Tax To The Rescue

Today's furore on the Government's proposal to add 1p to National Insurance is caused by a letter signed by 23 top business people in the Daily Telegraph which says that they back Tory plans to scrap the increase.

Ostensibly, they believe it is a 'Tax on Jobs' and that after steering their companies through the recession, now is not the time to compromise corporate recovery by increasing tax burdens. Naturally, the Government says that they have to cut the budget deficit and so how else are they to make inroads as this would raise £19bn toward that goal - and is actually only a fraction of the ever increasing problem.

I think it is more fundamental than this. On the one hand, the Government finally recognises the need to cut the deficit and then argues that it should not cut spending as this jeopardises Britain's economic recovery, so it says it must raise taxes and therefore individuals and business should make the necessary compensation for lack of cuts. So the burden is transferred to business to make the cuts in order to afford the amount needed - the circular argument here is that the payroll bill rises and this threatens jobs which in turn puts an increased burden on the Welfare State if Unemployment rises again.

On the other hand, if Government does not tackle the budget deficit, they have at least realised that Britain risks major issues on the bond market where it is so heavily reliant on raising debt - if our credit rating gets affected by market confidence in our ability to repay then we join Greece and Dubai as being the world economic pariahs and our bonds will become junk.

But the real issue is this, to my mind. The whole economic mess we are in came from appalling hubris and suicidal economic policy over a long period. The Credit Crunch arrived with the recession and banks rolled over like nine pins. Who had to come to the rescue? The taxpayer. We have been used as the crutch for the economy and the banking industry is making the same mistakes all over again at our expense. As we still reel at the magnitude of the problems and gasp in awe at the incredible cost of the bailouts, we are the ones expected to have to pay for more stupidity - the basic mismanagement of the economy as well.

Even successful businesses strive to contain the growth in costs and gain efficiencies at the best of times, let alone the worst. There is no point in spending money if it does not give a tangible return in that vain. And so to Government. The now ingrained belief is that if we stop spending a single penny then the whole economic recovery will implode and we would be plunged back into recession is clouding the need to re-evaluate what is important in terms of spending in Britain. And this is a typical economic dogma from the Government who seem to go to bed each night to read the same pages of the same economics book that got us into the mess we are in.

The stupid voters seem to take it all in. As we foot the bill for all this, the banking idiots who got us into this mess are making bumper 'profits' and are making huge bonuses once again thanks to us resetting the levels of debt they clocked up - we actually created the money for them to earn, it is that simple. It could not have been more stupid. But that's economics for you - it isn't for logical folk like us. We are the ones who sit bemused and just keep paying more of our earnings back into the pot to be wasted all over again.

The point that these business types make, which they do not make loud enough, is that the Government should go find the inefficiencies and save some money first before coming to the supposed limitless trough that is the taxpayers' pockets and goodwill. If this is just the start of it, would it not be nice to know before the Election just how much we are to be fleeced for over the next 6 years to get to the mythical halved deficit?

Because if it goes not come in spending cuts, guess who will be paying.

Purge The Soul

He's only gone and done it.

Alistair Darling has bared his teeth and swiped with his mighty paws at the City bankers to assuage the public's anger and try to win some votes. In doing so, he claimed it was not about the money but was a deterrent to stop banks paying excessive bonuses.

That's certainly going to work, right? Certainly, our souls are purged - not only can we feel satisfied that bankers have suffered for their follies, but we now see that the Government has distanced itself so far from the greedy City spivs that we can no longer believe that ministers had any culpability for our financial mess as surely they would not have punished them if they had endorsed what they were doing? Believe that and you believe I am Tiger Woods - let's not go there.

So the banks will have to pay 50% of any individual bonus over £25,000 as a levy - not the individual, and there are anti-avoidance measures already in place. Indeed, there must be as Mr. Darling has told us there are.

Curiously, among all the £billions contained in bonus pools, it is alleged the tax will only raise £550m which can go toward unemployment. Just as well, because in the great scheme of things £550m is hardly going to make a dent in the damage the bankers caused. The chances that it will deter them from doing the same thing again are about the same as for me surviving 5 rounds with Frank Bruno.

This is headline grabbing tosh. Bankers will be laughing all the way to new pay packets and bonuses.

Meanwhile, down here below Wonderland, National Insurance goes up 0.5% which probably raises more than the tax on bankers - shows that headline - grabbing taxes are just that.

New Report - State Pension To Be Paid Hours Before Death

The situation on State Pensions is getting so farcical that it may well be that we may only be eligible to draw one hours before our death rather than at a specific age.

We laugh? No. On the one hand we will be more aggressively screened via our DNA by insurance firms to find more reasons why we cannot have life insurance or critical illness cover as they will see from our genes whether we are potentially likely to have diseases of some kind at some point in our lives, and the other the State has strategically accrued for our retirements so badly that the pot will not cover a pension for us until we are a few hours before expiration.

Lord Adair Turner (oh no not him again - the serial report writer and FSA failure? Yes it is he!), wrote a report a while back which has been avidly grabbed by a clueless Government to get into law that the retirement age will be raised to 68 shortly. Now, the UK pension's regulator, David Norgrove, reckons that could be raised to 70.

I mean, come on. We pay astronomic amounts of tax and National Insurance - the employer pays a whack of National Insurance for each employee too and still we have no money? And let's be realistic, in an era of non-ageist political correctness, is it wise to believe that people should stay in employment that long, particularly as young people have been hardest hit in the current sharp rise in unemployment? What prospects for the future for our young?

The writing is on the wall. The bank of ideas are empty. We are going to have to work like domestic animals to our dying days because the state isn't going to provide for us despite the vast money we pay into the tax pot. Makes you wonder what on earth all that money has been spent on.

Bureaucracy springs to mind - about 1 in 4 UK jobs are in the Public sector thanks to the rise in layers of administration by this Government. Two major wars would be another. Massive, unchecked spending in Government departments like the MoD and NHS where we see little return for our tax pounds while we already know how much just keeping Politicians in the life they so richly deserve costs.

If you are in any Public Sector job then you excluded from the above shock figures, of course. Such employees are the chosen ones where the Government has granted them superannuated, index linked pensions - based on final salaries - the sort that the private sector can't afford. As the Government has not accounted or accrued for such lavish pensions, of course, it will be our fresh tax money that goes to pay for it. And it is rising as bureaucracy rises, the layers of Government rise and the cost of paying for them rises too.

But hang on. We have also 'agreed' to bail out the banks. Because of the extra burden on the State for doing so, underwritten by our tax money, the available money to be spent on Public Services is going to have to decrease - massively - in the next 20 years in order to pay for the failed gambles of the boys in the financial world who are now gearing up to pay themselves £billions in bonuses for conning us all that they should be allowed to do it all over again.

So the available money for pensions is actually decreasing and the current estimates of idiots like Lord Turner, who has so many jobs he won't have to worry about his retirement as he will be on boards and quangos probably long after his death and he probably already has difficulty remembering which one he should be turning up to each day, are already defunct even before they have cleverly press released them.

We did a really good thing in bailing out banks. All that money has gone down the financial drain and has done us not a jot of good, but has made us all far worse off. Clever.

Some 20+% of our remuneration between us and our employers goes into National Insurance every single year of our working life, I am not even thinking about PAYE tax here. Surely, there is more than enough to provide more than a pittance of a pension for a person in retirement here and chip in for the vast dole queues out of that?

But I can't add up like Lord Turner or Darling or Brown. They are the masters when it comes to the economy. Leave it to them and we will all be ok. Just hang onto your job as long as you can turn up to work or are alive, whichever comes first. I am even looking into legally bequeathing my job to a relative or keeping it after my death as there may be no money in the pot in the hereafter due to bail outs in the afterlife - I will let you know how I get on.

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.

Private Pensions - Darling Loses The Plot

It is estimated that only 4% of the working population reaching the age of retirement will earn anywhere near two thirds of their final income and that includes civil servants, MPs, NHS, teachers, emergency service employees et al who are on fantastic schemes and reach their full entitlement.

So it is very clear that there is simply a massive issue about the amount being saved for retirement. The Government initially attempted to try and plug the looming holes for the future by attempting to incentivise people to take up private pensions via the stakeholder scheme and force employers to contribute into them on their behalf. It was a pitiful attempt to cover the cracks and most of the schemes are pretty laughable. One of the points about the credit crunch and recession was that while we were all leveraging our assets to borrow more money to bolster our actually diminishing wages, savings were going negative.

The facts are simple - nobody is putting enough away for the future.

Changing Thinking

Again, one of the features of the boom of the last 12 years is that we have lived the 'here & now' and forfeited much of our future planning and specifically on pensions. For some odd reason many believe that their property portfolio will sort this out but we have had a stark reminder of 'what goes up up must come down' lately. Plus, Mr. Darling has suddenly got very hard on second homes which for many was seen as wise investing for the future.

At some point, society in general will have to turn its thoughts to how it is going to keep itself in the same standard of living in retirement. I can safely say that it is a matter about which I am very concerned for my family. Despite prudent savings and pension planning, it is nowhere near enough to get me anything like two thirds of my current earnings.

So it came as some surprise that Darling would start to throw cold water on those that change part of their salary and bonus to pension contributions.

Government View

True to the 'here & now' Darling has seen that those around the £150,000 total salary and bonus will be keen to sacrifice some of the salary to get below the threshold for 51.5% (maximum rate plus NI increase) and take the missing part as an employer's contribution on which no tax is currently paid. But Darling is looking at stopping that with a tapering tax system on employer contributions to be paid by the employee that will, for those on £180,000 or more, be up to 30%.

It is seen as stopping tax avoidance as not only is the tax relief saved but the employer pays no NI on the contribution. But it is a false economy - we really need to be pushed to save more for pensions and decrease burdens on the state. If people can maintain their living standards in retirement then there is a fair chance that the strain on the NHS will be less as more people will afford private healthcare as an example plus we will pay more tax (again). It's more than that - society needs to look forward and make sure it is putting aside more - we need to get that discipline in us all.

The tax relief is seen as being unfairly biased to top earners - that's rubbish as all that is happening is that tax already paid is being claimed back. If this were to be widened to all pension contributions then people will have to start thinking about how they can mitigate costs in retirement and that will almost certainly mean that retired people will look to countries like Cyprus where tax is 20% and pensions are portable. I know I have looked at Cyprus and other places like Malta to find a good alternative as this may just be the difference between being above or below the 'two thirds' earning level in retirement. Even if it is not that close, it is now a serious consideration.

While everyone seems to be fixated on the current top earners fleeing the coop, there is more of a danger that middle earners will leave the country in retirement and it is just as barmy as they will be tax payers.

Short Termism

What we are seeing from the Government is a number of short term moves to try and stimulate the 'here & now' again and try to get people to start spending while grabbing money off the top earners which they seem to believe will be popular amongst most earners. After all there are not that many people in Britain that earn over £150,000 a year, and many of those will only be just above it as normal employees and not Directors who may get supplementary goodies.

This may be a precursor to the phasing out of tax relief on pension contributions for PAYE taxpayers and the fall of the employer contributions as part of people's packages. I think it's opening up a gaping problem for the future.

Help Required For Small Businesses

In a recent leader article in an issue of Director Magazine from the IOD, Lord Mandelson asserted that no Government had ever done more for small businesses than the current one. Naturally such a daft comment was met with some derision and a volley of mail was sent to the Editors to refute the claim.

The Government Schemes

True to form, the Government has tackled the Recession from the point of view of banking and the Credit Crunch. By solving the Credit issue and easing cashflow worries, the logic was that businesses can survive while consumers would spend. To support this we saw the easing of VAT from 17.5% to 15% as a first step and then £1bn was set aside as a Loan Guarantee mechanism for small businesses which would help banks make more sensible credit decisions.

Neither initiative had any appreciable effect.

VAT Easing

It is argued that the VAT giveaway would actually release around £12bn from one form of tax so that consumers, who would actually fund the giveaway through their own tax returns, would spend more in the High Street. This logic was applicable only to retail business in the main as consumers spend the brunt of the VAT in this country. But a mere 2.5% easing had zero effect and the recession hammered home. Concerns about job security, negative equity and repossessions and a decrease in household income were the main issues, spending would be cut by most consumers who already collectively owed £1 trillion as unsecured debt on credit cards. The Government had also forgotten where most of the 'new wealth' had come from - not household disposable income from wages, which had shrunk, but mortgage equity release. And that had dried up due to the collapse in house prices.

VAT easing was a complete waste of money.

Loan Guarantee Scheme

The sentiment in the letters replying to Lord Mandelson's assertions were that he had no idea about how small businesses are run.

In fact, over the course of this Government's tenure, higher burdens in terms of taxation, regulations and red tape had been placed upon small businesses as if they were actually much larger concerns which had taken away entrepreneurial spirit and made business people focus more on compliance. Instead of spreading the burden of things like maternity, each company had to fork out directly for each employee who was on maternity or paternity leave and the impact on businesses was disproportionate - a BT can easily accommodate excellent conditions for working mums while a company of just 9 staff, say, would be badly hit. It definitely caused employers to stop and think - and it was not the only regulation to affect disproportionately, as general employee HR issues were much more in favour of the employee in case of poor performance.

I don't care what anyone says, it is getting far harder to deal with under-performing employees who are Employment Law savvy than ever before.

More importantly, while large businesses like banks and drug companies, can afford to find exotic ways to avoid paying tax by relocating their headquarters or moving Intellectual Property into offshore havens, small businesses do not have the financial muscle to hide and so pay a disproportionate amount of tax for the profits they create compared to larger companies.

This Government has done little to decrease this inequity in the system as small businesses, like law-abiding citizens for parking and speeding fines, are soft touches and always pay.

The Government Loan Guarantee Scheme is more to help a small number of companies raise a loan who might not get it before. It still will not get you money just for survival - do not mistake this as simple benevolence by the Government or banks. Mandelson has been hard on the fact that the Government is not a bank and will only step in as the 'lender of last resort' and never just to save a failing business. Unless of course you are a bank when the rule book is thrown away and any amount of money you like can be used, no questions asked - certainly not about how you spend it or on who. So this Loan Guarantee Scheme has a very limited use and is really just there to give the banks some comfort in their normal lending.

Speaking to Bank employees involved in risk assessment and loans to small businesses, even without use of the Government Scheme, they had hit all their targets for loans regardless and saw the Scheme as just a publicity stunt. Loans to small business on a regular basis was never the issue.

Real Help To Small Businesses

The thrust of the letters into Director Magazine beyond telling Lord Mandelson where to go, was that the real help that could be provided for small businesses was in the form of tax breaks, and I wholeheartedly agree.

Firstly, for all business to business firms, VAT is just a bureaucracy and a tax collection service for no reward. If you deal with companies who do not pay their bills on time, it is also an unnecessary and onerous burden on cashflow - and I am experiencing precisely that in the last month which has stopped salary payments, it has got so acute.

Lowering tax for small businesses will allow more entrepreneurs to invest more in their ideas and business, allowing them to market more widely or employ more staff which will help create more sales - hence more profit and more tax in the long run. Instead a huge slice in a small business' profits, the same percentage as larger ones, goes into the Government's coffers.

National Insurance (NI) is a particularly nasty tax. Right now, the theory is it pays for a raft of things associated with benefits and pensions. At this point, over 1 in 4 jobs are in the Public Sector, yet all businesses pay some 12.5% Employer Contributions for NI. For the vast majority of us, what we get out of the system is a fixed, small national old age pension. What Public Employees get is a superb, final salary, index-linked superannuated pension, on top of the minimum old age pension, which is disproportionately funded by private businesses.

The whole system is an elaborate 'Ponzi Scheme' - the money in gets you no relative output, as there is no investment pot which is growing. The money goes immediately to those Public Servants in retirement to give them superb pension rights. Yet small businesses have no choice but to pay up, and the tax has risen and will rise again in order to pay for new Public Sector retirements.

Fending For Ourselves

Beyond decreasing tax which could directly help small businesses, where help could be put in place is to help businesses attract overseas money in terms of export of goods and services. One of the reasons that Britain has not been able to capitalise on the weak pound is that exports are a relatively small part of the country's GDP.

Would it not be a good idea to give incentives to any business to drive foreign based business by either giving tax breaks or even making money available to increase marketing or sales activities to generate sales?

Most small businesses have to fend for themselves and I have blogged ad nauseum about ways in which small businesses can drive costs down and conserve cash. But none of that help comes from the Government - it seems to believe that credit is the only thing that is needed for survival and growth.

For Lord Mandelson's edification, it is orders and sales that will drive business forward. The more of those sales that come from other countries, the better. Of course, it is difficult to see that when his head is in the clouds and the businesses he has been exposed to need the likes of Nat Rothschild's help.