The directors present the strategic report for the year ended 31 December 2022.
The group continues to operate as a new build contractor and developer, we work across the Greater Manchester and wider Northwest region creating new homes and communities predominantly for the affordable housing market.
The affordable housing sector remains, as always, highly competitive and following two years of instability caused by the Covid-19 pandemic, the industry continued to face severe inflationary pressures during 2022. The inflationary pressures in the construction sector have been greater than in many other sectors with construction particularly affected by the energy crisis created through the Russian invasion of Ukraine. Inflation pressures have affected both supply and labour availability, in particular on those fixed price build contracts agreed in 2020 and 2021.
Whilst the business has successfully navigated the financial challenges presented by older developments agreed prior to and during the Covid-19 pandemic, with many of these being completed during the year, difficulties have been encountered on one ongoing development. The desire from our clients for fixed price contracts, which do not permit adjustments to reflect inflationary pressures, can result in a squeezing of margin, and turn profit making contracts into loss making ones. The business has just one such contract and this contract has been recognised as onerous during the year, which has led to the full anticipated loss being recognised in these accounts. The business reviews upcoming schemes on a project by project basis and now includes inflation price adjustment clauses where the risk deems this necessary.
Despite the challenges caused by this contract, it is pleasing to see the business continue to deliver profitable developments in a challenging market. This allows us to continue to deliver our growth plans and further contribute to remedying the affordable housing crisis in the region. During the year we handed over 279 affordable homes, a record number for the business, and we finished the year with 466 homes under construction.
We continue to secure developments predominantly through land and build packages, but have also secured a number of projects through competitive tender. Looking into 2023 and beyond the business is in a strong position, a large pipeline of work has allowed further developments to commence in 2023 and further opportunities to be secured. During late 2022 our planning appeal against the refusal of a major development for 255 homes and a canal restoration in Little Lever, we were successful in this appeal and planning consent was granted in early 2023. This project is one of a number of developments set to start on site during 2023. The secured projects means the business has in excess of 1,000 affordable homes waiting to start on site.
Despite the financial challenges facing the industry we believe it is right to continue to support our charitable partners and the valuable works they undertake. We have continued to support the Mustard Tree during the year, a Manchester based charity which operates with the aim of reducing and tackling the causes of poverty and homelessness across the city. Since beginning to support the charity in 2017 we have provided donations of over £150,000.
In addition to this we work closely with our development and charity partners to provide pathways into construction through work placements and apprenticeships. We believe that only apprenticeships can address the long term skills shortage facing all roles within the construction industry and our people teams work hard to provide apprenticeship programmes of the highest quality. Our commitment to apprentices saw new roles being created during 2022 and support provided to our supply chain to enable them to provide apprentices across our development sites. Our growing pipeline of work provides opportunity to further expand our social value offering in this area.
We monitor the performance of the group on a range of Key Performance Indicators throughout the financial year:
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2022.
The results for the year are set out on page 9.
Ordinary dividends were paid amounting to £93,280. The directors do not recommend payment of a further dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The auditor, PM+M Solutions for Business LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
We have audited the financial statements of Watson Construction (Holdings) Ltd (the 'parent company') and its subsidiaries (the 'group') for the year ended 31 December 2022 which comprise the group statement of comprehensive income, the group balance sheet, the company balance sheet, the group statement of changes in equity, the company statement of changes in equity, the group statement of cash flows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
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 are independent of the group and 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, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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.
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 and 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.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report. 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.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our 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 the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.
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 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.
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 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 parent company or to cease operations, or have no realistic alternative but to do so.
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.
Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, 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.
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we have considered the following:
the nature of the industry and sector, control environment and business performance including the design of the Company's remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
results of our enquiries of management about their own identification and assessment of the risks of irregularities;
the matters discussed among the audit engagement team including significant component audit teams and involving relevant specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud; and
any matters we identified having obtained and reviewed the Company's documentation of their policies and procedures relating to:
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: timing of recognition of commercial income, posting of unusual journals and complex transactions; and manipulating the Group's performance to meet targets. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the Company operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included UK Companies Act, employment law, health and safety, pensions legislation and tax legislation.
Audit response to risks identified
Our procedures to respond to risks identified included the following:
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;
enquiring of management concerning actual and potential litigation and claims;
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
reading minutes of meetings of those charged with governance and reviewing correspondence with HMRC; and
in addressing the identified risks of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the 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 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 company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
As permitted by s408 Companies Act 2006, the company has not presented its own profit and loss account and related notes. The company’s profit for the year was £386,457 (2021 - £124,132 loss).
In the application of the group’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
Construction contract profitability is assessed on a contract by contract basis using the total contract value less costs incurred to date and expected future costs to completion. Completion percentage of each contract is determined by the level of costs incurred at the reporting date as a percentage of the expected total costs of the contract. Calculation of these requires judgements which includes forecasted costs based on site designs and prior industry knowledge.
Amortisation and depreciation are recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases. These estimates require judgement to assess what the useful lives of the assets are.
Retentions are recognised at transactions price and are subsequently carried at amortised cost using the effective interest method. Where the effect of the using the effective interest method is not material to the financial statements or financial assets classified as receivable within one year are not amortised. At the reporting date judgements are made over the need for provisions against the recoverable amount.
Investment property valuation is determined off a judgement from directors. All investment properties are recognised at fair value and any changes in valuation is recognised in profit or loss.
Watson Construction (Holdings) Ltd (“the company”) is a private limited company domiciled and incorporated in England and Wales. The registered office is Spark Studio, 208-210 Clowes Street, Salford, Manchester, M7 2ZS.
The group consists of Watson Construction (Holdings) Ltd and all of its subsidiaries.
These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
The financial statements have been prepared under the historical cost convention, modified to include the revaluation of investment properties. The principal accounting policies adopted are set out below.
The consolidated group financial statements consist of the financial statements of the parent company Watson Construction (Holdings) Ltd together with all entities controlled by the parent company (its subsidiaries) and the group’s share of its interests in joint ventures and associates.
All financial statements are made up to 31 December 2022.
All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
At the time of approving the financial statements, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Thus the directors continue to adopt the going concern basis of accounting in preparing the financial statements.
Turnover is recognised at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, and is shown net of VAT and other sales related taxes. The fair value of consideration takes into account trade discounts, settlement discounts and volume rebates.
Revenue from construction contracts is recognised by reference to the stage of completion when the stage of completion, costs incurred and costs to complete can be estimated reliably. The stage of completion is calculated by comparing costs incurred, mainly in relation to contractual hourly staff rates and materials, as a proportion of total costs. Where the outcome cannot be estimated reliably, revenue is recognised only to the extent of the expenses recognised that it is probable will be recovered.
Construction contract revenue is recognised in line with the specific accounting policy 1.13 below.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is recognised in the profit and loss account.
Equity investments are measured at fair value through profit or loss, except for those equity investments that are not publicly traded and whose fair value cannot otherwise be measured reliably, which are recognised at cost less impairment until a reliable measure of fair value becomes available.
In the parent company financial statements, investments in subsidiaries, associates and jointly controlled entities are initially measured at cost and subsequently measured at cost less any accumulated impairment losses.
A subsidiary is an entity controlled by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.
At each reporting period end date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the company estimates the recoverable amount of the cash-generating unit to which the asset belongs.
The carrying amount of the investments accounted for using the equity method is tested for impairment as a single asset. Any goodwill included in the carrying amount of the investment is not tested separately for impairment.
At each reporting date, an assessment is made for impairment. Any excess of the carrying amount of stocks over its estimated selling price less costs to complete and sell is recognised as an impairment loss in profit or loss.
The group has elected to apply the provisions of Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments Issues’ of FRS 102 to all of its financial instruments.
Financial instruments are recognised in the group's balance sheet when the group becomes party to the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the group transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, loans from fellow group companies and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Financial liabilities are derecognised when the group's contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the group are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the group.
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account 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 group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.
Deferred tax liabilities are generally recognised for all timing differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Such assets and liabilities are not recognised if the timing difference arises from goodwill or from the initial recognition 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 reporting 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 profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset if, and only if, there is a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.
The costs of short-term employee benefits are recognised as a liability and an expense, unless those costs are required to be recognised as part of the cost of stock or fixed assets.
The cost of any unused holiday entitlement is recognised in the period in which the employee’s services are received.
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.
Rentals payable under operating leases, including any lease incentives received, are charged to profit or loss on a straight line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
Government grants are recognised at the fair value of the asset received or receivable when there is reasonable assurance that the grant conditions will be met and the grants will be received.
Where a grant does not specify performance conditions it is recognised in income when the proceeds are received or receivable. A grant received before the recognition criteria are satisfied is recognised as a liability.
Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting end date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting end date. Gains and losses arising on translation in the period are included in profit or loss.
Other non-distributable reserve
The cumulative fair value movements in respect of investment properties, including fair value movements initially reflected in profit and loss, which are then transferred via a reserve movement between profit and loss account reserve and the other non-distributable reserve.
During the year, the group received £Nil (2021 - £2,505) from the government as part of the coronavirus job retention scheme.
The average monthly number of persons (including directors) employed by the group and company during the year was:
Their aggregate remuneration comprised:
The actual (credit)/charge for the year can be reconciled to the expected (credit)/charge for the year based on the profit or loss and the standard rate of tax as follows:
The valuations were made by the Directors as at 31 December 2022, on an open market value basis.
The carrying value of land and buildings comprises:
Details of the company's subsidiaries at 31 December 2022 are as follows:
At 31 December 2022, retentions held by customers for contract work amounted to £1,830,775 (2021 - £1,657,067). At 31 December 2022, amounts of £457,694 (2021 - £416,047) included in trade debtors and arising from construction contracts are due for settlement after more than 12 months.
Included in other creditors as at the year ended 31 December 2022 is a loan balance of £Nil (2021: £5,000) owed to Watson Construction Pension Scheme. The pension scheme has a first charge over assets owned by the group. Also included within other creditors is an amount due to directors £19,636 (2021 - £19,636), that is interest free and repayable on demand.
Included within accruals is a gross amount due to customers for contract work as a liability £1,936,094 (2021 - £1,262,252).
Bank loans are secured by a fixed and floating charge over the company.
The following are the major deferred tax liabilities and assets recognised by the group and company, and movements thereon:
A defined contribution pension scheme is operated for all qualifying employees. The assets of the scheme are held separately from those of the group in an independently administered fund.
The holders of the preference shares are entitled to be paid a fixed cumulative preferential dividend at the rate of £10,000 per annum. The preferential dividend shall be paid quarterly on January 31, April 30, July 31 and October 31.
In the event of a winding up, the holders of these shares shall be entitled to repayment of a sum equal to the nominal capital paid up or credited as paid up on the preference shares held by them respectively, together with a sum equal to all arrears and accruals of the preferential dividend.
The holder of preference shares shall have the right to receive notice of, attend, speak and vote at a General Meeting of the company only if and when the preferential dividend on such shares is six months or more in arrears or the preference shares required to be redeemed, or if a resolution is to be proposed abrogating, varying or modifying any of the rights or privileges of the holders, or for the winding-up of the company, or for sanctioning the sale of the company. Otherwise, the holders shall not have the right to receive notice of, attend, speak or vote at any General Meeting of the company.
When the holders are entitled to vote, every such holder who is present in person or by proxy or by a representative shall have one vote in respect of each fully-paid preference share registered in the name of such holder.
The company shall have the right to redeem at any time and from time to time during the period commencing on 1 November 2015 and ending on 31 December 2030 all or any of the preference shares for the time being issued and outstanding, upon giving the holders at least 28 days' prior notice in writing of the redemption date. Any partial redemption shall be effected in proportion to the members' respective holdings. There shall be paid on each preference share redeemed the amount paid up on such preference share together with a sum equal to all arrears and accruals of the preferential dividend to and including the redemption date. The company shall redeem on 31 December 2030 all of the preference shares in issue on that date. The amount paid will be as specified above.
The above transfer from retained earnings is the revaluation surplus arising in the year, shown net of the deferred taxation charge £14,583 (2021 - £46,800) and realisation of investment property disposal £17,117 (2021 - £Nil).
At the reporting end date the group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
During the year the group incurred rental expense with Watson Construction Pension Scheme amounted to £25,000 (2021 - £25,000).