So You Want to be a Dragon?

So you would like to be like the Dragon's Den team on TV and have your own portfolio of investments in private small businesses?

Good. Because now everyone has a chance to be a real Dragon. This month's IOD Director Magazine features an article about an innovative and exciting new way for entrepreneur's to attract inward investment and for small investors to get a piece of the action. Set against the backdrop of banks unwilling to lend to small businesses, despite what was being said yesterday, who have solid orders and decent business plans because they have no collateral assets upon which to secure the loans, you now have the chance to make your own decisions based on these facts.

Enter Crowdcube.com, the new website and private investor club who specialise in investing in small businesses with big ideas. It's just like Dragon's Den in terms of the range of business types and what people are asking for and there is something for everyone. Rather than behaving like some arrogant tosspot for the TV's sake, you can either use your own judgement or just gamble with a minimum investment of just £50 in a single company.

Crowdcube is free to join but read the legal stuff at the beginning diligently and, just like the TV show, none of this amateur investing is governed by the FSA. So you are investing on your own judgement and you can lose the lot with no comebacks. This is real world stuff and not for the fainthearted.

Crowdcube acts pretty much like an angel network but investors can speculate on a small level and spread their money across several interesting ideas if they wish. There is a forum for chatting over ideas and there is an easy feel to the whole thing that makes you feel as if you are anything like small minded or have to be 'Bertie Big Bollocks' in order to invest in non quoted companies. It also means that you are part of small groups of investors in new ideas which are the lifeblood of the UK economy when Private Equity trade in buying and selling companies only and banks are more interested in trading debt. Without investment in simple ideas then Britain will not continue to replenish the 97% of all companies that make up this economy.


What frustrates about the stories at Crowdcube, such as Bubble & Balm who are seeking to raise £75,000, is that banks won't lend to the company because the owner, Sue Acton, has been wise enough to outsource manufacture and so has little or no tangible assets in the business. Banks shun this because there is no 'security' despite the fact the company has contracts with the likes of Waitrose and a niche corner of the market that could grow via the internet globally.
In the same issue of Director, a letter pleads in favour of bankers making £8m bonus and that we should applaud them for wealth creation but it is businesses like Bubble & Balm who make up the vast majority of the companies that trade and pay taxes in this country. Innovation is deemed not to be ideas like Sue Acton's but ideas to buy and sell companies like Boots to create wealth and we have to break that mentality in this country or to just believe it is about creating technology based companies.

Trade is crucial to our future. I think Crowdcube gives us the opportunity to be investors in the country's future and to build a portfolio as good as those who have the TV image for far less outlay.

Go onto the website, talk to the founder, Darren Westlake and see what you think. But remember, as with any investment, do your homework diligently. Bubble & Balm is one thing, snake oil is something quite different.

A Month Is A Long Time

I am happy to say I have enjoyed a month away from writing as I have been lucky enough to become a father for the first time at my ripe age. It's been a very rewarding time.

Not much has changed around us, if truth be told. I thought Gordon Brown's performance in the Chilcot Enquiry was cynical beyond belief when even ex-Ministers, let alone ex-heads of Services, have already told everyone that the UK troops have been denied vital equipment through budget restraints. It just seems that lying to the Enquiry is perfectly acceptable and Brown is playing a 'It's your word against mine' routine. I just hope that documents to be reviewed by the Enquiry actually discover what actually went on and that the word of a defunct PM is not taken as gospel.

Brown has told us that we still have a long road to go on the economic crisis and cuts should not be implemented right now for fear of upsetting the delicate recovery. His precise judgement, which has served us so dreadfully in terms of a ballooning budget deficit which is growing faster than he predicts each month, is that at approximately midday on 10 May will be the exactly time when a tumult of cuts will be finally be required - uncannily that is almost certainly to be one day after the election result is known. How spookily cynical is that?

Meanwhile, the IOD and CBI have urged the Government to start making cuts immediately as the budget deficit seems to be completely on its own spiral with Alistair Darling completely unable to predict where it will be month on month let alone in 2014. It's laughable but somehow on the back of this and the appalling news in Afghanistan and the lies about Iraq, the Government has closed the gap in the Polls to just 2 points.

The old Mandelson Magic is at work - our brains are washed. If we really do think things are ok, then we are barking mad.

Taxing Problems

While it may help soothe internal feeling about bankers by taxing them heavily for a short period, the reality is that the problem of banks running extreme risks in their business is not solved and we run the risks of other problems.

John Varley, CEO of Barclays, who did not use taxpayers' money to prop up their company in the Crunch, has said that using tax as a stick short and long term is not a solution. His argument is that it drives 'talent' away from Britain. Personally, I really don't care if unaccountable people who thrive on big bucks set up their own island somewhere in the Pacific to go race their fast cars and talk about the size of their wallets or purses. But I do care that if we do not fix the fundamental problems in the financial system, it makes not a jot of difference to the banks where they locate their staff just as long as they can earn big money - and so driving people away from the UK doesn't actually help us.

If the Taliban all dropped their weapons tomorrow, turned themselves in and embraced Christianity without a further shot being fired we might think this a victory but it isn't going to happen on the current tactics employed. Likewise, banking will find a way to continue what it does unless we tackle the underlying problems - it will also find a way to continue doing what they do to earn billions in scam profits and reward a thin wedge of staff beyond all sense of reality in some way or another. They can afford to as there are huge profits at stake and, frankly, we have shown that we cannot do without the banks. A compromise will be found or loopholes used - either way, banking will get what it wants in some place or another.

The UK Government's headline-grabbing move to tax bankers and high earners generally will not have the desired effect. Firstly, only £550m is expected to be raised on the windfall tax and secondly, high earners will find loopholes in the 50% tax on £150k or above - accountants and lawyers are hard at it as we speak, communicating openly on how to 'mitigate tax' on websites as legitimate as the IOD's.

Tax is a useless and archaic system in driving behaviour. As with speed cameras, it is a way to make money out of transgressions but it does not stop dangerous driving which can be done even at low speeds. So too, heavy tax on bankers merely makes a few bob to assuage public opinion but it does not stop the banks trading products that will cause the next bank meltdowns and even harder economic times while staff cream off ridiculous profits. In fact, unless we fundamentally reform what banks do, before we have paid off the bills for this time around, the next bill will be on us. You see, taxing them this way ultimately will get transferred to us anyway by the fact that they will continue to do what they do to cause financial meltdowns.

If the tax burden gets too high, ultimately it will drive people out of the country. The most able to pay will leave, transferring the burden back onto the people who did not cause the problem. The non-domicile rules will ring fence high earners at one end of the spectrum and banking havens will arise nearby fairly soon.

Fundamental reform of banks is what is needed. I applaud the splitting of investment and retail banking as a start - too often staff in retail banking pay with their jobs for the idiots in the investment banking side and the cash is used to hide the activities of the investment arms. But trading debt should be rigidly reformed so that complex, structured products cannot be used to hide poor asset valuations and debt management, creating a convoluted web that no one, even in the banks, understands. Wholesale money markets should not be used to prop up banks' activities, it is not a question of ratios it is far more fundamental than that.

Until we get some people with real sense and courage into the banking industry, regulators and Government who aren't so rich that their views are biased then we will always have this stupid attitude of tax being the tool to solve any problem.

The problem is that taxpayers have to pay for the mistakes. If we, the taxpayers, held people accountable for the money they use from our personal wealth pots, then people like Andy Hornby, Fred Goodwin, Alistair Darling, Gordon Brown and Hector Sants would be flipping burgers at McDonalds learning the basics of business by now - paying tax like the rest of us and ranting at the their former colleagues in the banks.

Layer Upon Layer

I recently took part in a survey of what things I felt could be done to help Britain reduce its borrowing. Hold your horses - it was neither the front bar of a pub nor was it in the corridors of power. It was an online thing in one of the networks I use.

So the results are hardly likely to go anywhere. However, I have to say that some of the thoughts seem to resonate with those of others and the broad consensus of agreement is that there were many, many ways for the country to save money and reduce borrowing long before we actually impact services.

The first and most obvious way to reduce costs is simply to look at the layers of structure that exist both within public service departments and Government itself. Over 1 in 4 jobs are now in the public sector and this is warning enough. But when you start looking at the complex web of management structures and communication bridges, quangos and the like you suddenly get very depressed at the level and competence of the people that must be in there. Yet not a day goes past when some advert comes out for an overpaid interim to run some NHS Trust. We are breeding terrible grounds for long term bureaucratic money sumps.

So a starting point would be to review how many people we need in Parliament, the number of people to support these and start cascading the process. Very quickly we could home in on the number of MPs, the flunkies and mandarins, then the level of Local Councillors required, their staff and amorphous bodies around them, National Assemblies and their associated costs. Vast sums could be saved on the multiple layers of politician and the associated support infrastructure and people in pretty short order. Then we start looking at the departments around them and critically analyse who does what and why - the old time and motion study on public servants would bring into stark focus why Departments have spawned their own empires and management structures - Business Secretary alone has 9 junior ministers and umpteen staff - it's bizarre.

Don't start me on quangos and ancillary 'private' companies like the FSA or similar - vast staff who have proven they do nothing and cost loads. There are thousands of them, all stocked with the highest paid clever-clogs and never sensibly priced workers. It's all jobs for the boys and none deliver real value.

Associated with this is the whole costs associated with public service. In Wales and Scotland whole new prestige buildings were erected to house new assemblies when there were oceans of office space going begging - the costs, the salaries, the expenses so much of it unregulated. Then you start to look at the 'hangers on' - how many of these offices have associated external advisers, consultants, PR agents and the like running around on vast retainers adding little value to the everyday business process and our lives. Value for money is the key issue - it's not about making politicians or civil servants' lives easier it is about getting value for taxpayers' money. First to get the chop would be the army of investment bankers and lawyers advising on the current economic crisis - nearly £100m on them alone per year.

Then we could start looking at the layers of management in each department. Having experienced the NHS at first hand in the last few months, it is absolutely clear that money is not being focused in the right area. I have no qualms with the services provided, but when consultants have to beg for the prescription pad to administrators you know there is something wrong. The layers of management in such organisations are dreadful and unnecessary. The first thing these people would do is call in advisers to look at structures when in fact this is what private business does all the time. Management reviews are an everyday occurrence in business and if that's what the NHS is meant to be, then the managers should be capable and tough enough to do it. The amount of cash it could free up in the largest public budget is enormous.

Coupled with this is the vast wastage of money associated with budget overruns or badly implemented projects. It is not rocket science but you see £billions wasted on overly complicated IT and data projects, emergency service automation projects and the like. And so much focused in Police projects on how to balance budgets through revenue collection rather than focus on crimes. Value for money is the mantra here.

And again coupled to all this is the potential savings in salaries and costs associated with reviews. But it should go deeper. There is also recession on and wage negotiations have to be tough and tightly controlled while the whole bonanza on public sector pensions has to tackled before it cripples us completely. Why public service has such bias in terms of pay and conditions is beyond most people in the private sector who would kill for such fantastic automatic pay increments and pension schemes.

The target system is these departments is just a mess. While checking in waiting times may have gone down at the NHS, the chances of getting treatment quickly is minimal and highly trained people are focused on the simplest of tasks as they help hit targets. As we all know, hitting targets means money so more can be spent to hit the next targets which move you ever further from proper value for money. The whole service of Government is becoming a postcode lottery as incompetence seems to breed in certain areas.

Education is costing more and more and delivering less. How Ed Balls can smile is beyond me when you look at the basic deficiencies of entrants into the business world. They can text nicely on a phone but using written English defeats them while basic maths skills are beyond them. Looking at exam results, then the message is that we are producing genii. We are loggerheads with reality and what is required for future generations.

It's a simple matter but layers of management are counterproductive - we in business know this. Looking in at the whole public sector and you see layer upon layer of unnecessary levels of management whose tasks are to aggregate communication for the next layer up - in today's world of advanced communication that delivers nothing and hinders plenty.

The problem stems back to the central control issue. The idea that a Government has to control everything means that you have a cascade principle at work. Only partly in that structure do you get any kind of devolved thinking and its why we get so little value for money. Services in general are less but cost more - just take a look at local refuse collection. The amount of refuse being taken is decreasing, we have to do more of the work as individuals than ever before in sorting and if we should break the rules we get a criminal record. yet do we see a decrease in cost? It's just crazy. More and more talk comes about direct taxation for specific roads or services and it makes you ask, 'Then what have I just paid for in taxes?'

Value for money should be the credo for all taxpayers. We should be able to ask how our money is spent in wars, services, education, health, bank bailouts and other areas - we want to know why we are funding more politicians than ever, why are we supporting such generous pension requirements for the public sector and why are we paying for so many external bodies who deliver zero value?

All that happens instead is we sell off £16bn of assets no one cares about. It's a drop in the ocean in terms of what is required. Governing this country and delivering service has been an enormous sponge to cash over the last 12 years and no one knows how much we get back for the money we spend. It's time that rigorous reviews are done and savings identified fast. The IOD reckons at least £50bn per year can be saved on annual expenditure without cuts in services and I think they are undercalling it.

Waiting for the election will not help deliver the necessary savings in time. It needs to start now.

Can or Should We Choose How Much Tax We Pay?

I got into an argumentative discussion on the IOD Linked In discussion group recently with a tax adviser/accountant who asserted that 'We have the right to choose how much tax we pay.'

Firstly, I was pretty miffed at the use of the royal 'We' as I certainly do not choose how much tax I pay. Secondly, there was not just an implication but a direct argument in the discussion that people have the right to not pay the correct amount of tax they owe. If they want to not pay it, they can. He claimed also that this is perfectly legal under the statutes governing tax.

The Royal 'We'

What the chap meant was that the 'We' he was referring too were those rich enough to afford the fees and special mechanisms in the murky world of 'Tax Mitigation' (heaven forbid we call it 'Avoidance'). As he was using the Linked In IOD Forum he was referring to the 'We' as those who are members of the IOD. This meant me.

He was wrong there on two counts - 1) I cannot afford such fees and suspect mechanisms and 2) I would not want to participate in any of them.

Of course, as much as the next person, I don't want to have to pay all the tax asked of me. I will use up as many allowances as I can like ISA, capital gains, some dividends from my company etc in but I am very opposed to going beyond the statutory allowances - I believe in paying my way fairly. If I don't like it, and I am opposed to the new taxes proposed, I will lobby and vote against it whenever I have the opportunity, but I will pay it if I have to.

A gaggle of directors I overheard this morning were discussing how they could take their earnings above £150k as 'fees' into limited companies thereby enabling them to not draw a salary and pay themselves in dividends which are taxed a great deal less and neither the company nor the 'contractor' pays National Insurance. They were worried about the VAT implications - I would be more worried about explaining to HMRC what their company does and why they only have one client. Of course, there would be an added benefit to the company, as they would not have troublesome Industrial Tribunals if they just terminated their contracts and wouldn't have to pay a bean in any compensation or redundancy money, nor any pension contributions or fringe benefits. Hey, why don't we all do it!?

The royal 'We' here, of course, would get found out by HMRC in an instant. From my perspective, and I have a limited company, I contract to several clients at once and not one occupies my time fully. The specific legislation on IR35, as it is known, is an area fraught with danger. It effectively says any contractor must form a legal limited company and take fees but they should show that over time they are not just working for one client - otherwise it is deemed to be a 'scam' to avoid paying the taxes associated with being an employee. Most contractors will show, even if they have a few long contracts, that over time they work with several different companies on different projects.

The royal 'We' might have a bit of difficulty on all that. What they hadn't considered would be what happened to their stock options and other goodies but as usual they were just focusing on their current pocket.

Dividends vs Salary

It was always a neat scam, even as a contractor, to pay yourself a small salary and then take whacking great dividends and save all the associated employee taxes. Naturally, HMRC became wise to that, as usually the dividends spookily equalled the amount of salary the person would have normally earned and, moreover, seemed to be paid monthly like clockwork, exactly when the client paid their invoice. In fairness, some contractors who get paid agency or commission fees based on the sales they generate can easily justify their small salary and high dividends - they cannot predict when they are going to earn their next cheque. Even so, HMRC is pretty dubious and sceptical on the whole thing and err on the side of stopping the practice even if it is justified.

You see, the ideas my director friends had were the obvious ones that the tax adviser would have paid only a single charge for telling them as there is no ongoing knowledge to impart. What the tax adviser would be doing for the royal, and very royal, 'We' would be to tell about how to pay no tax on very big amounts of money.

The Big Scams

The richer you are, the less tax you pay. That's the simple rule of thumb. It's convenient to marry someone who might be able to claim they are a non-domiciled person. But for good effect, it's best to own a 'primary' residence outside the UK and in a place where there are pretty low personal taxes. Places favoured by the rich are Monaco, the Channel Islands, Isle of Man or Switzerland. To boot, they are all nice places - no riff raff, generally speaking, and one has the advantage of having a decent football team. Having played cricket on Jersey, I can recommend it highly and we even bumped into 'Charlie Hungerford' from Bergerac fame once and gave him an exploding cigar. I digress.

The very rich basically siphon all their money into these domains. But this is for the F1 racing drivers, popstars and big swinging whatevers from business like Stelios or Philip Green. When you have such a set up, you can choose how much tax you can pay, alright. In the case of Philip Green he paid himself a single dividend of £1.2 billion and did not pay a penny of UK tax on any of it. The money wasn't really even earned by his company, it was a bank loan. By paying it to his wife, who was a qualified non-dom, he made doubly sure no-one could chase him. All he makes sure of is that he doesn't spend more than 90 days in the UK in any single tax year - although the days on which he travels either there or back or through, do not count. If you are rich enough, that is not an issue. Mind you, if you own your own budget airline, the last thing you want to do is go on it even if it flies to Nice. It's not exactly a company perk then, is it?

Some years ago, the fashion was to hold the shares in your company in an offshore Trust. These were lovely and expensive to set up and 'administer'. Famously, Lords Sainsbury and Levy operated these for at least a while, which meant that they took zero earnings in the UK but lived off the dividends generated by the shares in the offshore Trust which were miraculously tax free. I am, not sure if that particular avenue has been closed down now, but it was a belter.

Of course, the wise thing to do if you are mega-rich is to register your company offshore. Not the one that generates all the profit mind you - leave that on British soil, just make sure that the entity is owned by another and charges it a management charge exactly equal to the profits made or a few quid less to be on the safe side. Many of these rich fellows don't take much in the way of salary. Between expenses and dividends they are well cared for and most of these will be taken outside of the country and wrapped up as capital gains, carry forwards and other complex 'cheats' to make it look as though they earn nothing taxable but are actually taking millions or billions.

This is the royal 'We' that adviser was on about. Of course, there are some mini-scams for the not so filthy rich which helps make sure that very little of the tax Brown and Darling are aiming to get their hands on will actually be collected and thanks to giving everyone a year's heads up, there is plenty of time to pay the advisers for their advice and get round it. As always, it will be those just getting enough to qualify for the new tax but not enough to afford the advice and complicated instruments of 'avoidance' who will really get hit. Already, HMRC has indicated it will hammer down on 'salary sacrifice' which is the idea of giving up the portion of your salary above £150k and taking it as an employer's contribution to your pension. It means it can't be spent yet but at least you get your tax back. Not anymore - the proposal is a tapering tax which starts at 20% of the employer's contribution for a £150k earner and rises to 30% for those earning above £180k.

HMRC has already indicated it will be watching out for those earning around these thresholds who suddenly elect to 'sacrifice' part of their salary or bonus and take is as a employer pension contribution. But then again, they have a year to sort all this out.

Sympathy

It is those who earn around these threshold levels who I actually feel sorry for and it is where Darling is aiming. Just as the majority of law abiding citizens, who do not cause accidents or kill people on the roads, are the ones targeted by police with speed cameras as they are the ones who will pay however much they may not like it. The people who kill or have accidents are usually the ones who don't bother paying or can afford fancy lawyers to get them off on technicalities. The same is true of tax. Morally, it is corrupt.

The Government has blown a lot of money in the last year on this whole financial crisis and we are going to be paying for it for an awful long time - out until 2032 is the estimate on some £1.3 trillion of borrowing. The one thing you can be very sure of is that these will not be the only unpopular taxes introduced. You can also be sure that it will not just be the rich who get fleeced - ordinary, middle grounders and lower paid people will be disproportionately targeted through things like fuel tax or alcohol duty and will collectively pay more. Why? Because we will pay as we have no choice.

Tax 'Mitigation' or 'Avoidance' is one of the luxuries of being rich.

Be A Dragon - Get An Ego

If you want a darn good read about those annoying people who have started 'building their own brand', then flip to Jane Simms' article in this month's Director Magazine from the IOD.

I am sure we have all experienced the same as she had done - attending some self-help or business guru's online or live seminar when they start off by spouting on about how many books they have written, what companies they have created and sold, how much their life is better than ours, yada, yada, yada.

I have read many of Thomas Power's (co-founder of www.ecademy.com with his wife, Penny) articles on how the web has gone through phases and is not at the 'Follow me' stage which is represented at the nth degree by www.twitter.com and I have to say that I am not convinced. It all reminds me of those clever adverts you would find at the back of newspapers which tell you how to become a millionaire for a small sum. If you reply to them and pay the money, allegedly you would get a book detailing how to take out an advert in a newspaper saying how you can make someone a millionaire for a small sum - hey presto you become a millionaire and so does the next person ad nauseum.

Tony Blair is at it although 10 years in power, some dodgy dealings and a new job he never turns up to might be seen as a drawbacks, but he's earning nicely thank you at £250k for 90 minute speeches, £4m+ advances for his memoirs, and around £4m per annum for advisory positions at financial institutions. Tony Robbins, Deepak Chopra and many more have made absolute fortunes out of our ability to get sucked into the promise of a fantastic career, personal fulfilment and large bank balance.

Big Ego, Big Career?

But all this presupposes we have the ego to go do it. Watching the new series of The Apprentice for just a few seconds and it reminded me of all that it is bad in management - this self-belief and lack of depth which seems to be so lauded by Alan Sugar and his gurus. Former Apprentice contestant, Ruth Badger, got her own TV Show doing a 'John Harvey Jones - Troubleshooter' and going in to fix companies essentially off the back of scowling when other people were talking to make them look small or retarded. Character assassination by sarcasm and facial expressions tend to go only so far in business and mercifully I have not seen any new series of such tosh. The late Harvey Jones, meanwhile, made his name building ICI.

Jane Simms points out that Rachel Elnaugh on Dragons' Den has one claim to fame which is starting and busting the company known as 'Red Letter Days' - great concept but poor execution. Yet she has risen from the ashes with a personal brand of some kind of entrepreneurial guru. The difference between many with failed businesses and her is sheer ego, yet why would a failure like Red Letter Days be of particularly good value to others as it was so badly executed?

Ah well, that's for you to find out on one of her smashing 'Entrepreneur Courses'.

There are some who do match ego with success. Simms cites Gordon Ramsay and Richard Branson and they are good examples of well manufactured brands with real substance. Last weekend, Branson flung himself, albeit tentatively by his standards, behind the phoenix-like formed new F1 Team, Brawn. The result was a spectacular PR coup for the master PR man - not only did Team Brawn dominate qualifying to get positions 1 and 2 on the grid but they also occupied the same positions at the race finish - in the team's very first race, and with a British driver at the front. Branson has a real knack of spotting an opportunity and laying out some risk. Team Brawn was hastily put together when Honda pulled out of F1 due to the recession - how they could have done with Branson's nose for an opportunity and stuck it out.

Meanwhile, Peter Jones of Dragons' Den has won a Government contract to set up an Entrepreneur's academy ahead of many an eminent person and team who know plenty about how to teach the skills of business, entrepreneurship and success. He is a man who has made a lot of money over time and has built a fantastic personal brand of late. This is a big risk for him to take as now he has to prove beyond the puerile facial expressions on the show and fats cars that he has more then one success inside him. It will be interesting to see the result.

Personal Branding And Success

It is certainly wise to build something of a personal brand. We all do it - it's the ability of a friend or colleague to actually say what they think we are about if asked. Our brand is the mark we leave on people. You can build that up more by using clever tools like Facebook, LinkedIn, MySpace, Bebo, Twitter, blogs, and having the front to build a business around yourself. The danger always is that there needs to be some level of substance behind it all as no one likes paying for something that does not add value.

So, do as Jane Simms recommends, brand yourself by all means but make sure there is something that underpins it.