 pm Proof 5Report of the Directors continuedInterests in sharesThe interests of the directors and their families in the shares of the Company are as follows:As at 31 March 2021As at 31 March 2020Ordinary11%Preference7%PreferenceOrdinary11%Preference7%PreferenceR C Wright7,500––7,500––S G M Caffyn76,9881,60020051,9881,600200M Warren6,825––5,000––S J Caffyn46,2321,655–39,2321,655–N T Gourlay4,893––4,893––S G Bellamy5,000––5,000––On 6 May 2020 Mr S G M Caffyn was gifted 25,000 Ordinary shares in the Company (“Ordinary shares”) for nil consideration, taking his holding in Ordinary shares in the Company to 76,988. On 19 June 2020, Ms S J Caffyn was gifted 14,000 Ordinary shares for nil consideration, of which 7,000 have been placed in trust for her children. Following the transaction, her holding in Ordinary shares in the Company increased to 46,232.Mr S G M Caffyn and Ms S J Caffyn are directors of Caffyn Family Holdings Limited, which owns all the 2,000,000 6% Cumulative Second Preference shares which have full voting rights, except in relation to matters that under the Listing Rules (as amended from time to time) are required to be voted on by premium-listed securities, being the Ordinary shares.The market price of the Company’s Ordinary shares at 31 March 2021 was £3.50 and the range of market prices during the year was £2.80 to £4.25.Compensation for loss of officeIn the event of an executive director’s employment with the Company being terminated, Mr S G M Caffyn is entitled to receive from the Company a sum equivalent to twice his annual emoluments, which applied immediately before his termination. Ms S J Caffyn is entitled to receive from the Company a sum equivalent to her annual emoluments, which applied immediately before her termination, and Mr M Warren is entitled to receive from the Company a sum equivalent to six months’ emoluments, which applied immediately before his termination. Emoluments include a proportion of the available bonus, which the expired part of the measured period for bonus bears to the whole of such measurement period. The executive directors’ service contracts commenced from the date of their appointment to the board.In the event of the Chairman’s or a non-executive director’s employment with the Company being terminated, they are entitled to receive from the Company a sum equivalent to six months’ fees.Directors’ indemnity and insuranceThe Company’s Articles of Association permit the board to grant the directors indemnities in relation to their duties as directors in respect of liabilities incurred by them in connection with any negligence, default, breach of duty or breach of trust in relation to the Company. In line with market practice, each director has the benefit of a deed of indemnity. The Company has also purchased insurance cover for the directors against liabilities arising in relation to the Company, as permitted by the Companies Act 2006. This insurance does not cover fraudulent activity.Sharesave schemeThe Company encourages employee share ownership through the provision of periodic Save As You Earn schemes. The current scheme, which is administered by the Yorkshire Building Society, was launched in December 2020 with share options for 101,926 Ordinary shares being subscribed. The scheme matures in February 2024 when the share options become exercisable upon expiry of a three-year savings contract at a pre-determined price of £3.06 per share. At 31 March 2021, the number of share options outstanding remained at 101,926.The Company’s previous scheme, launched in July 2017, matured in September 2021. As the market price for the shares at that time was lower than the pre-determined exercise price of £3.99 per share, most participants allowed their options to lapse and only 586 share options were exercised.Greenhouse gas emissionsInformation on greenhouse gas emissions is set out in the Strategic Report on page 11.34Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 3430620-Caffyns-AR2021.indd 3421/06/2021 13:00:2721/06/2021 13:00:27Stock code CFYN Employees Employees are encouraged to discuss with management any matters which they are concerned about and issues affecting the Company. The Chief Executive had planned in the 2021 financial year to start visiting each site regularly for a question-and-answer session with staff although this has had to be delayed due to the covid-19 pandemic. Once visits are able to commence, he will be reporting to the board on the outcome of these sessions. In addition, the board takes account of employees’ interests when making decisions. Suggestions from employees aimed at improving the Company’s performance are welcomed. The board reviews feedback from the employee consultation group on pay and bonuses as well as reviewing all exit interview feedback. The board also meets with senior staff during the strategic review process. The Company has a Human Resources director, Ms S J Caffyn. Further information on employees is set out in the Strategic Report on page 10 and the Section 172 statement on page 12. Share capital and the rights and obligations attaching to shares As at 31 March 2021, the issued share capital of the Company comprised Ordinary shares of 50p each and three classes of preference share, namely 7% Cumulative First Preference shares of £1 each, 11% Cumulative Preference shares of £1 each, and 6% Cumulative Second Preference shares of 10p each. Details of the share capital of the Company are set out in note 25 to the financial statements. Subject to applicable statutes and other shareholders’ rights, shares may be issued with such rights and restrictions as the Company may by ordinary resolution decide. Holders of Ordinary shares are entitled to attend and speak at general meetings of the Company, to appoint one or more proxies (and, if they are corporations, corporate representatives). Holders of Ordinary shares are entitled to receive a dividend if one is declared and receive a copy of the Company’s annual report and accounts. Holders of Cumulative First Preference shares are entitled, in priority to any payment of dividend on any other class of shares, to a fixed cumulative preferential dividend at the rate of 7% per annum. Subject to the rights of the holders of Cumulative First Preference shares, holders of 6% Cumulative Second Preference shares of 10p each are entitled in priority to any payment of dividend on any other class of shares to a fixed cumulative preferential dividend at the rate of 6% per annum. Subject to the rights of the holders of Cumulative First Preference shares and 6% Cumulative Second Preference shares of 10p, holders of 11% Cumulative Preference shares of £1 each are entitled in priority to any payment of dividend on any other class of shares to a fixed cumulative preferential dividend at the rate of 11% per annum. The percentage of the total share capital represented by each class of share as at 31 March 2021 is shown below. The full rights and obligations attaching to the Company’s shares are set out in the Company’s Articles of Association, copies of which can be obtained from Companies House or by writing to the Company Secretary. Authorised 500,000 7% Cumulative First Preference shares of £1 each 1,250,000 11% Cumulative Preference shares of £1 each 3,000,000 6% Cumulative Second Preference shares of 10p each 4,000,000 Ordinary shares of 50p each Allotted, called-up and fully paid 170,732 7% Cumulative First Preference shares of £1 each 441,401 11% Cumulative Preference shares of £1 each 2,000,000 6% Cumulative Second Preference shares of 10p each Total Preference shares recognised as a financial liability 2,879,298 Ordinary shares of 50p each £’000 500 1,250 300 2,000 4,050 171 441 200 812 1,439 2,251 % 12.35 30.86 7.41 49.38 100.00 7.58 19.60 8.88 36.06 63.94 100.00 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 35 30620-Caffyns-AR2021.indd 35 30620 21 June 2021 1:00 pm Proof 5 35 21/06/2021 13:00:28 21/06/2021 13:00:28 30620 21 June 2021 1:00 pm Proof 5Report of the Directors continuedPropertyThe Company valued its portfolio of freehold premises as at 31 March 2021. The valuation was carried out by CBRE Limited, Chartered Surveyors, based on an existing use valuation. The excess of the valuation over net book value at that date 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. The value of a single freehold property was impaired by £0.2 million in the year.Voting rights, restrictions on voting rights and deadlines for voting rightsShareholders (other than any who, under the provisions of the Articles of Association or the terms of the shares they hold, are not entitled to receive such notices from the Company) have the right to receive notice of, and attend, and to vote at all general meetings of the Company. The Company’s auditor has similar rights except that they may not vote. A resolution put to the vote at any general meeting is to be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any demand for a poll) a poll is properly demanded.Every member present in person at a general meeting has, on the calling of a poll, one vote for every Ordinary share of which the member is the holder, and one vote for every 6% Cumulative Second Preference share of which the member is the holder. In the case of joint holders of a share, the vote of the member whose name stands first in the register of members is accepted to the exclusion of any vote tendered by any other joint holder. Unless the board decides otherwise, a shareholder may not vote at any general meeting or class meeting or exercise any rights in relation to meetings while any amount of money relating to their shares remains outstanding.A member is entitled to appoint a proxy to exercise all or any of their rights to attend and speak and vote on their behalf at a general meeting. Further details regarding voting at the Annual General Meeting can be found in the notes to the Notice of the Annual General Meeting. To be effective, paper proxy appointments and voting instructions must be received by the Company’s registrars no later than 48 hours before a general meeting.There are no restrictions on the transfer of Ordinary shares other than certain restrictions which may be imposed pursuant to the Articles of Association of the Company, certain restrictions, which may, from time to time, be imposed by laws and regulations (for example in relation to insider dealing), restrictions pursuant to the Company’s share dealing code whereby directors and certain employees of the Company require prior approval to deal in the Company’s shares, and where a person has failed to provide the Company with information concerning the interests in those shares.The Company is not aware of any arrangements or agreements between shareholders that may result in restrictions on the transfer of Ordinary shares or on voting rights.Significant direct or indirect shareholdingsAt 1 June 2021, the directors were aware of the following interests in 3% or more of the nominal value of the Ordinary share capital (excluding treasury shares) of the Company:Ordinary shares%Maland Pension Fund (Pershing Nominees Ltd RKCLT)352,50013.08Charles Stanley234,6278.70HSBC Republic Bank Suisse SA128,3494.76Caffyns Pension Fund125,5704.66A W Caffyn/B Lees107,4093.98K E Caffyn104,8043.89M I Caffyn103,4953.84Armstrong Investments (Nortrust Nominees)100,0003.71GAM Exempt UK Opportunities Fund88,2673.2736Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 3630620-Caffyns-AR2021.indd 3621/06/2021 13:00:2821/06/2021 13:00:28Fostering relationships with stakeholders Details of the Company’s engagement with stakeholders are explained in more detail on page 12. The Company also engages with its suppliers in order to maintain good relationships, and with its prospective and actual customers by offering excellent service and an attractive omni- channel retail experience. Modern Slavery Act 2015 In the light of the legislation regarding employment and human rights, in particular the Modern Slavery Act 2015, the board continues to review its policies and risk management processes to determine additional measures which may be required to prevent slavery and human trafficking taking place in any part of its businesses, or in its supply chains. We expect all who have, or seek to have, a business relationship with Caffyns plc or with any of our employees, to familiarise themselves with our anti- slavery values and to act at all times in a way which is consistent with those values. The board has adopted a Statement on Slavery and Human Trafficking, which can be found on its corporate website at www.caffynsplc.co.uk. Business at the Annual General Meeting As well as dealing with formal business, the Company takes the opportunity afforded at the Annual General Meeting to provide up-to-date information about the Company’s trading position and to invite and answer questions from shareholders on its policies and business. At the Annual General Meeting, a separate resolution is proposed for each substantive matter. The Company’s Annual Report and financial statements are posted to shareholders, together with the Notice of Annual General Meeting summarising the business proposed, giving the requisite period of notice. The board has carefully considered the format of this year’s Annual General Meeting, which is scheduled to be held on 3 August 2021. Based on its expectations for the levels of social- distancing restrictions which are expected to be in place at that time the board’s intention is that the meeting will be run as an open meeting to which shareholders will be invited to attend in person. Further information will be made available closer to the date of the meeting via the Company’s corporate website, www.caffynsplc.co.uk. Stock code CFYN Auditor BDO LLP has indicated its willingness to continue as the independent auditor to the Company and a resolution concerning its reappointment will be proposed at the Annual General Meeting in August 2021. By order of the board S J Caffyn Company Secretary 1 June 2021 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 37 30620-Caffyns-AR2021.indd 37 30620 21 June 2021 1:00 pm Proof 5 37 21/06/2021 13:00:28 21/06/2021 13:00:28 30620 21 June 2021 1:00 pm Proof 5Directors’ Responsibilities StatementThe directors are responsible for preparing the Report of the Directors and financial statements in accordance with applicable law and regulations.Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements of Caffyns plc and its subsidiaries (the “Group”) and have elected to prepare the parent company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements the directors are required to:• select suitable accounting policies and then apply them consistently;• make judgements and accounting estimates that are reasonable and prudent;• state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements;• prepare a Director’s Report, a Strategic Report and Remuneration Committee Report which comply with the requirements of the Companies Act 2006; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.The directors confirm that:• so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and• the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.The directors are responsible for preparing the annual report in accordance with applicable law and regulations. Having taken advice from the Audit and Risk Committee, the directors consider that the annual report and the financial statements, taken as a whole, provides the information necessary to assess the Company’s performance, business model and strategy and is fair, balanced and understandable.The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.To the best of the directors’ knowledge:• the Group financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and• the annual report, including the strategic report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.Approved by order of the boardS G M Caffyn M WarrenChief Executive Finance Director1 June 202138Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 3830620-Caffyns-AR2021.indd 3821/06/2021 13:00:2821/06/2021 13:00:28Report of the Independent Auditor Opinion on the financial statements In our opinion: • • • • • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2021 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; the Group financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union; the Parent Company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of Caffyns plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 March 2021 which comprise the Group and Company Income Statement, the Statement of Comprehensive Income, the Group and Company Statement of Financial Position, the Group and Company Statement of Changes in Equity, the Group and Company Cash Flow Statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit committee. Stock code CFYN Independence Following the recommendation of the audit committee, we were appointed by the directors on 25 July 2019 to audit the financial statements for the year ended 31 March 2020 and subsequent financial periods. The period of total uninterrupted engagement including retenders and reappointments is two years, covering the years ended 31 March 2020 to 31 March 2021. We remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services prohibited by that standard were not provided to the Group or the Parent Company. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and the Parent Company’s ability to continue to adopt the going concern basis of accounting included building on our understanding of the business model, objectives, strategies and related business risk, the measurement and review of the entity’s financial performance including forecasting and budgeting processes and the entity’s risk assessment process. In light of the COVID-19 pandemic and the resultant economic uncertainty, as described in the going concern accounting policy, we considered the ability of the Group to operate within its facilities and continue as a going concern in this environment to be a Key Audit Matter. The directors have forecast a number of scenarios. This is described further in the going concern accounting policy to these financial statements. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 39 30620-Caffyns-AR2021.indd 39 30620 21 June 2021 1:00 pm Proof 5 39 21/06/2021 13:00:28 21/06/2021 13:00:28 30620 21 June 2021 1:00 pm Proof 5Report of the Independent Auditor continuedOur procedures included the following:• Reviewing management’s assessment of going concern through analysis of the group’s cash flow forecast through to 31 March 2024, including assessing and challenging the assumptions underlying the forecasts by reference to our own knowledge of the industry and also commentary made by industry experts (e.g. SMMT, CAP). We looked at the relevance and reliability of underlying data used to make the assessment via consideration of the underlying assumptions and agreement to underlying forecasts.• As part of this process we have considered the impact of the COVID-19 pandemic and the impact on the forecasts. We have also sensitised these forecasts and also considered the underlying assumptions of the forecasts to industry commentary.• We also obtained an understanding of the financing facilities, including the nature of these facilities, repayment terms and covenants. We then assessed the facility headroom calculations on both a base case scenario, and the sensitised forecasts.• We considered the likelihood of the sensitised forecasts happening and considered what actions the group has available should there be a potential covenant breach.• The adequacy and appropriateness of disclosures in the financial statements regarding the going concern assessment.Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s or the Parent Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the Parent Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.OverviewCoverage1100% (2020: 100%) of Group profit before tax100% (2020: 100%) of Group revenue100% (2020: 100%) of Group total assetsKey audit matters20212020Defined benefit pension scheme✔✔Going concern✔✔Impairment review✔✔Revenue recognition✗✔Revenue recognition is no longer considered to be a key audit matter due to the straightforward revenue recognition adopted by the Group.MaterialityGroup financial statements as a whole£80,000 (2020: £80,000) based on 5% (2020: 8%) of profit before tax adjusted for the impairment charge in the year (2020: average underlying profit of past three years)1 These are areas which have been subject to a full scope audit by the group engagement team40Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 4030620-Caffyns-AR2021.indd 4021/06/2021 13:00:2821/06/2021 13:00:28Stock code CFYN An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the directors that may have represented a risk of material misstatement. The only trading component in the group is the parent company Caffyns plc with all the subsidiary companies being dormant. Caffyns plc was deemed the only significant component and was subject to a full scope audit. All work was carried out by the group audit team. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Conclusions related to going concern section of our report, we have determined the matters below to be the key audit matters to be communicated in our report. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e Key audit matter Defined benefit pension scheme Please refer to note 23, accounting policies on page 52 to 57 The Group operates a defined benefit pension scheme, which is accounted for in accordance with IAS 19 Employee Benefits which requires complex calculations and disclosures. Management exercise a number of judgements and actuarial assumptions, with the assistance from their actuaries, which have a significant impact on the valuation of the pension scheme assets and liabilities recognised on the balance sheet. The valuation of the defined benefit pension scheme is highly sensitive to movements into the key inputs. The valuation of the liability is therefore considered a significant audit risk. How the scope of our audit addressed the key audit matter We performed an assessment of whether the Group’s accounting policy for the defined benefit pension scheme complied with IAS 19 Employee Benefits and ensuring its consistent application. Working with our external actuarial experts, we challenged the appropriateness of the actuarial valuation methodologies and their inherent assumptions such as discount rates, growth rates and mortality rates with reference to relevant market data and industry practice. We also considered the capabilities and competence of management’s as well as our own actuarial experts. We also assessed the accuracy of the underlying data utilised in the actuarial valuation on a sample basis through use of source documentation such as the pension scheme accounting records. The pension scheme assets were agreed to investment statements prepared by the fiduciary manager. Key observations: Based on the procedures performed, we considered the assumptions and judgements made by management to be reasonable. F i n a n c i a l s O t h e r i n f o r m a t i o n i F n a n c a s l i O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 41 30620-Caffyns-AR2021.indd 41 30620 21 June 2021 1:00 pm Proof 5 41 21/06/2021 13:00:28 21/06/2021 13:00:28 30620 21 June 2021 1:00 pm Proof 5Report of the Independent Auditor continuedKey audit matter How the scope of our audit addressed the key audit matterImpairment of assetsPlease refer to note 13, the accounting policies on pages 52 to 57Under IAS 36 Impairment of Assets, the directors are required to determine whether the carrying value of the Group’s assets, which includes the Group’s property, plant and equipment, investment property and goodwill, is impaired. As at 31 March 2021 the carrying amount of the net assets of the Group was more than the market capitalisation, being a potential indicator of impairment.There is judgement in assessing the ability of assets to generate cash inflows largely independent of other assets and therefore also in the identification of appropriate cash generating units (CGUs).In addition, there is significant judgement and estimation involved in determining the recoverable amount of each CGU. For all CGU’s this relates to both establishing fair value as part of the fair value (using CBRE, the group’s external valuers) less costs to sell method and the key inputs, such as projected future cash flows and the discount rate applied, into the value in use model.As described further in note 13 to the financial statements, the exercise of judgement in respect of CGUs valued on the basis of fair value less costs to sell was heightened due to the surveyor’s reference to a material valuation uncertainty in their valuation report. Movements in the judgements and estimates could impact the conclusion of the impairment review and we therefore the matter as a key audit matter. As a result of the review an impairment charge of £184,000 has been made in the financial statements.We performed an assessment of whether the Group’s accounting policies for impairment of assets complied with IAS 36 Impairment of Assets and ensuring its consistent application. We obtained management’s assessment of relevant cash generating units (CGUs) used in the impairment calculation. This included the identification of each CGU. We compared those to our understanding of the business units and operating structure of the Group. We also performed arithmetical checks to management’s model to provide assurance over its accuracy in comparing CGU recoverable amounts to the relevant carrying values. We agreed property valuations used for the purposes of impairment testing to the valuation report and considered the expertise and independence of the third party surveyor engaged by management.In relation to the property valuations, we considered the implications of the material valuation uncertainty and consulted with internal and the Group’s external real estate specialists.Where CGUs are valued based on value in use, we critically assessed estimated future cash flows with reference to past performance and the potential impact of the covid-19 pandemic and challenged the appropriateness of the inputs and valuation methodology, including the discount rate applied, with the assistance of our internal valuation experts.For both fair value less costs to sell and value in use bases of valuation, we performed sensitivity analysis on the assumptions.Key observations: Based on the procedures performed, we considered management’s impairment review to be appropriate. 42Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 4230620-Caffyns-AR2021.indd 4221/06/2021 13:00:2821/06/2021 13:00:28Stock code CFYN Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows: Materiality Group financial statements Parent company financial statements 2021 £ 80,000 2020 £ 80,000 2021 £ 80,000 2020 £ 80,000 Basis for determining materiality 5% of adjusted profit before tax Rationale for the benchmark applied We considered 5% of adjusted profit before tax to be a key performance benchmark for the Group and the users of the financial statements in assessing financial performance. In light of the results for the year the basis of materiality changed to 5% of adjusted profit before tax for the year. The level of materiality remained at the same level as prior year. 5% of adjusted profit before tax We considered 5% of adjusted profit before tax to be a key performance benchmark for the Group and the users of the financial statements in assessing financial performance. 8% of three year average of underlying profit before tax We considered 8% of the three year average of underlying profit before tax to be a key performance benchmark for the Group and the users of the financial statements in assessing financial performance. 8% of three year average of underlying profit before tax We considered 8% of the three year average of underlying profit before tax to be a key performance benchmark for the Group and the users of the financial statements in assessing financial performance. Due to the low level of profitability in the year this metric was deemed suitable for the year under review. Performance materiality 60,000 52,000 60,000 52,000 On the basis of our risk assessment, together with our assessment of the Group’s control environment, our judgement is that performance materiality for the financial statements should be 75%. On the basis of our risk assessment, together with our assessment of the Group’s control environment, our judgement is that performance materiality for the financial statements should be 65%. Basis for determining performance materiality On the basis of our risk assessment, together with our assessment of the Group’s control environment, our judgement is that performance materiality for the financial statements should be 65%. As a first year audit it was deemed appropriate to adopt a 65% level of performance materiality. On the basis of our risk assessment, together with our assessment of the Group’s control environment, our judgement is that performance materiality for the financial statements should be 75%. In light of it being the second year of audit by BDO LLP and our review of the risk assessment and the Group’s control environment we reassessed the level of performance materiality and increased it from 65% to 75%. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 43 30620-Caffyns-AR2021.indd 43 30620 21 June 2021 1:00 pm Proof 5 43 21/06/2021 13:00:28 21/06/2021 13:00:28 30620 21 June 2021 1:00 pm Proof 5Report of the Independent Auditor continuedReporting threshold We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £1,600 (2020: £1,600). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.Other informationThe directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.We have nothing to report in this regard.Corporate governance statementThe Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance Statement specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit. Going concern and longer-term viability• The directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on pages 18 and 19; and• The directors’ explanation as to its Assessment of the entity’s prospects, the period this assessment covers and why the period is appropriate set out on pages 18 and 19.Other Code provisions • The directors’ statement on fair, balanced and understandable set out on page 20; • The board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 17 to 18; • The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 19; and• The section describing the work of the audit committee set out on pages 17 to 1844Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 4430620-Caffyns-AR2021.indd 4421/06/2021 13:00:2921/06/2021 13:00:29Stock code CFYN Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. Strategic report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Strategic report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ Report. Directors’ remuneration In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 45 30620-Caffyns-AR2021.indd 45 30620 21 June 2021 1:00 pm Proof 5 45 21/06/2021 13:00:29 21/06/2021 13:00:29 30620 21 June 2021 1:00 pm Proof 5Report of the Independent Auditor continuedfor the year ended 31 March 2021Extent to which the audit was capable of detecting irregularities, including fraudIrregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.Procedures performed by the group audit team included:• Discussions with management regarding known or suspected instances of non-compliance with laws and regulations;• Obtaining an understanding of controls designed to prevent and detect irregularities, including specific consideration of controls and group accounting policies relating to significant accounting estimates;• Obtaining an understanding of the significant laws and regulations impacting the group and the motor retail industry, including data protection laws and regulations around FCA compliance;• Communicating relevant laws and regulations and potential fraud risks to all engagement team members (which included motor dealership specialists) and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit; • Reviewing minutes of meetings of those charged with governance to identify any instances of non-compliance with laws and regulations;• Assessing journals entries as part of our planned audit approach, with a particular focus on journal entries to key financial statement areas such as revenue and inventories and journals raised after the year end; and• Consideration of significant management judgements, particularly in respect of the underlying assumptions in impairment assessments and estimating the defined pension benefit liability (as detailed within key audit matters above).Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.Use of our reportThis report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.Stephen Le Bas (Senior Statutory Auditor)For and on behalf of BDO LLP, Statutory AuditorSouthamptonUnited KingdomBDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).1 June 202146Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 4630620-Caffyns-AR2021.indd 4621/06/2021 13:00:2921/06/2021 13:00:29Income Statement for the year ended 31 March 2021 Group and Company Revenue (restated) Cost of sales (restated) Gross profit Operating expenses Distribution costs Administration expenses Operating profit before other income Other income (net) Operating profit Operating profit before non-underlying items Non-underlying items within operating profit Operating profit Finance expense Finance expense on pension scheme Net finance expense Profit before taxation Profit before tax and non-underlying items Non-underlying items within operating profit Non-underlying items within finance expense on pension scheme Profit before taxation Taxation Profit/(loss) for the year Earnings/(deficit) per share Basic Diluted Underlying earnings/(deficit) per share Basic Diluted See accompanying notes to the financial statements. Stock code CFYN Note 1 2021 £’000 2020 £’000 165,085 195,787 (142,304) (170,783) 22,781 25,004 (13,481) (7,317) 1,983 909 2,892 3,142 (250) 2,892 (1,266) (202) (1,468) (16,035) (8,025) 944 728 1,672 1,633 39 1,672 (1,382) (187) (1,569) 1,424 103 1,876 (250) (202) 1,424 (14) 1,410 52.4p 52.1p 66.0p 65.6p 251 39 (187) 103 (355) (252) (9.4)p (9.4)p (4.9)p (4.9)p 4 2 3 6 7 2 2 8 9 9 9 9 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 47 30620-Caffyns-AR2021.indd 47 30620 21 June 2021 1:00 pm Proof 5 47 21/06/2021 13:00:29 21/06/2021 13:00:29 30620 21 June 2021 1:00 pm Proof 5Statement of Comprehensive Incomefor the year ended 31 March 2021Group and CompanyNote2021 £’0002020£’000Profit/(loss) for the year1,410 (252) Items that will never be reclassified to profit and loss:Remeasurement of net defined benefit liability23(301)(1,169)Deferred tax on remeasurement2457 222 Effect of change in deferred tax rate– 154 Total other comprehensive expense, net of taxation(244)(793)Total comprehensive income/(expense) for the year1,166 (1,045)See accompanying notes to the financial statements.48Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 4830620-Caffyns-AR2021.indd 4821/06/2021 13:00:2921/06/2021 13:00:29Statement of Financial Position at 31 March 2021 Stock code CFYN Non-current assets Right-of-use assets Property, plant and equipment Investment properties Interest in lease Goodwill Deferred tax asset Investment in subsidiary undertakings Current assets Inventories Trade and other receivables Interest in lease Current tax recoverable Cash and cash equivalents Total assets Current liabilities Interest-bearing overdrafts and loans Trade and other payables Lease liabilities Current tax payable Net current assets Non-current liabilities Interest-bearing overdrafts and loans Lease liabilities Preference shares Retirement benefit obligations Total liabilities Net assets Capital and reserves Share capital Share premium account Capital redemption reserve Non-distributable reserve Retained earnings Total equity attributable to shareholders Note 11 12 13 14 15 24 16 17 18 14 20 19 22 20 22 25 23 25 Group 2021 £’000 610 37,624 7,751 557 286 412 – Restated Group 2020 £’000 Company 2021 £’000 Restated Company 2020 £’000 925 38,783 8,052 730 286 – – 610 37,624 7,751 557 286 412 250 925 38,783 8,052 730 286 – 250 47,240 48,776 47,490 49,026 36,562 5,072 173 34 5,735 47,576 94,816 3,875 39,338 495 306 44,014 3,562 41,459 4,318 178 66 1,478 47,499 96,275 5,875 40,077 491 – 46,443 1,056 36,562 5,072 173 34 5,735 47,576 95,066 3,875 39,588 495 306 44,264 3,312 41,459 4,318 178 66 1,478 47,499 96,525 5,875 40,327 491 – 46,693 806 12,187 11,844 12,187 11,844 783 812 9,434 23,216 67,230 27,586 1,439 272 707 1,724 23,444 27,586 1,362 812 9,434 23,452 69,895 26,380 1,439 272 707 1,724 22,238 26,380 783 812 9,434 23,216 67,480 27,586 1,439 272 707 1,724 23,444 27,586 1,362 812 9,434 23,452 70,145 26,380 1,439 272 707 1,724 22,238 26,380 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n The financial statements were approved by the board of directors and authorised for issue on 1 June 2021 and were signed on its behalf by: R C Wright Chairman M Warren Finance Director See accompanying notes to the financial statements. Company number: 105664 www.caffyns.co.uk 30620-Caffyns-AR2021.indd 49 30620-Caffyns-AR2021.indd 49 30620 21 June 2021 1:00 pm Proof 5 49 21/06/2021 13:00:29 21/06/2021 13:00:29 30620 21 June 2021 1:00 pm Proof 5Statement of Changes in Equityfor the year ended 31 March 2021Group and CompanySharecapital£’000Sharepremium£’000Capitalredemptionreserve£’000Non-distributablereserve£’000Retained earnings£’000Total£’000At 1 April 20201,439 272 707 1,724 22,238 26,380 Total comprehensive income/(expense)Profit for the year––––1,410 1,410 Other comprehensive expense––––(244)(244)Total comprehensive Income for the year ––––1,166 1,166 Transactions with owners:Issue of shares – SAYE––––3 3 Share-based payment––––37 37 At 31 March 20211,4392727071,72423,444 27,586 for the year ended 31 March 2020Group and CompanySharecapital£’000Sharepremium£’000Capitalredemptionreserve£’000Non-distributablereserve£’000Retained earnings£’000Total£’000At 1 April 20191,4392727071,72423,833 27,975 Total comprehensive expenseLoss for the year––––(252)(252)Other comprehensive expense––––(793)(793)Total comprehensive expense for the year––––(1,045)(1,045)Transactions with owners:Dividends––––(606)(606)Share-based payment––––56 56 At 31 March 20201,439 2727071,72422,23826,38050Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 5030620-Caffyns-AR2021.indd 5021/06/2021 13:00:2921/06/2021 13:00:29Cash Flow Statement for the year ended 31 March 2021 Group and Company Net cash inflow/(outflow) from operating activities Investing activities Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Receipt from investment in lease Net cash outflow from investing activities Financing activities Overdraft facility (repaid)/utilised Revolving-credit facility utilised Secured loans repaid Issue of shares – SAYE scheme Dividends paid Repayment of lease liabilities Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents Bank overdrafts See accompanying notes to the financial statements. Stock code CFYN Note 27 2021 £’000 6,724 – (394) 185 (209) (2,000) 1,000 (657) 3 – (604) (2,258) 4,257 1,478 5,735 2021 £’000 5,735 (3,000) 2,735 Restated 2020 £’000 (802) – (980) 185 (795) 1,000 – (781) – (606) (446) (833) (2,430) 3,908 1,478 2020 £’000 1,478 (5,000) (3,522) O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 51 30620-Caffyns-AR2021.indd 51 30620 21 June 2021 1:00 pm Proof 5 51 21/06/2021 13:00:30 21/06/2021 13:00:30 30620 21 June 2021 1:00 pm Proof 5Principal Accounting PoliciesBasis of preparation and statement of complianceThe 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.The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are set out below. The preparation of financial statements in conformity with IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based upon management’s best knowledge of the amount, events or actions, actual results may ultimately differ from those estimates.The estimated and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.Judgements made by the directors in the application of accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 32.The consolidated financial statements are prepared in Sterling, which is both the functional currency of the Company and its subsidiaries and the presentational currency of the Group. All values are rounded to the nearest thousand pounds (£’000) except where otherwise indicated.Standards, amendments and interpretations to existing Standards that are not yet effective and have not been adopted early by the GroupDuring the year the Group has adopted the amendments to IAS 1 Presentation of Financial statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IFRS 3 Business Combinations which has had no impact on the financial statements. The standards have been published by the International Accounting Standards Board and adopted by EU.At the date of authorisation of these financial statements, there are no new Standards, or amendments to existing Standards, that have been published by the International Accounting Standards Board that are not effective, and, in some cases not yet been adopted by the UK endorsement board that would have a material impact on the Group.Going concernThe 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 7.9 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 52Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 5230620-Caffyns-AR2021.indd 5221/06/2021 13:00:3021/06/2021 13:00:30is 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 on page 8 and 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. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 March each year. All subsidiaries are currently dormant, so the income, expenses and cash flows are the same for the Group and the Company. The results of businesses and subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement using the acquisition method from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. 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. www.caffyns.co.uk 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 assets or net assets. The only correction would have been to increase inventories and trade payables at that date by £776,000. Acquisitions On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill, which is allocated to Cash Generating Units (“CGUs”). Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to profit or loss in the period of acquisition. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired and is tested annually for impairment. Any impairment is recognised immediately in the income statement and is not subsequently reversed. Gains and losses on subsequent disposal of the assets acquired include any related goodwill. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date, and annually thereafter. 30620-Caffyns-AR2021.indd 53 30620-Caffyns-AR2021.indd 53 30620 21 June 2021 1:00 pm Proof 5 Stock code CFYN Revenue recognition Revenue generated from a contract for the sale of goods is recognised on delivery when all promises to the customer have been fulfilled, such as the supply of a specific vehicle. If the customer has added various accessory products to their order, the Company’s promise is fulfilled by supplying these products onto the vehicle at the time of its delivery. Where the Company acts as an agent on behalf of a principal in relation to the sale of a new car, the associated income is recognised within revenue in the period in which the product is sold. Finance commissions are earned from the finance house that is providing a finance arrangement to a consumer buying the vehicle. In this regard, the Company’s customer is considered to be the finance house, rather than the end user of the vehicle. Income derived from such commissions is recognised within revenue on completion of the arranging of the various products (i.e. at the point at which control passes to the customer). For servicing work, the Company promises to complete the work in accordance to the contract. This obligation is satisfied when the customer takes collection of their vehicle on completion of the work. If a customer takes out a service plan, the Company has a future obligation to complete agreed work over a set period of time – these obligations are only completed in full once those elements of the service plan have expired. Where the Company sells a service plan alongside a vehicle, the service element is distinct from the vehicle sale and is subject to a fixed and determinable transaction price. Each individual service included within the service plan is considered distinct and revenue is recognised at a point in time when the services have been carried out. The obligation of supplying vehicle parts to customers is satisfied when the customer takes delivery of the goods. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 53 21/06/2021 13:00:30 21/06/2021 13:00:30 30620 21 June 2021 1:00 pm Proof 5Principal Accounting Policies continuedSupplier incomeThe Company receives income from brand partners and other suppliers. These are generally based on achieving certain predetermined objectives such as specific sales volumes and maintaining agreed operational standards. The supplier income received is recognised as a deduction from cost of sales at the point when it is reasonably certain that the targets have been achieved for the relevant period and when income can be measured reliably based on the terms of each relevant supplier agreement. Supplier income that has been earned but not invoiced at the balance sheet date is recognised in other receivables.Manufacturer bonuses are recognised as income to gross profit but not within revenue.Government and other support grantsGovernment grants received under the Coronavirus Job retention Scheme (“CJRS”) and support and re-opening grants received from local Councils in the areas that the Company operates are recognised where there is reasonable assurance that the grants will be received and that all attached conditions have been complied with. The grants received under CJRS are credited to the appropriate cost lines in Income Statement to which the affected furlough employees would normally be charged. Local Council support and re-opening grants are recognised as Other Income.Non-underlying itemsNon-underlying items are those items that are unusual because of their size, nature or incidence. Management consider that these items should be disclosed separately to enable a full understanding of the operating results. Profits and losses on disposal of property, plant and equipment are also disclosed as non-underlying, as are certain redundancy costs and costs attributable to vacant properties held pending their disposal.The net financing return and service cost on pension obligations in respect of the defined benefit pension scheme, which is closed to future accrual, are presented as non-underlying items due to the inability of management to influence the underlying assumptions from which the charges are derived.All other activities are treated as underlying.Borrowing costsAll borrowing costs are recognised in the Income Statement in the period in which they are incurred unless the borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset, in which case they are capitalised.Retirement benefit costsThe Company operates the Caffyns Pension Scheme, which is a defined benefit pension scheme. The defined benefit scheme defines the amount of pension benefit that an employee will receive on retirement, dependent on one or more factors including age, years of service and final salary. The Scheme was closed to new members in 2006 and to future accrual in April 2010.Under IAS 19 (Revised) Employee Benefits, the defined benefit deficit is included on the Statement of Financial Position. Liabilities are calculated based on the current yields on high-quality corporate bonds and on market conditions. Surpluses are only included to the extent that they are recoverable through reduced contributions in the future or through refunds from the Scheme.Remeasurement arising from experience adjustments and changes in actuarial assumptions each year are charged or credited, net of deferred tax, to reserves and shown in the Statement of Comprehensive Income.An interest expense or income is calculated on the defined benefit liability or asset respectively by applying the discount rate to that defined benefit liability or asset.The Company also provides pension arrangements for employees under defined contribution schemes. Contributions for these schemes are charged to the Income Statement in the year in which they are payable.Share-based employee compensationThe Company operates an equity settled share-based compensation plan for all employees through the Company’s Save As You Earn (“SAYE”) scheme. All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. These are indirectly determined by reference to the share option awarded. Their fair value is appraised at the grant date. The vesting period from the date of grant is three years.All share-based compensation is ultimately recognised as an expense in the Income Statement with a corresponding credit to retained earnings, net of deferred tax where applicable in the Statement of Financial Position. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Service and performance vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Non-vesting conditions, such as the employee’s requirement to continue to save under the SAYE scheme, are considered when determining the fair value of the award. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to the expense recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated. Failure by the employee to meet a vesting condition is treated as a cancellation.Fair value is measured by use of the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.54Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 5430620-Caffyns-AR2021.indd 5421/06/2021 13:00:3021/06/2021 13:00:30Stock code CFYN Property, plant and equipment Land and buildings used in the business are stated in the Statement of Financial Position at cost. The property held at the date of transition to IFRSs in 2007 was recognised at deemed cost, being the carrying amount at the date of transition to IFRSs. The date of the last valuation undertaken under its previous GAAP was in 1995. Depreciation on buildings is charged to the Income Statement. On the subsequent sale of a property, the attributable surplus remaining in the non- distributable reserve is transferred directly to accumulated profits. Properties in the course of construction are carried at cost, less any recognised impairment loss. Cost includes professional fees and attributable borrowing costs. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Properties are regarded as purchased or sold on the date on which contracts for the purchase or sale become unconditional. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Income Statement. Other assets are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost less residual values of assets, other than land and properties under construction, over their estimated useful lives using the straight-line method, on the following basis: Freehold buildings – 50 years Leasehold buildings – period of lease Plant and machinery, fixtures and fittings – 3 to 10 years The residual value of all assets, depreciation methods and useful economic lives, if significant, are assessed annually. Investment property Investment property, which is property held to earn rentals and/ or capital appreciation, is stated at cost less accumulated depreciation and impairment. Rental income from investment property is recognised on a straight-line basis over the term of the lease. Depreciation is charged to write off the cost less residual values of investment properties over their estimated useful lives using the straight- line method over 50 years. Any transfers from property, plant and equipment are made at cost less accumulated depreciation. Leases The Company recognises a right-of- use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, and subsequently at cost less accumulated depreciation and impairment losses and is then adjusted for certain remeasurements of the lease liability. Depreciation is recognised on a straight-line basis over the period of the lease the right-of-use asset is expected to be utilised. The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted by the Company’s incremental borrowing rate. The lease liability is subsequently increased by the interest cost on the lease liability and reduced by payments made. It is remeasured when there is a change in future lease payments arising from a change of index or rate, a variation in amounts payable following contractual rent reviews and changes in the assessment of whether an extension/ termination option is reasonably certain to be exercised. Where lease contracts include renewal and termination options, judgement is applied to determine the lease term. The assessment of whether the Company is reasonably certain to exercise such options impacts the lease term and the subsequent recognition of the lease liability and right-of-use asset. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 55 21/06/2021 13:00:30 21/06/2021 13:00:30 Taxation The tax expense represents the sum of the tax currently payable and deferred tax. Tax balances are not discounted. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the year-end accounting date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each financial year- end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited within other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. The tax base of an item considers its intended method of recovery by either sale or use. www.caffyns.co.uk 30620-Caffyns-AR2021.indd 55 30620-Caffyns-AR2021.indd 55 30620 21 June 2021 1:00 pm Proof 5 30620 21 June 2021 1:00 pm Proof 5Principal Accounting Policies continuedWhere the Company acts as a lessor, receipts of lease payments are recognised in the income statement on a straight-line basis over the period of the lease unless it is deemed that the risks and rewards of ownership have been substantially transferred to the Company’s lessee. If it is deemed that the risks and rewards of ownership have been substantially transferred then the Company will, rather than recognise a right-of-use asset, recognise an investment in the lease, this being the present value of future lease receipts discounted at the interest rate implicit in the lease or, if this is not specified, at the Company’s incremental borrowing rate. The finance lease receivable will be increased by the interest received less payments made by the lessee.Impairmenta. Impairment of goodwill: Goodwill is tested annually for impairment. If an impairment provision is made, it cannot subsequently be reversed.b. Impairment of property, plant and equipment, investment properties and right-of-use assets: At each financial year-end date, the Company reviews the carrying amounts of its property, plant and equipment, investment properties and right-of-use assets in order to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash inflows that are independent from other assets, the Company estimates the recoverable amount of the CGU to which it belongs.The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash inflows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash inflows have not been adjusted.If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset (CGU) is reduced to its recoverable amount.An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.Where an impairment loss subsequently reverses, the carrying amount of the asset (CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (CGU) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other groups of assets. Management have determined that the CGUs are the individual dealerships for each franchise.InventoriesInventories are stated at the lower of cost and net realisable value. Cost represents the purchase price plus any additional costs incurred.Vehicle inventories include owned vehicles used for demonstration purposes and as courtesy cars for service customers. Consignment vehicles are regarded as being under the effective control of the Company and are included within inventories on the Statement of Financial Position as the Company has substantially all the significant risks and rewards of ownership even though legal title may not yet have passed. The corresponding liability is included in trade and other payables. Parts inventories are valued at cost and are written down to net realisable value, in accordance with normal industry practice, by providing for obsolescence on a time in stock basis.Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing and selling.Cash and cash equivalentsCash and cash equivalents comprise cash in hand and on demand deposits. In the Cash Flow Statement, cash and cash equivalents exclude the Company’s Cash Overdraft facility from Volkswagen Bank, as this facility has the properties of a revolving-credit facility. This facility is shown within interest-bearing borrowings in current liabilities on the Statement of Financial Position.Investments in subsidiary undertakingsInvestments in subsidiary undertakings are included at cost less amounts written off if the investment is determined to have been impaired and are included in the Parent Company’s separate financial statements.Interest-bearing borrowingsInterest-bearing bank loans and revolving-credit facilities are recorded at their fair value on initial recognition (normally the proceeds received less transaction costs that are directly attributable to the financial liability) and subsequently at amortised cost under the effective interest method. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis to profit or loss using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.56Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 5630620-Caffyns-AR2021.indd 5621/06/2021 13:00:3021/06/2021 13:00:30Stock code CFYN Trade and other payables Trade payables are not interest-bearing and are stated at their fair value on initial recognition and are subsequently carried at amortised cost. Other payables include obligations relating to consignment stock and vehicle stocking loans. Obligations relating to consignment stock relate to new cars supplied by manufacturers on consignment terms and the full purchase price can be funded. Vehicle stocking loans relates to creditors in relation to used vehicles and is funded up to a level generally 80% of market value of the used car based on independent market guides. The utilisation is recorded at fair value with associated interest charged to profit or loss. Cash flows relating to these arrangements are included in operating cash flows. Equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Share premium includes any premium received on the sale of shares. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any corporation tax benefits. The capital redemption reserve comprises the nominal value of ordinary and preference share capital purchased by the Company in prior years and cancelled. The non-distributable reserve within equity is a revaluation reserve which comprises gains and losses due to the revaluation of property, plant and equipment prior to 1995. Retained earnings includes all current and prior period retained profits. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. The only types of financial assets held by the Group are financial assets at amortised cost. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires. Financial assets at amortised cost Trade receivables do not carry any interest and are stated at their fair value on initial recognition as reduced by appropriate allowances for estimated irrecoverable amounts and subsequently carried at amortised cost. The Group applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance for all receivables. The expected loss rates are based on the payment profile of sales over 36 months before the year-end date, or the first day of the accounting period under review respectively, and the corresponding historical losses expected in the period. The Company also considers future expected credit losses due to circumstances in addition to historical loss rates. Where any company in the Group purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued any consideration received, net of any directly attributable incremental transactions costs and the related tax effects, is included in equity attributable to the Company’s equity holders. Preference shares Preference shares are accounted for as non-current liabilities, as they have the attributes of debt. Preference dividends are accounted for as finance charges within finance expenses. Financial instruments Recognition, initial measurement and re-recognition Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted for transaction costs, except for those carried at fair value through profit and loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities is described below. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 57 30620-Caffyns-AR2021.indd 57 30620 21 June 2021 1:00 pm Proof 5 57 21/06/2021 13:00:30 21/06/2021 13:00:30 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statementsfor the year ended 31 March 20211.General informationCaffyns plc is a company incorporated in England and Wales under the Companies Act 2006. The address of the registered office is given on page 14. Its revenue is attributable to the sole activity of operating as a motor retailer in the south-east of the United Kingdom and comprises revenue from: 2021£’000Restated2020£’000Sale of goods154,269184,350Rendering of services10,81611,437Total revenue165,085195,787Sales of motor vehicles, parts and aftersales servicesThe Group’s full revenue recognition policy is set out in the section on Principal Accounting Policies under the heading Revenue Recognition. The Group generates revenue through the sale of new and used motor vehicles (together comprising Sale of Goods as shown above), and through the provision of aftersales services in the form of vehicle servicing, maintenance and repairs and introducing customers to finance companies (together comprising Rendering of Services as shown above).The Group recognises revenue from the sale of new and used motor vehicles when a customer takes possession of the vehicle, at which point they have an obligation to pay in full and as such control is considered to transfer at this point. The Group typically receives cash equal to the invoice amount for most direct retail sales to consumers at the time the consumer takes possession of the vehicle. When the consumer has taken out a finance agreement to purchase the vehicle the Group receives payment from the finance company at the time the consumer takes possession of the vehicle. Payment terms on sales to corporate customers typically range from seven to ten days. The Company acts as an agent in instances where it facilitates sales that have been arranged by the manufacturer.The Group recognises revenue from the provision of aftersales services when the service has been completed, at which point customers have an obligation to pay in full. The Group typically receives cash equal to the invoice amount for most direct retail sales to consumers at the time the service has been completed. Payment terms on sales to corporate customers typically range from 30 to 60 days.All revenue recognised in the Income Statement is from contracts with customers and no other revenue has been recognised. No impaired losses have been recognised on any receivables arising from a contract with a customer.Due to the nature of the Group’s contractual relationships with customers and the nature of the services provided there are no timing differences between revenue recognised in the Income Statement and trade receivables being recognised in the Statement of Financial Position.There have been no significant judgements regarding the timing of transactions or the associated transaction price.The transaction price is set out in individual contractual agreements and there is a range of prices based on the types of goods and services offered. There are no variable pricing considerations.Contract liabilities relating to aftersales service plansWhere the Group receives an amount of consideration in advance of completion of performance obligations under a contract with a customer, the value of the advance consideration is initially recognised as a contract liability within liabilities. Revenue is subsequently recognised as the performance obligations are completed over the period of the contract (i.e. as control is passed to the customer). Contract liabilities are presented within trade and other payables in the Statement of Financial Position and disclosed in note 19 Trade and Other Payables. Approximately one-third of the value of these liabilities would be anticipated to be recognised as revenue in each of the next three financial years.58Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 5830620-Caffyns-AR2021.indd 5821/06/2021 13:00:3021/06/2021 13:00:30Stock code CFYN Contract costs The Group applies the practical expedient in paragraph 94 of IFRS 15 Revenue from Contracts and recognises the incremental costs of obtaining contracts as an expense when incurred if the amortisation period of the assets that the Group otherwise would have recognised is one year or less. The Group is satisfied that any incremental costs incurred in obtaining contracts that extend for more than one year is immaterial. Transaction price allocation to remaining performance obligations The Group applies the practical expedient in paragraph 121 if IFRS 15 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Segmental reporting Based upon the management information reported to the chief operating decision maker, the Chief Executive, in the opinion of the directors the Company has one reportable segment. The Company physically operates and is managed from individual dealership sites although strategic and investment decisions are made based on dealership groupings or market territories. The Company’s individual dealerships represent a range of manufacturers but are considered to have similar economic characteristics, such as margin structures, and offer similar products and services to a similar customer base. As such, the results of each dealership have been aggregated to form one reportable segment. There are no major customers amounting to 10% or more of revenue. All revenue and non-current assets derive from, or are based in, the United Kingdom. 2. Non-underlying items Net loss on disposal of property, plant and equipment Other income, net Within operating expenses: Service cost on pension scheme Redundancy and restructuring costs VAT compliance provision movement Liquidation distribution received Property impairments Non-underlying items within operating profit Net finance expense on pension scheme Non-underlying items within net finance expense Total non-underlying items before taxation Taxation credit on non-underlying items Total non-underlying items after taxation 2021 £’000 (3) (3) (23) (40) – – (184) (247) (250) (202) (202) (452) 86 (366) 2020 £’000 (2) (2) (25) – 44 22 – 41 39 (187) (187) (148) 28 (120) 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 12 and 13). 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. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 59 30620-Caffyns-AR2021.indd 59 30620 21 June 2021 1:00 pm Proof 5 59 21/06/2021 13:00:30 21/06/2021 13:00:30 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 20213. Operating profitOperating profit has been arrived at after charging/(crediting):2021£’0002020£’000Employee benefit expense (see note 5)15,438 15,494 Coronavirus Job retention Scheme claims(2,413)– Depreciation of property, plant, equipment and investment property – owned assets1,667 1,537 – right-of-use assets315 256 Impairments of investment property184 – Net loss on disposal of property, plant and equipment3 2 Short-term lease rentals payable – land and buildings106 83 Short-term lease rentals receivable – land and buildings(710)(708)The Company applies the exemption in IFRS 16 Leases not to recognise right-of-use assets and liabilities for leases with a duration of less than twelve months.Operating profit has been arrived at after charging:2021£’0002020£’000Auditor’s remunerationFees payable to the Company’s auditor for the audit of the Company’s annual accounts73 69 Fees payable to the Company’s auditor and its associates for other services:– pursuant to legislation being review of interim financial statements13 13 86 72 The Company’s Statutory Auditor is BDO LLP. Subsequent to the completion of the Company’s statutory audit for the prior year a fee variation of £4,000 was agreed for additional audit work required to be carried out as a result of the covid-19 pandemic. This fee has been disclosed as part of the current year fee in the table above.The statutory audit of the Caffyns plc Occupational Pension Scheme is performed by Grant Thornton UK LLP.A description of the work of the Audit and Risk Committee is set out in the Chairman’s Statement on Corporate Governance on pages 17 and 18 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the Statutory Auditor.The Company refers to underlying profit and underlying EBITDA as being key alternative performance measures when considering the results for the year. These performance metrics can be reconciled to the Company’s result for the year as follows:2021£’0002020£’000Profit/(loss) for the year1,410 (252)Tax charge (note 8)14 355 Profit before tax1,424 103 Net finance expense (notes 6 and 7)1,468 1,569 Non-underlying items within operating profit (note 2)250 (39)Depreciation charged on property, plant and equipment, right-of-use assets and investment properties (notes 11, 12 and 13)1,982 1,795 Underlying earnings before interest, tax, depreciation and amortisation (“EBITDA”)5,124 3,428 60Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 6030620-Caffyns-AR2021.indd 6021/06/2021 13:00:3121/06/2021 13:00:314. Other income Rent receivable Local Government covid-19 support grants Liquidation distribution received Loss on disposal of tangible fixed assets Other income 5. Employee benefit expense The average number of people (full time equivalents) employed in the following areas was: Group and Company Sales Aftersales Administration Average number of full time equivalents employees Employee benefit expense, including directors, during the year amounted to: Group and Company Wages and salaries Social security costs Redundancy costs Contributions to defined contribution plans Other pension costs (see note 23) Employee benefit expense Directors’ emoluments were: Salaries and short-term employee benefits Details of the directors’ remuneration are provided in the Directors’ Remuneration Report on pages 27 to 32. Key management compensation: Salaries and short-term employee benefits Key management personnel includes the directors and other key operational employees. 6. Finance expense Interest payable on bank borrowings Interest payable on inventory stocking loans (see note 19) Interest on lease liabilities Finance costs amortised Preference dividends (see note 10) Finance expense No interest was capitalised in the current or prior periods. www.caffyns.co.uk 30620-Caffyns-AR2021.indd 61 30620-Caffyns-AR2021.indd 61 30620 21 June 2021 1:00 pm Proof 5 Stock code CFYN 2021 £’000 710 202 – (3) 909 2020 £’000 708 – 22 (2) 728 2021 Number 2020 Number 121 201 80 402 2021 £’000 13,614 1,325 40 234 225 128 208 83 419 2020 £’000 13,670 1,320 – 292 212 15,438 15,494 2021 £’000 591 2021 £’000 1,081 2021 £’000 367 681 21 125 72 2020 £’000 657 2020 £’000 1,136 2020 £’000 440 741 24 105 72 1,266 1,382 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 61 21/06/2021 13:00:31 21/06/2021 13:00:31 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 20217. Finance expense on pension scheme2021£’0002020£’000Defined benefit pension scheme net finance expense (see note 23)202 187 8. Tax2021£’0002020£’000Current taxUK corporation tax(401)– Adjustments recognised in the period for current tax of prior periods33 22 Total (charge)/credit(368)22 Deferred tax (see note 24)Origination and reversal of temporary differences381 (356)Adjustments recognised in the period for deferred tax of prior periods(27)(21)Total credit/(charge)354 (377)Tax charged in the Income Statement(14)(355)The tax (charge)/credit arises as follows:2021£’0002020£’000On normal trading(100)(383)On non-underlying items (see note 2)86 28 Tax charged in the Income Statement(14)(355)The charge for the year can be reconciled to the profit per the Income Statement as follows:2021£’0002020£’000Profit before tax1,424 103 Tax at the UK corporation tax rate of 19% (2020: 19%)(271)(20)Tax effect of expenses that are not deductible in determining taxable profit(133)(23)Other differences related primarily to the revaluation of the pension scheme and from property impairments(34)(134)Effect of change in corporation tax rate– (255)Movement in rolled over and held over gains117 76 Reversal of impairment of Advanced Corporation Tax asset301 – Adjustment to tax charge in respect of prior periods6 1 Tax charge for the year(14)(355)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.62Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 6230620-Caffyns-AR2021.indd 6221/06/2021 13:00:3121/06/2021 13:00:31The total tax (charge)/credit for the year is made up as follows: Total current tax (charge)/credit Deferred tax credit/(charge) Credited/(charged) in the Income Statement Credited against other comprehensive income Total deferred tax credit/(charge) Total tax credit for the year Stock code CFYN 2021 £’000 (368) 354 57 411 43 2020 £’000 22 (377) 376 (1) 21 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 24). 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. 9. 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 post-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: Underlying Basic Profit before tax Adjustments: Non-underlying items (note 2) Profit before tax Tax (note 8) Profit/(loss) after tax Earnings/(deficit) per share (pence) Diluted earnings/(deficit) per share (pence) Underlying earnings/(deficit) after tax Underlying earnings/(deficit) per share (pence) Underlying diluted earnings/(deficit) per share (pence) Non-underlying losses after tax Losses per share (pence) Diluted losses per share (pence) Total earnings/(deficit) Earnings/(deficit) per share (pence) Diluted earnings/(deficit) per share (pence) 2021 £’000 1,424 452 1,876 (100) 1,776 66.0p 65.6p 2020 £’000 103 148 251 (383) (132) (4.9)p (4.9)p 2021 £’000 1,424 – 1,424 (14) 1,410 52.4p 52.1p 2021 £’000 1,776 66.0p 65.6p (366) (13.6)p (13.5)p 1,410 52.4p 52.1p 2020 £’000 103 – 103 (355) (252) (9.4)p (9.4)p 2020 £’000 (132) (4.9)p (4.9)p (120) (4.5)p (4.5)p (252) (9.4)p (9.4)p O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n 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). www.caffyns.co.uk 30620-Caffyns-AR2021.indd 63 30620-Caffyns-AR2021.indd 63 30620 21 June 2021 1:00 pm Proof 5 63 21/06/2021 13:00:31 21/06/2021 13:00:31 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202110. Dividends2021£’0002020£’000Preference shares7% Cumulative First Preference1212 11% Cumulative Preference4848 6% Cumulative Second Preference1212 Included in finance expense (see note 6)7272 Ordinary sharesNo interim dividend paid in respect of the current year (2020: 7.5p)–202 No final dividend paid in respect of the March 2020 year end (2019: 15.0p)–404 –606 No final dividend was declared in respect of either the year ended 31 March 2021, or the year ended 31 March 2020.11. Right-of-use assetsGroup and Company£’000Deemed costAt 1 April 2019, on implementation947Additions234At 31 March 20201,181Deemed costAt 1 April 2020 and 31 March 20211,181 Accumulated depreciationAt 1 April 2019– Depreciation for the year256 At 31 March 2020256 Accumulated depreciationAt 1 April 2020256 Depreciation for the year315 At 31 March 2021571 Net book valueAt 31 March 2021610 At 31 March 2020925 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).Payments made in the year under other leases with contractual periods of 12 months or less, which have not been required to be capitalised, of £106,000 (2020: £83,000) are disclosed in note 3.64Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 6430620-Caffyns-AR2021.indd 6421/06/2021 13:00:3121/06/2021 13:00:31Stock code CFYN 12. Property, plant and equipment Group and Company Cost or deemed cost At 1 April 2019 Additions at cost Disposals At 31 March 2020 Cost or deemed cost At 1 April 2020 Additions at cost Disposals At 31 March 2021 Accumulated depreciation At 1 April 2019 Depreciation charge for the year Disposals At 31 March 2020 Accumulated depreciation At 1 April 2020 Depreciation charge bfor the year Disposals At 31 March 2021 Net book value 31 March 2021 31 March 2020 31 March 2019 Freehold property £’000 Leasehold improvements £’000 Fixtures & fittings £’000 Plant & machinery £’000 40,748 4 – 40,752 40,752 – – 40,752 4,955 575 – 5,530 5,530 583 – 6,113 34,639 35,222 35,793 690 38 – 728 728 – – 728 445 62 – 507 507 74 – 581 147 221 245 4,804 461 (45) 5,220 5,220 160 (30) 5,350 3,168 471 (43) 3,596 3,596 522 (27) 4,091 1,259 1,624 1,636 6,086 477 (46) 6,517 6,517 234 (16) 6,735 4,535 312 (46) 4,801 4,801 371 (16) 5,156 1,579 1,716 1,551 Total £’000 52,328 980 (91) 53,217 53,217 394 (46) 53,565 13,103 1,420 (89) 14,434 14,434 1,550 (43) 15,941 37,624 38,783 39,225 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 has been recognised within administration expenses in the Income Statement. The freehold properties were originally revalued externally on 31 March 1995 by Herring Baker Harris, Chartered Surveyors, at open market value for existing use (which is close to the then fair value). Freehold properties acquired since that date and the other assets listed above have been stated at cost in accordance with IAS 16 Property, Plant and Equipment. 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. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 65 30620-Caffyns-AR2021.indd 65 30620 21 June 2021 1:00 pm Proof 5 65 21/06/2021 13:00:31 21/06/2021 13:00:31 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202113. Investment propertiesGroup and Company2021£’0002020£’000CostAt 1 April 2020 and 31 March 20219,650 9,650Accumulated depreciationAt 1 April 20201,598 1,481Depreciation for the year117 117Impairments for the year184 –At 31 March 20211,899 1,598Net book valueAt 31 March 20217,751 8,052Depreciation 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 valueAs 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.14. Net investment in leaseGroup and Company2021£’0002020£’000Due after more than one year557730Due within one year173178At 31 March 2021730908The 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.66Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 6630620-Caffyns-AR2021.indd 6621/06/2021 13:00:3121/06/2021 13:00:3115. Goodwill Group and Company Cost At 1 April 2020 and 31 March 2021 Provision for impairment At 1 April 2020 and 31 March 2021 Carrying amounts allocated to CGUs Volkswagen, Brighton Audi, Eastbourne At 31 March 2021 Stock code CFYN 2021 £’000 2020 £’000 481 195 200 86 286 481 195 200 86 286 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 12. 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. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 67 30620-Caffyns-AR2021.indd 67 30620 21 June 2021 1:00 pm Proof 5 67 21/06/2021 13:00:32 21/06/2021 13:00:32 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202115. Goodwill continuedDiscount rateThe 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 rateThe 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.ConclusionAt 31 March 2021, no impairment charge in respect of goodwill was identified (2020: no impairment charge).Sensitivity to changes in key assumptionsImpairment 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.16. Investments in subsidiary undertakingsThe Company owns the whole of the issued ordinary share capital of Caffyns Wessex Limited, Caffyns Properties Limited and Fasthaven Limited, all of which are dormant. The amount at which the investments are stated is equivalent to the net assets of the subsidiaries. All subsidiary undertakings are registered in England and Wales.Company£’000CostAt 1 April 2020 and 31 March 2021476 ProvisionAt 1 April 2020 and 31 March 2021226Net book valueAt 31 March 2021250At 31 March 202025017. InventoriesGroup and Company2021£’000Restated2020£’000Vehicles19,74123,126Vehicles on consignment15,99517,408Oil, spare parts and materials821920Work in progress55At 31 March 202136,56241,459Group and Company:2021£’0002020£’000Inventories recognised as an expense during the year135,348162,929Inventories stated at fair value less costs to sell708810Carrying value of inventories subject to retention of title clauses23,94027,272All 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).68Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 6830620-Caffyns-AR2021.indd 6821/06/2021 13:00:3221/06/2021 13:00:3218. Trade and other receivables Group and Company Trade receivables Allowance for doubtful debts Other receivables At 31 March 2021 All amounts are due within one year. Stock code CFYN 2021 £’000 3,757 (3) 3,754 1,318 5,072 2020 £’000 3,004 (7) 2,997 1,321 4,318 The Group makes an impairment provision for all debts that are considered unlikely to be collected. At 31 March 2021 trade receivables were shown net of an allowance for impairment of £3,000 (2020: £7,000). The charge recognised during the year was £2,000 (2020: £5,000). Trade receivables have been classified at amortised cost under IFRS 9 Financial Instruments. Group and Company Not impaired: Neither past due nor impaired Past due up to three months but not impaired At 31 March 2021 Group and Company The movement in the allowance for impairment during the year was: At 1 April 2020 Impairment recognised in the Income Statement Utilisation At 31 March 2021 All amounts are due within one year. 2021 £’000 3,694 60 3,754 2021 £’000 7 2 (6) 3 2020 £’000 2,957 40 2,997 2020 £’000 2 5 – 7 Credit risk The Company’s principal financial assets are trade receivables, bank balances and cash that represent the Company’s maximum exposure to credit risk in relation to financial assets. The Company’s credit risk is primarily attributable to its trade receivables that are due on the earlier of the presentation of the invoice or the expiry of a credit term. The amounts presented in the Statement of Financial Position are net of allowances for doubtful receivables, estimated by the Company’s management based on prior experience and their assessment of the current economic environment. Consequently, the directors consider that the carrying amount of trade and other receivables approximates to their fair value. Before granting any new customer credit terms the Company uses external credit rating agencies to assess the potential new customer’s credit quality and to define credit facility limits to be made available. These credit limits and creditworthiness are regularly reviewed. The concentration of credit risk is limited due to the customer base being large and unrelated. The Company has no customer that represents more than 5% of the total balance of trade receivables. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 69 30620-Caffyns-AR2021.indd 69 30620 21 June 2021 1:00 pm Proof 5 69 21/06/2021 13:00:32 21/06/2021 13:00:32 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202119. Trade and other payables2021£’000Restated2020£’000Trade payable14,74212,649Obligations relating to consignment stock15,99517,408Vehicle stocking loans5,1007,315Social security and other taxes1,173549Accruals1,4821,283Deferred income614592Other creditors232281Group total39,33840,077Amounts owed to Group undertakings250250Company total39,58840,327Trade 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 2021 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:2021£’0002020£’000At 1 April 2020592 590 Utilisation of deferred income in the year(1,136)(1,300)Income received and deferred in the year1,158 1,302 At 31 March 2021614 592 70Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 7030620-Caffyns-AR2021.indd 7021/06/2021 13:00:3221/06/2021 13:00:3220. Interest-bearing loans and borrowings Group and Company Current liabilities: Secured bank loans and overdrafts Non-current liabilities: Secured bank loans At 31 March 2021 Stock code CFYN 2021 £’000 2020 £’000 3,875 5,875 12,187 16,062 11,844 17,719 Note 21 sets out the maturity profile of non-current liabilities. The directors estimate that there is no material difference between the fair value of the Company’s borrowings and their book value. The loan and overdraft facilities provided to the Company of £26.1 million (2020: £26.7 million) are secured by a general debenture and fixed charges over certain freehold properties. 21. Financial instruments The Group utilises financial instruments such as bank loans and overdrafts and new and used vehicle stocking loans to finance its operations and to manage the interest rate and liquidity risks that arise from those operations and from its sources of finance. The disclosures below apply to the Group and the Company unless otherwise noted. Group and Company Fair value of financial assets and liabilities: Primary financial instruments held or issued to finance operations Classification 2021 carrying value & fair value £’000 2020 carrying value & fair value £’000 Long-term bank borrowings (note 20) Financial liability measured at amortised cost (12,187) (11,844) Bank overdraft (note 20) Financial liability measured at amortised cost Other short-term bank borrowings (note 20) Financial liability measured at amortised cost (3,000) (875) (5,000) (875) Trade and other payables (note 19) Financial liability measured at amortised cost (37,551) (38,936) Trade and other receivables (note 18) Financial asset at amortised cost Cash and cash equivalents Financial asset at amortised cost Preference share capital (note 25) Financial liability measured at amortised cost 5,072 5,735 (812) 4,318 1,478 (812) The amounted noted in the above table are the same for the Company apart from: Trade and other payables (note 19) Financial liability measured at amortised cost (37,801) (39,186) Financial risk management The Group is exposed to the following risks from its use of financial instruments: a) Funding and liquidity risk – the risk that the Group will not be able to meet its obligations as they fall due; b) Credit risk – the risk of financial loss to the Group on the failure of a customer or counterparty to meet their obligations as they fall due; and c) Market risk – the risk that changes in market prices, such as interest rates, have on the Group’s financial performance. The Group manages credit and liquidity risk by particularly focusing on working capital management. The Group’s quantitative exposure to these risks is explained throughout these financial statements while the Group’s objectives and management of these risks is set out below. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 71 30620-Caffyns-AR2021.indd 71 30620 21 June 2021 1:00 pm Proof 5 71 21/06/2021 13:00:32 21/06/2021 13:00:32 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202121. Financial instruments continuedCapital managementThe Group views its financial capital resources as primarily comprising share capital, bank loans and overdrafts, vehicle stocking credit lines and operating cash flow.The board’s policy is to maintain a strong capital base to facilitate market confidence and safeguard the Group’s ability to continue as a going concern while maximising the return on capital to the Group’s shareholders. The Group monitors its capital through closely scrutinising and reviewing its cash flows. The capital of the Group is £27.6 million and comprises share capital, share premium, retained earnings and other reserve accounts: the capital redemption reserve, the non-distributable reserve and the other reserve. In order to maintain or adjust the capital structure, the Group may adjust the level of dividends paid to the holders of ordinary shares, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group’s ratio of net bank loans and overdrafts to equity was 37% at 31 March 2021 (2020: 62%). Capital requirements imposed externally by HSBC are that borrowings should not exceed 70% of the current open-market value for existing use of the Group’s freehold properties which are subject to a fixed charge. The underlying pre-tax return as a proportion of equity for the year was 6.8% (2020: 1.0%).The Company has occasionally repurchased its own shares in the market and cancelled them to promote growth in earnings per share. There is no predetermined plan for doing this although the Company has permission from its shareholders to buy back up to 15% of its equity in any one financial year. The Company may also purchase its own shares to satisfy share incentives issued to employees and these shares are then held as treasury shares.Treasury policy and proceduresThe Company’s activities expose it primarily to the financial risks of changes in interest rates. There are no fixed rate borrowings other than preference shares.Funding and liquidity risk managementThe Group finances its operations through a mixture of retained profits and borrowings from bank, vehicle stocking credit lines and operating cash flow. The Group’s policy is to maintain a balance between committed and uncommitted facilities and between term loans and overdrafts. Facilities are maintained at levels in excess of planned requirements and at 31 March 2021 the Group had undrawn floating rate borrowing facilities of £15.7 million (2020: £10.5 million) represented by overdrafts and revolving-credit facilities which would be repayable on demand, in respect of which all conditions precedent had been met. The Group is not directly exposed to foreign currency risk.Interest rate managementThe objective of the Group’s interest rate policy is to minimise interest costs while protecting the Group from adverse movements in interest rates. Borrowings at variable rates expose the Group to cash flow interest rate risk whereas borrowings at fixed rates expose the Group to fair value interest rate risk. The Group does not currently hedge any interest rate risk.Interest rate risk sensitivity analysisAs all of the Group’s borrowings and vehicle stocking credit lines are floating rate instruments, they therefore have a sensitivity to changes in market rates of interest. The effect of a change of 100 basis points in interest rates for floating rate instruments outstanding at the period end, on the assumption that the instruments at the period end were outstanding for the entire period, would change interest charges by £154,000 (2020: £236,000) before tax relief.Credit risk managementThe Group’s receivables are all denominated in sterling. The Group is exposed to credit risk primarily in respect of its trade receivables and financial assets. Trade receivables are stated net of provision for estimated impairment losses. Exposure to credit risk in respect of trade receivables is mitigated by the Group’s policy of only granting credit to certain customers after an appropriate evaluation of their credit risk. Credit risk also arises in respect of amounts due from manufacturers in relation to bonuses and warranty receivables. This risk is mitigated by the range of manufacturers dealt with, the Group’s procedures in effecting timely collection of amounts due, and management’s belief that it does not expect any manufacturer to fail to meet its obligations. Finance assets comprise cash balances. The counterparties are major banks and management do not expect any counterparty to fail to meet its obligations. The maximum exposure to credit risk is represented by the carrying amount of the financial asset in the Statement of Financial Position.These objectives, policies and strategies are consistent with those applied in the previous year.72Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 7230620-Caffyns-AR2021.indd 7221/06/2021 13:00:3221/06/2021 13:00:32Stock code CFYN 2021 carrying value & fair value £’000 2020 carrying value & fair value £’000 5,735 1,478 Group and Company Bank balances and cash equivalents All borrowings are denominated in sterling. The effective interest rates for all borrowings are based on bank base rates. Information regarding classification of balances and interest and the range of interest rates applied in the year to 31 March 2021 are set out in the following table: Current: within one year or on demand Overdraft Term loan Term loan Trade and other payables Not repayable within one year Term loan Term loan Revolving-credit facility Preference share capital Carrying value & fair value Classification Interest classification Interest rate range 3,000 Amortised cost 500 375 Amortised cost Amortised cost 37,551 Amortised cost Floating Floating Floating – Base rate + 1.80% VBBR* + 1.75% LIBOR** + 1.75% – Carrying value & fair value Classification Interest classification Interest rate range 1,000 6,188 5,000 812 Amortised cost Amortised cost Amortised cost Amortised cost Floating Floating Floating Fixed VBBR* + 1.75% LIBOR** + 1.75% LIBOR** + 1.80% – * Volkswagen Bank Base Rate, a base rate calculated by Volkswagen Bank United Kingdom Branch. ** London Interbank Offered Rate. The maturity of non-current borrowings is as follows: Group and Company Between one and two years Between two and five years Over five years At 31 March 2021 2021 £’000 11,688 500 812 2020 £’000 875 10,969 812 13,000 12,656 Maturities include lease liabilities and amounts drawn under revolving-credit facilities. The maturities of lease liabilities represent the undiscounted future repayments on those leases. The Company’s revolving-credit facility can continue to be drawn in whole or part at any time under a facility which will continue until 2023. The maturities of the revolving-credit facility represent the final payment dates for those drawn facilities as at 31 March 2023. If the amounts drawn at the year-end were redrawn at the Group’s usual practice of three-monthly drawings, the total cash outflows, assuming interest rates remain at the same rates as at year-end, are estimated on an undiscounted basis as follows: O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n Group and Company Within six months Six – twelve months More than twelve months Contractual cash flows www.caffyns.co.uk 30620-Caffyns-AR2021.indd 73 30620-Caffyns-AR2021.indd 73 30620 21 June 2021 1:00 pm Proof 5 2021 £’000 320 320 6,187 6,827 2020 £’000 308 308 5,659 6,275 73 21/06/2021 13:00:32 21/06/2021 13:00:32 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202121. Financial instruments continuedThe Group has a term loan with HSBC, entered into in March 2018, originally of £7.5 million, at a rate of interest of 1.75% above LIBOR. The loan has a five-year term and is repayable over 20 years. To assist in partially mitigating the impact of the covid-19 pandemic, HSBC agreed to suspend capital repayments on the term loan for the first and second calendar quarters of 2020. Therefore, the balance outstanding on this term loan at 31 March 2021 was £6.6 million (2020: £6.8 million) with capital repayments in the year of £0.28 million, rather than the usual £0.38 million. HSBC also make available to the Group a revolving-credit facility of £7.5 million at a rate of interest of 1.8% above LIBOR. This facility has a five-year term and expires in March 2023. The balance drawn as at 31 March 2021 was £5.0 million (2020: £4.0 million). These facilities are subject to covenants which are tested half-yearly with respect to debt/freehold property values and interest cover and which were passed at 31 March 2021. The failure of a covenant test would render these facilities repayable on demand at the option of the lender.The Group also has a bank term loan from Volkswagen Bank United Kingdom Branch, which carries a rate of interest of 1.75% above VBBR. The loan is repayable over its ten-year term which expires in December 2024. Similarly to HSBC, Volkswagen Bank suspended capital repayments on the term loan for the months of April, May and June 2020.No reduction in term loan or revolving-credit facilities is expected to apply consequent to the trading results for the year ended 31 March 2021.The Group also had £10.5 million of combined annual overdraft facilities (2020: £10.5 million) from HSBC and Volkswagen Bank United Kingdom Branch and these facilities are next due for renewal in August 2021. The directors have every expectation that these facilities will be renewed based on the current discussions with the relevant banks. The two overdrafts carry an interest rate of 1.85% above bank base rate and 2.64% above VBBR, respectively.The Group has granted security to HSBC and Volkswagen Bank United Kingdom Branch by way of a general debenture over its assets and a fixed charge over certain freehold property. The total value of those assets at 31 March 2021 in the Statement of Financial Position was £69.3 million (2020: £66.9 million). The Group has also granted security to its defined-benefit pension scheme by way of fixed charge over certain freehold property. This charge ranks in priority behind those charges granted to HSBC and Volkswagen Bank United Kingdom Branch.The ongoing costs associated with the bank facilities are included in finance expense (see note 6).The preference shares in issue do not have a maturity date as they are non-redeemable.22. Lease liabilitiesGroup and Company2021£’0002020£’000Deemed liabilityAt 1 April 20201,853 2,038 Additions in the year– 234 Interest charge for the year29 24 Lease payments(604)(443)At 31 March 20211,278 1,853 Due in less than one year495 491 Due after more than one year783 1,362 At 31 March 2021 1,278 1,853 74Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 7430620-Caffyns-AR2021.indd 7421/06/2021 13:00:3221/06/2021 13:00:32Stock code CFYN 23. Retirement benefit scheme Group and Company Description of scheme The Company operates a pension scheme, the Caffyns Pensions Scheme (“CPS”), providing benefits based on final pensionable pay until 31 March 2006. With effect from 1 April 2006, the Scheme closed to new entrants and all members in the final salary section were transferred to the career average section for future service and certain benefits were reduced. Depending on the proportion of pensionable pay purchased, the Company contribution rates varied between 4% and 15%. With effect from 1 April 2010 the Scheme closed to future accrual with all members transferred to a defined-contribution scheme for their future service. As part of the 2014 funding valuation it was agreed that the inflation measure used to set in-deferment and in-payment increases for pensions in excess of guaranteed minimum pensions would change from the Retail Prices Index to the Consumer Prices Index for members (or dependents of members) who were in service on or after 1 April 1991. The Trustees are responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme’s funding and investment strategy, in conjunction with the Company. The assets of the Caffyns Pensions Scheme, administered by Capita Employee Solutions, are held separately from those of the Company, being held in separate funds by the trustees of the Caffyns Pensions Scheme. The Scheme rules do not impose a restriction on the level of Scheme asset that may be reported under IAS 19. The Scheme has been registered with the Pensions Regulator and is subject to the scheme-specific funding requirements as outlined in UK legislation. The liabilities are determined by a qualified actuary based on triennial valuations using the projected unit method. The most recent completed valuation was at 31 March 2017 although, subsequent to the year-end, the next valuation ,effective from 31 March 2020, has been completed. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e Description of expected cash flows to and from the Scheme As part of the 31 March 2017 funding valuation the Trustees and the Company agreed a recovery plan with a view to eliminating the scheme-specific funding shortfall by 31 July 2028. Over the year to 31 March 2021 the Company contributed £527,000 (2020: £523,000) to fund the existing deficit of which £502,000 (2020: £491,000) was in relation to deficit-reduction contributions. Since the year-end, a new recovery plan has been agreed with the trustees. Over the year to 31 March 2022 the Company expects to contribute £1,750,000 in relation to deficit-reduction contributions. This expected contribution includes a one-off contribution of £1,000,000. In addition, the Company will continue to make contributions towards risk benefits and to meet the administrative expenses of the Scheme and its Pension Protection Fund levies. The liabilities of the Scheme are based on the current value of expected benefit payment cash flows to members of the Scheme over the next 70 to 80 years. The average duration of the liabilities is approximately 16 years. Expected benefit payments in the year to 31 March 2022 are £3,796,000. Risks to the Scheme The ultimate cost of the Scheme to the Company will depend upon actual future events rather than the assumptions made. Many of the assumptions made are unlikely to be borne out in practice and as such the cost of the Scheme may be higher, or lower, than disclosed. In general, the risk to the Company is that assumptions underlying the disclosures, or the calculation of contribution requirements, are not borne out in practice and the cost to the Company is higher than expected. More specifically, the Scheme exposes the Company to actuarial risks such as: • • Interest rate risk – the present value of the defined-benefit liability is calculated using a discount rate determined by reference to market yields of corporate bonds whereas the Scheme holds a mixture of investments. A decrease in market yield on high quality corporate bonds will increase the Company’s defined-benefit liability, although it is expected that this would be offset partially by an increase in the fair value of certain of the Scheme’s assets; Investment risk – the Scheme’s assets at 31 March 2021 are invested by an appointed fiduciary management company, SEI Investments (Europe). The investment in various types of asset funds is intended to reduce risk while maintaining planned returns; • Longevity risk – the Company is required to provide benefits for life for the members of the Caffyns Pensions Scheme. Increases in life expectancy of the members will increase the defined-benefit liability; • Inflation risk – a significant proportion of the defined-benefit liability is linked to inflation. An increase in the inflation rate will increase the Company’s liability. A portion of the Scheme’s assets are inflation-linked debt securities, which would mitigate some of the effect of inflation. The Company has applied IAS 19 Employee Benefits (Revised) to this scheme and the following disclosures relate to this Standard. The Company recognises any remeasurement (actuarial gains and losses) in each period in the Statement of Comprehensive Income. F i n a n c i a l s O t h e r i n f o r m a t i o n i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 75 30620-Caffyns-AR2021.indd 75 30620 21 June 2021 1:00 pm Proof 5 75 21/06/2021 13:00:32 21/06/2021 13:00:32 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202123. Retirement benefit scheme continuedResults of most recent actuarial valuationThe assumptions which have the most significant effect on the results of the valuation are those relating to rates of mortality, the discount rate used to reflect the present value of scheme liabilities, and the rate of inflation. As at the year-end, the last available actuarial valuation, as at 31 March 2017, showed that the market value of the assets of the Caffyns Pensions Scheme were £90.4 million and that the actuarial value of those assets represented 87% of the value of the benefits that had accrued to employees at that date. The deficit arising at 31 March 2017 of £13.5 million compared to a deficit of £9.5 million under IAS 19 and was due to different assumptions being adopted for the triennial valuation. The payments agreed with the trustees of the Caffyns Pensions Scheme under the recovery plan were for deficit-reduction cash payments to be made in the year ended 31 March 2018 of £480,000 with payments increasing annually from 1 April 2019 by the greater of 2.25% or the percentage increase in annual shareholder dividends paid until 31 July 2028.Since the year-end the actuarial valuation, effective 31 March 2020, has been completed and full details of this valuation will be reported on in the Company’s 2022 Annual Report. The costs and liabilities of the Caffyns Pensions Scheme are based on actuarial valuations. At the year-end, the latest available full actuarial valuation, carried out at 31 March 2017, was updated to 31 March 2021 by Willis Towers Watson, independent qualified actuaries, for the requirements of IAS 19. Details of the actuarial assumptions are as follows:20212020Mortality tables used: females97% of SAPS series 297% of SAPS series 2Mortality tables used: males100% of SAPS series 2100% of SAPS series 2Future improvements in mortalityCMI2020 + 1.25%CMI2018 + 1.25%Discount rate1.95%2.20%Inflation (CPI)2.75%1.75%Pension increase for in-payment benefits (CPI max 5%)2.70%1.90%The discount rate adopted is based upon the yields of high-quality corporate bonds of appropriate duration.The sensitivities regarding the principal assumptions used to measure scheme liabilities are set out below:AssumptionChange in assumptionImpact on scheme liabilitiesDiscount rateIncrease/decrease by 0.1%+/– £1.5 millionRate of inflationIncrease/decrease by 0.1%+/– £0.7 millionPension increasesIncrease/decrease by 0.1%+/– £1.0 millionMortalityIncrease/decrease by 0.1%+/– £4.8 millionThe fair value of assets of the Caffyns Pensions Scheme for each class of asset, all of which have a quoted market price in an active market, are as follows:Market value2021£’0002020£’000LDI fund16,89611,080Growth fund72,18169,500Equity instruments469501At 31 March 202189,54681,081A fiduciary manager, SEI Investments (Europe) operates with the objective of improving the performance of the assets of the Caffyns Pensions Scheme. Assets of the Scheme (excluding cash in the trustees’ administrative bank account) at 31 March 2021 were invested 19% (2020: 13%) in LDI funds, 80% (2020: 86%) in return enhancing growth funds and 1% (2020: 1%) in Caffyns plc shares.76Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 7630620-Caffyns-AR2021.indd 7621/06/2021 13:00:3321/06/2021 13:00:33Stock code CFYN In accordance with the requirements of IAS 19 Employee Benefits, the expected return on assets is based on the discount rate noted above of 2.70% and not the return on the underlying portfolio of investments. Consequently, the charge to the Income Statement for the year ending 31 March 2022 is expected to be approximately £202,000. Equity instruments include shares in Caffyns plc, which are detailed in note 25. The assumptions used by the actuary are the best estimates based on market conditions chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. Life expectancy at age 65 (in years): Member currently aged 65 Member currently aged 45 2021 Male 21.6 22.9 2021 Female 23.8 25.4 2020 Male 21.6 22.9 2020 Female 23.8 25.3 A liability for the defined-benefit pension scheme deficit is included in the Statement of Financial Position under the heading of non- current liabilities. Analysis of the movement in the net liability for defined-benefit obligations recognised in the Statement of Financial Position At 1 April 2020 Expense recognised in the Income Statement Contributions paid by the Company Net remeasurement recognised in other comprehensive income At 31 March 2021 Total expense recognised in the Income Statement Interest cost Interest income on Scheme assets Interest – net (see note 7) Current service cost Changes in the present value of the defined-benefit pension obligation At 1 April 2020 Service cost Interest cost Actuarial gains - experience Actuarial (gains)/losses – demographic assumptions Actuarial losses/(gains) – financial assumptions Benefits paid At 31 March 2021 2021 £’000 (9,434) (225) 526 (301) (9,434) 2021 £’000 1,946 (1,744) 202 23 225 2020 £’000 (8,576) (212) 523 (1,169) (9,434) 2020 £’000 2,100 (1,913) 187 25 212 2021 £’000 2020 £’000 90,515 95,421 23 1,946 (954) (198) 11,811 (4,163) 98,980 25 2,100 (365) 377 (2,887) (4,156) 90,515 In October 2018, the High Court issued a judgement which required pension schemes to equalise members’ benefits to address the unequal effect of Guaranteed Minimum Pensions between genders. In assessing the present value of the pension liabilities, an allowance for the liabilities to increase by 0.9% continue to be made for the estimated cost of this Guaranteed Minimum Pensions equalisation process. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s i l O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 77 30620-Caffyns-AR2021.indd 77 30620 21 June 2021 1:00 pm Proof 5 77 21/06/2021 13:00:33 21/06/2021 13:00:33 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202123. Retirement benefit scheme continuedMovement in the fair value of scheme assets2021£’0002020£’000At 1 April 202081,081 86,845 Interest income1,745 1,913 Actuarial losses/(gains) – financial assumptions10,357 (4,044)Contributions paid by the Company526 523 Benefits paid(4,163)(4,156)At 31 March 202189,546 81,081 Reconciliation of the impact of the asset ceilingThe Company has reviewed the implications of the guidance provided in IFRIC 14 and has concluded that it is not necessary to make adjustments to the IAS 19 disclosures at 31 March 2021 as any scheme surplus would be available to the Company unconditionally by way of a refund, assuming the gradual settlement of scheme liabilities over time until all members had left the Caffyns Pensions Scheme.24. Deferred taxGroup and CompanyThe following are the major deferred tax assets and liabilities recognised and the movements thereon during the current and prior reporting period.Accelerated taxdepreciation£’000Unrealised capital gains£’000Retirement benefit obligations£’000Tax losses£’000Short-termtemporary differences£’000RecoverableACT£’000Total£’000At 1 April 2019(928)(1,357)1,458 – (8)835 – Change in tax rates and prior year adjustments117 (409)17 – (1)– (276)Timing differences(131)76 (59)28 (14)– (100)Recognised in other comprehensive income– – 376 – – – 376 At 31 March 2020(942)(1,690)1,792 28 (23)835 – At 1 April 2020(942)(1,690)1,792 28 (23)835 – Change in tax rates and prior year adjustments1 – – (28)– – (27)Timing differences16 118 (57)– 4 301 382 Recognised in other comprehensive income– – 57 – – – 57 At 31 March 2021(925)(1,572)1,792 – (19)1,136 412 In the Spring Budget 2021, the Government announced that from 1 April 2023 the corporation tax rate will increase to 25%. As the proposal to increase the rate to 25% had not been substantively enacted at the balance sheet date, its effects are not included in these financial statements. However, it is likely that the overall effect of the change, had it been substantively enacted by the balance sheet date, would be to reduce the current deferred tax asset of £412,000 by £222,000 to £190,000.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 (2020: £1,136,000) and shadow ACT is £376,000 (2020: £845,000).78Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 7830620-Caffyns-AR2021.indd 7821/06/2021 13:00:3321/06/2021 13:00:33Stock code CFYN 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: Deferred tax liabilities Deferred tax assets At 31 March 2021 2021 £’000 (2,516) 2,928 412 2020 £’000 (2,655) 2,655 – 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 were no trading losses available for use in future periods (2020: £147,000). 25. Called up share capital Authorised 500,000 7% Cumulative First Preference shares of £1 each 1,250,000 11% Cumulative Preference shares of £1 each 3,000,000 6% Cumulative Second Preference shares of 10 pence each 4,000,000 Ordinary shares of 50 pence each At 31 March 2021 Allotted, called up and fully paid 170,732 7% Cumulative First Preference shares of £1 each 441,401 11% Cumulative Preference shares of £1 each 2,000,000 6% Cumulative Second Preference shares of 10 pence each Total preference shares recognised as a financial liability (see note below) 2,879,298 Ordinary shares of 50 pence each At 31 March 2021 2021 £’000 500 1,250 300 2,000 4,050 171 441 200 812 1,439 2,251 2020 £’000 500 1,250 300 2,000 4,050 171 441 200 812 1,439 2,251 At 1 April 2020, the Company held 2,879,298 Ordinary shares with 184,508 shares held in treasury. During the year 586 of these shares were utilised for options exercised under the 2017 SAYE scheme. Shares held in treasury at 31 March 2021 were 183,922. No treasury shares were utilised in the prior year. The remaining treasury shares are held to fulfil the requirements of the current, and any future, Company Save As You Earn schemes for eligible employees. The market value of these shares at 31 March 2021 was £644,000 (2020: £517,000). Dividend income from, and voting rights on, the shares held in treasury have been waived. The 7% Cumulative First Preference shares have rights to a fixed dividend and, in the event of a winding-up, a priority to the Ordinary shares for a capital repayment. The shares do not have voting rights. The 11% Cumulative Preference shares have rights to a fixed dividend and, in the event of a winding-up, a priority to the Ordinary shares for a capital repayment. The shares do not have voting rights. The 6% Cumulative Second Preference shares continue to have voting rights (one vote per Second Preference share) except in relation to matters which under the Listing Rules, as amended from time to time, are required to be voted on only by premium-listed securities, being the Ordinary shares. Although the Articles of Association of the Company give the directors discretion to pay the preference dividend only if they consider there are adequate profits, such dividends are cumulative. For this reason, the directors consider that the preference shares have the characteristic of a financial liability rather than equity, and consequently the preference shares are included as a non-current liability. None of the preference shares have rights of conversion or rights to capital repayment. O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 79 30620-Caffyns-AR2021.indd 79 30620 21 June 2021 1:00 pm Proof 5 79 21/06/2021 13:00:33 21/06/2021 13:00:33 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202126. Share-based paymentsYear of grantExercisepriceExercisedateNumber at1 April2019IssuedCancelledNumber at31 March 20202017£3.99September 2020106,330– (20,958)85,372Year of grantExercisepriceExercisedateNumber at1 April2020IssuedLapsedNumber at31 March 20212017£3.99September 202085,372(586)(84,786)–2020£3.06February 2024–101,926 – 101,926All grants made under the Company’s Save As You Earn schemes are for periods of three years and vest in ordinary shares. The market value of the shares at the date of the grant of the 2017 Save As You Earn scheme options was £4.99 and at the date of the grant of the 2020 Save As You Earn scheme options was £3.85. The fair value of the grants made under the SAYE scheme is charged to the Income Statement over the vesting period based on the valuation derived from an adjusted Black-Scholes model. The volatility factor for movements in the Company’s share price used in the valuation model was estimated at 65%.At the exercise date of the 2017 grant the exercise price was above the current market price of the Company’s ordinary shares. As a result, only 586 options were exercised with the remaining options lapsing.The total expense included within operating profit relating to share-based payments for the year was £37,000 (2020: £56,000), with an associated tax credit to the Income Statement and Equity of £7,000 (2020: £11,000).27. Notes to the cash flow statementGroup and Company2021£’000Restated2020£’000Profit before tax for the year1,424103Adjustments for net finance expense1,4681,5692,8921,672Adjustments for:Depreciation of property, plant and equipment, investment properties and right-of-use assets1,9821,793Impairment against investment properties184–Cash payments into the defined-benefit pension scheme(526)(523)Loss on disposal of property, plant and equipment32Share-based payments3756Operating cash flows before movements in working capital4,5723,000Decrease/(increase) in inventories3,484(309)(Increase)/decrease in receivables(754)4,479Increase/(decrease) in payables697(6,467)Cash generated by operations7,999703Tax paid, net of refunds(31)(147)Interest paid(1,244)(1,358)Net cash derived from/(absorbed) operating activities6,724(802)All interest payments are treated as operating cash movements as they arise from movements in working capital. 80Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 8030620-Caffyns-AR2021.indd 8021/06/2021 13:00:3321/06/2021 13:00:33Stock code CFYN Reconciliation of debt Group and Company: At 1 April 2019 Cash movement At 31 March 2020 Current liabilities Non-current liabilities At 31 March 2020 At 1 April 2020 Cash movement At 31 March 2021 Current liabilities Non-current liabilities At 31 March 2021 Bank loans £’000 9,500 (781) 8,719 875 7,844 8,719 8,719 (657) 8,062 875 7,187 8,062 Revolving credit facilities £’000 8,000 1,000 9,000 5,000 4,000 9,000 9,000 (1,000) 8,000 3,000 5,000 8,000 Lease liabilities £’000 2,038 Preference shares £’000 812 Liabilities arising from financing activities £’000 20,350 Bank and cash balances £’000 (3,908) (185) 1,853 491 1,362 1,853 1,853 (575) 1,278 495 783 1,278 – 812 – 812 812 812 – 812 – 812 812 34 20,384 6,366 14,018 20,384 20,384 (2,232) 18,152 4,370 13,782 18,152 2,430 (1,478) (1,478) – (1,478) (1,478) (4,257) (5,735) (5,735) – (5,735) O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e Net debt £’000 16,442 2,464 18,906 4,888 14,018 18,906 18,906 (6,489) 12,417 (1,365) 13,782 12,417 28. Related parties The remuneration of directors, who are key management personnel, is set out in note 5 for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual directors is provided in the Directors’ Remuneration Report on pages 27 to 32. The 2,000,000 6% Cumulative Second Preference shares have full voting rights along with the Ordinary shares, except in relation to matters which under the Listing Rules, as amended from time to time, are required to be voted on only by premium-listed securities, being the Ordinary shares. These Cumulative Second Preference shares are beneficially owned by Caffyn Family Holdings Limited (“Holdings”). Mr S G M Caffyn and Ms S J Caffyn are directors of Holdings. The whole of the issued share capital of Holdings is held by close relatives of those directors. Holdings controls directly 42.6% (2020: 42.6%) of the voting rights of Caffyns plc. The directors and shareholders of Holdings are also beneficial holders of 535,481 (2020: 535,481) Ordinary shares in Caffyns plc representing a further 11.4% (2020: 11.4%) of the voting rights. It is therefore considered that the Caffyn family is the ultimate controlling party. As required under the Stock Exchange Listing Rules, the Company entered into a Relationship Agreement with Holdings on 6 November 2014 whereby Holdings undertakes to the Company that it shall exercise its voting rights and shall exercise all its powers to ensure, so far as it is properly able to do so, that its associates shall exercise their respective voting rights and exercise all their respective powers to ensure, to the extent that they are able by the exercise of such rights to procure, that: a) transactions and arrangements between any member of the Company and Holdings (and/or any of its associates) will be conducted at arm’s length and on normal commercial terms; b) neither holdings nor any of its associates will take any action that would have the effect of preventing the Company from complying with its obligations under the Listing Rules; and c) neither Holdings nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules. Directors of the Company and their immediate relatives control 14.0% (2020: 16.4%) of the issued Ordinary share capital of the Company. No dividends were paid to directors in the year (2020: £25,188). F i n a n c i a l s O t h e r i n f o r m a t i o n i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 81 30620-Caffyns-AR2021.indd 81 30620 21 June 2021 1:00 pm Proof 5 81 21/06/2021 13:00:33 21/06/2021 13:00:33 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202128. Related parties continuedCaffyns Pension SchemeDetails of contributions are disclosed in note 23.The Caffyns Pension Scheme held the following investments in the Company:Fair value2021£’0002020£’000Shares held:125,570 (2020: 125,570) Ordinary shares of 50 pence each43935212,862 (2020: 12,862) 11% Cumulative Preference shares of £1 each2020At 31 March 2021459372During the year to 31 March 2021, the Company paid management fees of £410,000 (2020: £249,000) on behalf of the Caffyns Pension Scheme. These costs comprised the Pension Protection Fund levy, actuarial advisory fees and external administration fees.29. Leases as a lessorThe Group’s interest in leasesAt 31 March 2021 the Company had an interest in a single lease. The total future minimum lease receipts payable are:Group and Company2021£’0002020£’000Within one year185185In two to three years185185In three to four years185185In four to five years185185Beyond five years782628181,002The finance income on the net investment in the lease was £7,000 (2020: £3,000).Group and Company2021£’0002020£’000Gross undiscounted cash flows818 1,002 Unearned finance income(88)(94)Net investment in lease730 908 The Group as lessor – operating leasesThe Company’s gross property rental income earned during the year from the direct lease of three (2020: three) investment properties owned by the Group was £710,000 (2020: £708,000). No contingent rents were recognised in income (2020: £nil).At 31 March 2021 there were contracts for land and buildings with tenants for the following lease rentals receivable:Group and Company2021£’0002020£’000Within one year311 516In two to three years237 224In three to four years237 224In four to five years209 198Beyond five years1,570 1,7052,564 2,86782Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 8230620-Caffyns-AR2021.indd 8221/06/2021 13:00:3321/06/2021 13:00:33Stock code CFYN 30. Capital commitments Neither the Group nor the Company had any capital commitments at 31 March 2021 (2020: £nil). 31. 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: O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e (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 ?” Judgement 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 judgement 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. F i n a n c i a l s O t h e r i n f o r m a t i o n Accordingly, no provision for liability has been made in these financial statements. i F n a n c a s i l O t h e r i f n o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 83 30620-Caffyns-AR2021.indd 83 30620 21 June 2021 1:00 pm Proof 5 83 21/06/2021 13:00:34 21/06/2021 13:00:34 30620 21 June 2021 1:00 pm Proof 5Notes to the Financial Statements continuedfor the year ended 31 March 202132. Critical accounting judgements and estimates when applying the Company’s accounting policiesJudgements 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 obligationThe 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. At 31 March 2021, the net liability included in the Statement of Financial Position was £9.4 million (2020: £9.4 million).ImpairmentThe carrying value of property, plant and equipment and goodwill are tested annually for impairment as described in notes 11, 12, 13 and 15. 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 15). As a result of this review the directors considered that a single impairment of £184,000 was required to the carrying value of one property asset (2020: no impairment charges) (see notes 11, 12, 13 and 15).Surplus ACT recoverableThe 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. 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 arrangementsOn 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 2023.84Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 8430620-Caffyns-AR2021.indd 8421/06/2021 13:00:3421/06/2021 13:00:34Five Year Review (adjusted for discontinued operations) Income Statement Revenue Underlying operating profit Finance expense Underlying profit before tax Non-underlying items Profit before tax from discontinued operations Profit/(loss) before tax Profit/(loss) after tax Basic earnings/(deficit) per ordinary share Underlying earnings/(deficit) per ordinary share Dividend per ordinary share payable in respect of the year Stock code CFYN 2017 £’000 Restated 2018 £’000 2019 £’000 Restated 2020 £’000 2021 £’000 212,581 215,868 209,246 195,787 165,085 2,981 (930) 2,051 (392) 4,623 6,282 5,123 186.3p 58.0p 22.50p 2,325 (935) 1,390 (225) – 1,165 1,030 38.2p 45.6p 22.50p 2,626 (1,181) 1,445 (1,873) – (428) (566) (21.0)p 35.3p 22.50p 1,633 (1,382) 251 (148) – 103 (252) (9.4)p (4.9)p 7.50p These results are shown exclusive of the Land Rover business, which was sold in April 2016. As at year-end Shareholders’ funds Property, plant and equipment* Bank overdrafts and loans (net) 28,326 42,609 8,554 27,913 46,957 14,000 27,975 47,394 13,592 26,380 46,835 16,241 Bank overdrafts and loans/shareholders’ funds (gearing) 30% 50% 49% 62% Retirement benefit liability 8,554 9,497 8,576 9,434 * Represents property, plant and equipment and investment properties 3,142 (1,266) 1,876 (452) – 1,424 1,410 52.4p 66.0p 0.00p 27,586 45,375 10,327 37% 9,434 O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 85 30620-Caffyns-AR2021.indd 85 30620 21 June 2021 1:00 pm Proof 5 85 21/06/2021 13:00:34 21/06/2021 13:00:34 30620 21 June 2021 1:00 pm Proof 5Our dealershipsAUDI BRIGHTON: EASTBOURNE: WORTHING: 200 Dyke Road, Brighton, BN1 5AT (01273 553061) Edward Road, Eastbourne, BN23 8AS (01323 525700) Roundstone Lane, Worthing, BN16 4BD (01903 231111)MG ASHFORD: Monument Way, Orbital Park, Ashford, TN24 0HB (01233 504620)LEVC EASTBOURNE: Lottbridge Drove, Eastbourne, BN23 6PJ (01323 418312)LOTUS ASHFORD: Monument Way, Orbital Park, Ashford, TN24 0HB (01233 504630)SEAT TUNBRIDGE WELLS: North Farm Industrial Estate, Tunbridge Wells, TN2 3EL (01892 515700)SKODA ASHFORD: TUNBRIDGE WELLS: The Boulevard, Ashford, TN24 0GA (01233 504600) North Farm Industrial Estate, Tunbridge Wells, TN2 3EL (01892 515700)VAUXHALL ASHFORD: Monument Way, Orbital Park, Ashford, TN24 0HB (01233 504604)VOLKSWAGEN BRIGHTON: EASTBOURNE: HAYWARDS HEATH: WORTHING: Victoria Road, Portslade, BN41 1YD (01273 425600) Lottbridge Drove, Eastbourne, BN23 6PW (01323 647141) Market Place, Haywards Heath, RH16 1DN (01444 451511) Nightingale Avenue, Worthing, BN12 6FH (01903 837878)VOLVO EASTBOURNE: WORTHING: Lottbridge Drove, Eastbourne, BN23 6PJ (01323 418300) Palatine Road, Worthing, BN12 6JH (01903 507124)MOTORSTORE ASHFORD: Monument Way, Orbital Park, Ashford, TN24 0HB (01233 504624)HEAD OFFICE EASTBOURNE: Meads Road, Eastbourne, BN20 7DR (01323 730201)86Caffyns plc Annual Report 202130620-Caffyns-AR2021.indd 8630620-Caffyns-AR2021.indd 8621/06/2021 13:00:3521/06/2021 13:00:35Stock code CFYN O u r i B u s n e s s O u r B u s i n e s s G o v e r n a n c e G o v e r n a n c e i F n a n c a s l i O t h e r i f n o r m a t i o n F i n a n c i a l s O t h e r i n f o r m a t i o n www.caffyns.co.uk 30620-Caffyns-AR2021.indd 3 30620-Caffyns-AR2021.indd 3 30620 21 June 2021 1:00 pm Proof 5 C 21/06/2021 13:00:43 21/06/2021 13:00:43 C a f f y n s p l c A n n u a l R e p o r t 2 0 2 1 Caffyns plc Meads Road Eastbourne East Sussex BN20 7DR www.caffyns.co.uk 30620-Caffyns-AR2021.indd 3 30620-Caffyns-AR2021.indd 3 30620 21 June 2021 1:00 pm Proof 5 21/06/2021 13:00:05 21/06/2021 13:00:05

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