The Man Who Hijacked Christmas

Call me a cynic. Simon Cowell has, as I am one of those who is just delighted that the Rock Band 'Rage Against The Machine' is challenging the single by the X Factor winner, Joe McThingie, for the No. 1 slot at Christmas.

I admit I know naff all about this band and their single, 'Killing In The Name', is about as Christmassy as 'God Save The Queen' by the Sex Pistols but this is one in the eye against the 'Formula' that makes Cowell and his backers millions each year. To boot, young Joe's voice is one I have heard many times before but cannot put names to it and the single, 'The Climb' is sugary claptrap, hastily put together to target the sales cycles that will get it into the charts for Christmas. If that is the standard of British music this year, then we have not progressed much. On the album side, Susan Boyle is dominating with historic high sales on Amazon.com - at least she has a profoundly different voice and helps light up old songs. McThingie, meanwhile, is all formula even though his voice is very good he brings little new life to existing songs as Will Young embarrassingly did not either.

The 'Formula' is cynically designed by Cowell & Co. The X Factor show serves up on a plate an audience participation melee which is carefully designed to build up to Christmas so that he delivers a package of around 30m viewers to his advertisers ensuring he gets top dollar on rates while a guarantee of a No. 1 single for the winner, regardless of what tripe they sing - it really does not matter as a big proportion of the audience who voted for the winner will buy the single even if they sang 'Bah, Bah Black Sheep' - frankly.

And that's how Simon Cowell has hijacked Christmas.

But two can play at that game. Cowell spends a good deal of his vast profit to ensure that the 'Formula' delivers the hit single at the right time via the prodigious viewing figures of the show. What is new is that the internet has the ability, through social networking, to take the germ of an idea of an individual and spread virally - for free - across the globe and get people to do things. The 'Formula' would not work if it cannot guarantee the Christmas No. 1 and Cowell will be a few pence poorer as a result.

But there is more than that at stake. Britain has always been the seeding ground of cutting edge music from Punk Rock to Glam Rock to Northern Soul - we have a history of innovation in music that comes from the grass roots. This whole Christmas affair is one strike back for the people who still fight to get on the bill of the local pub or club, who take their demo tapes around by hand to studios, who busk at Underground stations in the hope of being discovered. Talent endures and karaoke is just rehashing old songs with a slight difference and while that has a place, surely it is not at the top of the charts at Christmas.

While I am on the subject, I saw the dreadful video and song by Cheryl Cole the other day. She is beautiful, have no doubt, but dressed in stupid clothes and made up to look like some dominatrix took away all the good things about her. It's like the hair advert she does - all is fine until she opens her mouth and even some of that is dubbed. Talent does rise to the top - I am not that much of a cynic, but surely when we have grown bored with the 'Formula', as inevitably we will, the likes of Ms. Cole, as gorgeous as she is, will outlive their purpose.

I actually think it is Simon Cowell who has cynically used his 'Formula' to manipulate Christmas to fuel his personal wealth and excite the likes of Sir Philip Green to back the worldwide advance of the X Factor to make him even richer. Good luck to the guy - each to his own and he works hard for his success.

But let's make Christmas ours again. If Rage Against The Machine achieves that, then I am all for cynicism.

Lack of Role Models?

It is fair to say that young people are sometimes wrongly led by modern role models. In a recent survey, careers at the top of young people's lists are no longer doctor or lawyer but singer or sports star.

I'm not sure how such careers got to the top of the list but certainly there is a growing belief, it seems, that success comes on a plate ala X Factor or scouts just arrive from Premier League clubs at your municipal sports ground. It appears that hard slog is no longer on the agenda - and some would say this a direct result of our 'Can Have' rather than a 'Can Do' culture of materialism and new found affluence, perhaps fuelled by the credit boom years since 1997. I don't know.

So scouring the Sunday Times on the weekend, I came across an article in the Appointments Section which intrigued me. Under a general article on the Law as a career, there was a pull out biography of a Mike Pullen, described as a 'Class Warrior'. Mr. Pullen has no doubt had an extraordinary and hard career, having not attended school until 12 as a fairground child. The rest you can read for yourself but suffice to say he is now at the top of his profession and he advises countries on how to deal with the EU and the World Trade Organisation. He cites that he gets on well with Iraqis as he also comes from a 'tribal society', having not lived in a brick building until he was 26. A great 'rags to riches story', it appears - the stuff of role models.

He claims he fought the class system as his accent was a negative for getting into the City, but he did. Pity for us Welsh too but we each have our cross to bear. Then it all goes belly up as he says, "If you want to be controversial, you would say the most disadvantaged minority is the white working class male. They've no role model, apart from drug dealers and footballers."

There was a bit of 'lawyer speak' up front so that you cannot say it was his real opinion but it is clear that it is by glancing at his background. It's the kind of comment that would appeal to Nick Griffin and the BNP Party - successful white lawyer fought prejudice to get to the top and it is a story tinted with colour. White working class men are at a disadvantage - and they don't even have role models.

I think his comment is both dangerous and laced with racial connotations and is not worthy f a successful person. You only have to look at people Lord Sugar or Sir Philip Green to see how people who come from a working class background can get to the top. I am always moved by the story of Bruce Oldfield who came from a Barnardo's Home to rise to the top of his profession - ah, but he was more advantaged because of his colour? There are many, many stories of not just sports people but business people who have made a great fist of their lives yet came from a working class background - and they would be people of any race, sex, colour, or disability. We might find that most people from a working class background who have made success are white - we may not. I would be more interested to know if coming from a working class background is a disadvantage at all - the opportunities are there for those with the commitment to to better themselves. I would suggest there are sectors of society far worse off than white working class males - if Mr. Pullen wants one great role model, look to Simon Weston. Neither his accent or his horrific burns or lack of education has held him back when any one of those could.

I don't see why white working class males should have a role model who is the same as them in terms of colour of their skin - what has that to do with it? I doubt if Tiger Woods thought about his origins when rising up to become the most brilliant golfer in the world in a sport dominated by white people, nor Arthur Ashe or Barack Obama for that matter but in professional careers and business we can all think of many people who rose to the top from working class backgrounds. Looking across the array of successful business or legal people, I suspect that there is a whole array of stories of hardship to get to the top, and it would have involved all sorts of race, sex and disability stories to go with it.

I come from a working class area although my father, a man with no degree, worked his way up from a working class background to become a highly rated professional in the oil business that gave me an advantage in life that I was very grateful for. He was always my role model because he worked hard for what he got and he developed skills and expertise of his own to become an invaluable commodity to his company, BP. It killed him in the end but that is a different story.

It also taught me that you may think you are disadvantaged in life but if all you do is wallow in your situation then it is highly likely that you will stay there. In my final year at college, I was the only graduate in my class who had got a job before my course ended. There was a good reason for that as we were in the turmoil of miner's and steel strikes - the same time as Mike Pullen was graduating the 'University of Life' - I applied to 72 companies, got 55 first interviews, made 23 second interviews and got offered two jobs. I went to work for Hewlett Packard, about who I had no idea when I applied, and the interviews were with real managers who were looking for something different in what was then, and now, a company that held talent in high regard rather than looked at your home background. My accent or background never held me back.

I think Mike Pullen is doing himself a disservice but he is definitely doing a disservice to others. I fail to resonate with his point and I think it is remark savoured by the wrong sort of people and serves as little inspiration to any working class person let alone white males. It is the kind of remark that is at the heart of the BNP's illogical ideal - if you are a white working class male, blame everyone else for your plight except yourself as you are disadvantaged.

How you better yourself has plenty to do with race, colour, age and disability and Britain has a track record of prejudice in all those areas. But to say that white people are discriminated against in Britain is worthy of the BNP only and it's why it is representative of the 'blame culture' that is growing in our society.

We are in a modern world and opportunities to grow ourselves abound. Mike Pullen could be a role model but he didn't have to be white to be one. If he wants to see what disadvantage is all about, take a trip to Africa and see at first hand. His eyes may just get opened.

The Economics of Debt

Any small businessman will tell you that debt is a huge burden. It is not only that the interest cost is a drain on money that can otherwise be invested but it is the notion that once you have a debt, it is damn difficult to get rid of it.

Other businessmen think debt is fantastic. From it you can leverage huge profits and it is the principle behind many private equity fuelled buy outs. For a small capital outlay, vast sums of money can be borrowed to buy companies which can be later sold with a disproportionate amount of profit from the risk going to the private equity house. In the purchase of Boots, private equity outlayed less than a few hundred million while raising £9bn.

Debt, in that sense is good. Philip Green used a pile of debt to pay himself a one-off dividend of £1bn tax free. Debt, in plenty of senses then, is good.

But for the average business, the problem with debt is that it has to be productive in terms of increasing profits. Without a huge boost to profits, cashflow does not sustain the interest payments and so you have to borrow more in the hope that your business will catch up. In the end, it can be good money after bad as the implosion inevitably comes as the debt gets ahead of the business. For small businesses, debt is only good for working capital and generating more cash, beyond that it is a millstone.

So how do Government's view all this? The US just closed out its fiscal year with $1.4 trillion of debt, the highest national debt since 1945. As former Head of the Fed, Alan Greenspan, observed this is the most worrying aspect of the US economy. The equations start getting explosive in his eyes as more money is required to pay interest on the debt and you end up borrowing more just to pay the interest - the priority has to be to bring that debt down.

There are a few ways to do this. First up, you can get the economy growing, which is why there is so much debt there at the moment as the US tries to use more debt to stimulate the economy. This is exactly Greenspan's issue - using debt to stimulate growth can go horribly wrong and it's exactly what small businesses fear - if the revenue streams do not come through fast enough to bring much needed cash, then pretty soon you end up borrowing more. The second way, is to sell assets which has been the recent domain of the UK Government. The problem is that beyond gold, countries usually do not have easily 'liquifiable' assets. In Britain's case, we no longer have large golden stakes in large companies, we have the stakes in the banks but they are all still under water while other things like buildings and debts are not so easily sold. One thing we did not have was gold to sell. Such asset sales, as a small businessman would know, tend not to add much to the coffers to reduce debt - in our case it may be a few company cars, maybe a building, furniture or plant facilities. Asset sales of this type are usually done in desperation, like pawning jewellery in the face of credit card debt. Inevitably you are a buyer's dream and so you will never get full value for your assets as the British Government will soon find out.

Further, selling assets as a business means you have less to bargain with for the future and for a Government, once it is sold that's it - gone. The final way to make inroads into debt is to make cuts in the budget. Small businesses know all about this. Wastage is the first port of call but usually there is not a massive amount of 'wiggle room'. Certainly, the end of month pizzas may go, fresh flowers in reception, travel is fairly game forcing salespeople and managers to think hard before travelling and then looking levels of spend on things like flights and hotels. Then it gets nasty - the biggest expense for small business is the salary bill and that's where cutting can produce real savings. Of course, you are affecting your future capabilities but needs as must - for my money, it should always be the last port of call.

And so to Government. I argued yesterday that cuts can be made very easily - when you look around at the multifarious layers of Government and the associated lackies and cost, long before you start affecting public-facing services, you have vast layers of expense which are pure wastage. This is an easy starting point for Government and savings can be realised very quickly by canning external advisers, consultants, halting project overruns, getting rid of contractors, looking at layers of management and getting rid of many of them.

It has been pointed out that this recession has been felt almost exclusively in the private sector and that the public sector has done nothing to rein in cost, eliminate wastage or make cuts. Thus, the majority of the newly unemployed have come from the private sector. Yesterday, we saw positive results on the unemployment number as the rate of additions to the total seemed to slow and this had a small positive effect on the budget deficit forecast for the month. This could be a false dawn as the Government are going to have to start making some serious cuts - very soon and that means people hitting the dole queues from the public sector. It's crazy that it hasn't yet happened - but it has to.

My point in all this is that as small business people we know the economics of debt. It is a bad thing, particularly when markets are depressed. You can borrow in such times but it is usually out of desperation when in all reality, you should be cutting your cloth. Spending money in the hope things will come good, without a great plan for finding ways to grow, usually ends in tears as interest payments mount.

Alan Greenspan knows a thing or two about economics and I think he is right. Debt is know reaching the critical point - Britain is spending in the hope of an upturn and spending big. While you have to spend money to stimulate, you have to realise that in the background you have to make essential cuts.

It isn't as if we cannot survive if cuts are made - Britain is a bureaucratic monster with one of the heaviest public sectors in Europe. If we cannot find efficiencies in this structure then we ought not to be in Government, because as small businessmen we can see it all too easily.

The public sector is too big, too fat, has overly generous pension schemes and is a huge burden on our taxes and business - it has grown vast, inefficient, multi-level departments, which are mini-governments in themselves, over the last 12 years that has spawned regulation after regulation culminating in the last tranche of the farcical new Companies Act just last month which was years in the making, issued in 3 almighty sections and added really just 4 things of note to over 97% of the number of companies in Britain.

The waste is just awesome and shameful - and it needs to be cut, and fast.

When Does A Bonus Drive The Right Behaviour?

The front page of the FT yesterday had an article which said that en masse 30 people from Societe Generale's Hedge Fund activities in France resigned and formed their own Hedge Fund.

The whole saga was triggered, allegedly, by the French President's stated desire to curb the bonus culture in financial institutions specifically by limiting the percentage of profits earned which can be set aside for bonuses. Defenders of current and future bonuses in the City, like Barbara Knight of the British Banker's Association (BBA), would argue this would be a growing trend if bonuses are curbed meaning that extraordinary 'talent' would migrate to other places or set up their own businesses in order to maintain their earnings.

I am not sure how much bonus was in question about these 30 individuals at Soc Gen but I think it is safe to assume that it is more money in a single year than most of us would earn in a lifetime. That sort of frames the context here. We are talking incredible amounts of money. This is only a snapshot of an industry that rewards a comparitively small number of their workers with more wealth each year than the average weekly lottery pay out in the UK. It would be easy to trivialise the work that they do - I would venture to say that their jobs are hard, require incredible levels of dedication, aggression, some skill (come on, give them some credit) and specialist knowledge and I am sure also that the work is highly pressurised. We have all seen the films and TV programs about these types of job, the peer pressure is immense, the relentess pursuit of profits is huge and the potential rewards are fabulous leading to a lifestyle few of us can comprehend.

Perhaps if we knew the kind of pressure these people worked under and the level of specialist 'skills' required to do their job, we would have some sympathy with the 'Soc Gen 30' who seem to be martyrs for the cause of freedom of the right to earn in the world of finance. Is their loss to Soc Gen going to change the balance too for the French institution? Will it affect France as an economy? These are important questions as we deal with the concept of bonus and its culture in order to understand how we deal with the issue in future.

We need also to ask ourselves, if the incredible bonuses which have been earnt, say, in the last 12 years had not been available, would the financial world have been any different than it is today? Would the Credit Crunch and the fallout which we have suffered ever have existed if such levels of bonuses be available?

It's an important and fundamental question on a very complex topic.

Many entrepreneurs' memoirs say their commercial acumen was evident at very early ages. People like Richard Branson started making money when he was a schoolboy. He is today the epitome of the successful man in Britain, perhaps only dwarfed by the bizarre pedestal on which Lord Sugar is placed as some kind of Enterprise Tsar who openly ridiculed his own Viglen products with Ratner-style comments and whose business practices have their own war stories, some of which I can attest to. Clearly, success is only measured by the money made in that context as surely Sir Philip Green could not have been knighted for paying himself, via his non-domiciled wife, a single one-off dividend of £1bn in a year when his company earned less than a fraction of that amount in profit. In fact, it is not only the fact that people are revered if they have a great deal of money, we do not care how they made their billions to be idolised by would-be entrepreneurs. Perhaps this is human nature.

There is also in innate desire within such people to keep earning more and more fabulous amounts of wealth even though they have more money already than they could ever spend in their lifetime. What makes Warren Buffett get up each day or Bill Gates? What makes Philip Green want to buy another company? It would be like me winning the lottery then going to the bank to raise a loan and then spending the loan on buying more tickets. Some of us know when to quit when we are ahead, the knack for these people is to keep on going and making much more. We all want a steady rise in our eranings but this is at a much higher level.

You do not have to look far to understand that bonuses are woven deep into our society. Hardly a job in Britain, particularly in the private sector, does not have an element of the total compensation available marked as 'bonus or commission' - the part of the annual remuneration which is termed 'at risk'. You can also look at the public sector and see a great deal of evidence of the same culture at work - only today there is an article about head teachers being paid sizeable bonuses and even 'golden handshakes' for starting jobs in a very similar vain, although the figures involved are orders of magnitude less, as the world of finance. In the world of teaching, there are zero profits to be made as in the same way as in the world of finance but there are Government targets to be hit and that's where bonuses were and are still designed to attain.

I am a sales animal at heart and a portion of my attainable earnings each year has been driven by attaining targets - in some cases it has doubled my annual salary. From the web 1.0 era I also had stock options which came to nothing but at one stage I could have speculated about possibly paying off my mortgage if not more if things had gone right. However, in all situations, if I did not reach minimum target levels or if the business collectively suffered then my bonus/commissions and stock options were completely at risk, if worth anything at all. In many schemes it was normal to have 'clawback' mechanisms that adjusted automatically my bonuses over a year-to-date performance so if one good month triggered a bonanza and then there was poor performance, over time I earned only the average amount. Such schemes are commonplace and can be very complicated, often have large caveats to reward specific behaviour and not unwanted ones and even be taken away at the discretion of the company for whatever reason they dreamt up. Some schemes in the IT business could see SAP or other big ticket software salespeople earn over £250,000 a year in total remuneration while in general people could have anywhere from 20 to 60% of their overall package geared on achieving certain targets. I am not talking about anything unusual which has not gone on in my business for a long while.

This is generally acknowledged to be a successful system - you pay for achieving but you don't pay for not achieving - some companies do get this wrong but that is in the minority. Also, in general, it has promoted the generation of profits based on product or service sales which have added value to the customers who bought them - and this is critical in our analysis. In the public sector, when profits are not at stake, then other performance measurements and targets are in place. Some of these are just silly as they are often handed out for no more than someone doing what is on their job description and that can lead to people believing that bonuses are some sort of guaranteed element of their earnings which in turn can lead to big issues when a recession arrives.

But the general principle is the same - in Britain today, bonus culture goes far, wide and deep in both the private and public sector.

So why are we so inflamed by the bonuses in the financial world? The Soc Gen 30 would argue that they are high performers in their field, they might argue that they have generated €billions in profits for their company, they might argue that they are the 'best in class' people in their field, they might even argue that they did not cause the credit crunch and associated losses and indeed, during that time, they continued to generate profits possibly. I am sure that this will be the basis of argument for the majority of traders in the financial world - it was someone else who lost the money or management's fault for not covering the risk. And we are talking $billions and billions of profit. In fact, the amount of money allocated to bonus pools is actually a small fraction of the kind of money these financial companies have earned - let us not forget that they have also distributed a great deal of wealth to their shareholders while handsomely rewarding other sorts of investors like bondholders. The base argument here is that such incredible profits cannot be generated without the vast bonuses available to be earned down at the traders' end and the management above. One does not go without the other. Before we argue otherwiese, you have to agree with the basic principle as it pervades in all business and even the public sector as I have argued above.

Bonus drives profit - that's the credo.

Well it is not always true. In the case of the financial world we have learned that it is not true. And let us be clear here - the incredible amounts of profits earned in the last 10 years by banks have all been written off with few exceptions. Most financial companies in the main stream of commerce have had to write off all, if not more, of the profits they have made over a period of around 10 years. If companies have not already done so, i.e. those who have not made such huge losses, then they probably will at some point in the future. The reality is that the financial system has regularly given back the proceeds of periods of huge growth as huge losses, and some more learned than me would argue that the only stable underlying profit banks make are from general lending, mortgages and insurance products. Almost all profits associated with investment banking or hedge funds are regularly wiped out.

But in those periods of huge profits, a comparitively small number of people make massive bonuses. It could be argued that our financial system today, our prosperity as a world even, cannot be as we observe it today without the world of finance driving such massive profit cycles to end in bust. In the last 10 to 15 years since deregulation of the financial system we have experienced an unprecedented period of 'sustained growth'. We have found, to our cost, this has been a false boom. Yet in that period, bank executives and traders have earned more in bonuses than they ever have. And as the trades got riskier, they earned more.

In fact, they are still doing so and more aggressively as now they have the safety net that if they do make huge mistakes that incur amazing losses there is an unlimited fund available to pay for their mistakes - they have the freedom to trade as hard as they like, risk more and get paid more without fear of losing. It's like playing the casino with fake money.

And these people are already fabulously wealthy. Many earn each year in bonuses the equivalent of an individual like me winning a single lottery jackpot which is a once in a life time experience and has a chance of one in 14 million of occurring. For these people, playing the lottery is a mug's game, they have a far more secure way of winning. It's called using other people's money and the financial system.

While I would expect, quite habitually, that if I did not acheive my goals that I would not get paid a bonus or, as in the case right now, I would not get paid at all, these people have no such level of accountability. The financial system has just been bailed out to the tune of $15trillion globally and the measure of accountability has been almsot zero with the odd exception and in reality the actual collapse, far from wiping out the stupid banks that caused, it has actually primed them again to believe they can make money out of the losses they incurred.

Think about that last statement as this is the essence of the argument. By wiping the slate clean for all these people and allowing them to keep their methods of working, they will make $billions on the fact that they made the losses. Lehman Bros derivative positions worth just fractions of of their original values are now potential gold mines in the eyes of financial people. Toxic debt will be worth billions in speculation that there are plenty of potential good bits in there. Bankers already speculated before the fall of the system that repackaged Government debt would be worth trillions.

Why? Because we underwrite the whole thing and these people simply do not get it. You cannot make money out of nothing - someone, somewhere pays for it. You can buy a derivative from Lehmans for 20 cents in the dollar without someone someone else paying for that loss. When Barclays bought the assets of Lehmans for less than $2bn, it has been now alleged that the structure of the deal allowed them to make $8bn immediately. We can sit here in awe that such daring and brilliance can occur or we can stand up and call a halt to this fantastic game that is being played with our money.

The point about bonuses is that it drives behaviour. In the public sector it makes people do only the the things that hit targets - if it is reducing waiting times in Accident & Emergency at hospitals then people will be registered minutes after they arrive and then wait hours to be seen by a medical person because the statistic records that they are not really waiting at all. If the target is 20 operations per day and ingrowing toenails operations take 30 minutes but heart surgery takes 5 hours, then only ingrowing toenails get done by surgeons skilled to save lives not nails.

You get what you pay for - you reap what you sew. You gear people to take incredibly high risks without fear of accountability or losing their bonuses by selling products of no real value then they will take ever more riskier options and they will dream up ever more creative ideas to create bonuses knowing full well that such profits that are earned have to be given back at some time as they are literally conjured out of nothing.

There is a price to pay. As numb taxpayers we can watch in awe as £1.5 trillion is added to the National Debt of which by 2014 the interest alone will be £60bn which is equivalent to the entire annual education budget. Do we scrap education or raise tax to cover it? You guessed it - and the whizz kids in the City will employ clever accountants so that neither the companies who incurred the debt or the traders who engineered it pay anything like their fair share of that £60bn.

It is that perverse. We sit here glibbly reading about the whole situation and we think that because we think we understand bonuses that the financial system should have them, it is just a matter of how much they are. But we don't get it as we are the only schmucks who pay for them - they are not, over the long term, paid back for the sustained losses made; these bonuses are paid for by the taxpayer to cover the losses that are really being made.

But banning or curtailing bonuses is not the answer as the Soc Gen 30 have shown. They simply will up sticks and go elsewhere. The economy does not lose out, France does not lose as they simply do the same eleswhere - maybe Soc Gen loses for a while. The point is that until we change the system at the fundamental level to properly define what these people can trade, then will we start to get to pay them for doing things which really help our economy rather than just helping themselves.

The time has passed when we could do this and so the new course has been set. The financial world is at the trough making vast profits out of the losses they made and maybe we can curb the bonuses but we cannot stop the damage they are causing.

It's like building your house with bricks of poor stone, it does not matter how much you pay for them, your house will fall over sooner or later.

Bonuses are not the problem. It's the industry that is the problem.

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.

Small Businesses - What The Budget Meant

I think most people would agree that the budget speech made by Alistair Darling this week was pretty depressing. It is hard to dress up what is a very serious situation that Britain is in but I cannot help feeling this was an opportunity missed to focus on some key areas that matter to small businesses.

It's a very important point. Small businesses employ over 13 million people and constitute around 95% of all companies in Britain. We are, in reality, the engine room of the UK economy as by proportion of our size, we pay more tax into the system than any other part. However, the figures for small companies failing right now are staggering - literally hundreds per week fail.

Most small businesses are failing on two counts - a lack of new orders and a lack of cash. It is very difficult in a downturn for the Government to conjure up more orders, although there were some things they could have done, but they can give access to more cash. After all they have given £ billions of it to the banking sector which had caused much of the problems.

That said - here are some highlights of the budget and business generally worth noting from this week.

The Budget Highlights

- Corporation Tax

The first big area is that any company making losses will have the ability to claim more of the tax back that they have paid over the last 3 years. This is an important consideration when filing this year's accounts and how much loss has been accrued.

- Capital Allowance

The main business capital allowance has now risen from 20% to 40%. This is a big concession for those businesses who have invested in machinery or new technology and is also a good incentive to think about capital vs. overheads.

- Strategic Investment

£750 million has been ear-marked for strategic investments in emerging technologies. It is well worth getting up to speed on this as your business may qualify particularly if you are working in the arena of more carbon or environmental friendly technology.

- Credit Insurance

Up to £5 billion of extra cash has been committed to cover trade credit for those businesses who have experienced a reduction in the level of cover. I think there is an opportunity missed here as we have seen from the Enterprise Loan Guarantee scheme that banks have abused the system and I think credit insurers will also. I think insurers will use this extra cover to merely cover their existing book more. The issue for many companies is that they are having to find new clients and they will need new cover in order to deal with them and this has not been forthcoming. Once again I think this is putting money into the wrong area and all it is doing is maintaining existing sales.

- Safeguarding Jobs

I have to admit I thought this was just a soundbite with not a scrap of credible detail to tell us how 500,000 jobs will be saved. I think most small businesses would like to know where they can apply today in order to avoid redundancies they may be making but somehow I don't think either the Chancellor or PM has thought this through, but it was carefully designed to sound as if they were doing something.

- Work Experience

Some £250 million is set aside to help people in certain industries to get job experience. Precious little detail has been given but this could be of real importance in the coming months as this can help provide business with a helping hand on staff levels without having to hire or pay contractors.

- Statutory Redundancy Payments

The minimum payment per week of service is now £380, up from £350, and this is an important factor when costing out job cuts. Also, the maximum pay out is now moved up from £10,500 to £11,400. Unions had fought to get this higher as redundancy is actually a very cheap option in the current business climate and not enough thought is going into the process by managers.

- Environmental Initiatives

If you are a low carbon industry, then there is good news. The Government has pledged a further £1 billion to be invested in low carbon businesses. A further £405 million is available to support low carbon manufacturers and if you are into offshore wind projects, you have hit the jackpot as £525 million will be spent on them.

An interesting little extra is that £525 million will be spent on energy efficient projects in homes, firms and public buildings. For all builders reading this blog, I would get up to speed on this as this could be a lucrative new business opportunity in the coming year.

- Childcare For Workers

Many firms encounter the difficulty of childcare for employees. While the new initiative to compensate grandparents in their pension for caring for grandchildren does not seem much, it actually may filter down. Hopefully more grandparents will get involved as their sacrifice of time may be compensated and this may take the strain financially off some workers who have to pay significant sums in order to provide nanny services. It may also ease pressure on working hours as grandparents tend to be more flexible. I have real hope that this may help.

- Government Savings

Tax loopholes are closing and there is an aim to raise £1 billion via this. For those firms and individuals who have been using such loopholes, I dare say this may up your fees to your clever accountants and lawyers to find the next 'loophole'. If the Government hits anywhere near this figure I will be very surprised.

Public spending is coming down in 2011 from 1.1% to 0.7%. The figure seems innocuous but if you have a business depending on this spend, then find something new to do.

£9 billion in efficiencies are planned - I assume this will mean clearing out dross in vast new departments like Dept. of Business Secretary and the Office of the Deputy Prime Minister but how the stupid policies of increasing bureaucracy and Government via Assemblies have backfired just as everyone thought they would. So much money is absorbed by all this, it is a tragedy that we have to go back and save it. If only they would completely overhaul public sector expenses then I am sure we could save a ton more.

- Housing

Some good news for the building industry as more stopped housing projects will be restarted as £500 million will be ploughed into these but it does include £100 million for local authorities to build energy efficient homes. For those with businesses around armed forces camps, £50 million has been specifically set aside to upgrades of their homes.

- Property

Lots of mixed messages here on holiday or second homes and the detail needs to be gone through, but for many who had bought second homes and hoped to get some rental income then they are going to be sadly disappointed about how that will get treated for tax. Also, there is more of a potential hit when selling. What this does on the buy-to-let side needs to be teased out. For many who bought their second homes and planning the financials based on existing legislation, this will be a major blow and some would argue a very unfair one. I can see a need for sound advice from agents and accountants here and for all second property owners I would go back and look at the Terms and Conditions from your advisers at the time of purchase particularly if you were lured in by some 'glossy' adverts and sales speak offering 'guaranteed returns'. The industry, sadly, is not noted for it.

- Duty Increases

Travel is once again targeted with an increase on fuel duty of 2p per litre from September and I have to say this is once again a very hard tax. The cost of travel is heavy enough as it is and public transport is so overly expensive in Britain that people have no choice but to use cars. This is a big cost to individuals and to business as this cost will be passed on to customers. Via staff mileage allowances or cost of delivery, costs rise and have to be absorbed or passed on. This really is a stupid extra cost at this time as it will penalise business and individuals.

Naturally the perennial duty rises on alcohol and tobacco are high. I got lost as to why this is done - either this is a problem area in society, draining the NHS, or it is a good thing, either way the tax is neither punitive nor helpful.

- The Car Industry

Good news at last for the beleaguered car makers and their dealers who have suffered a greater than 30% drop in sales. The Government announced a £2,000 scrappage scheme for cars over 10 years old to be given as a credit against a new car. Already 8 out of 10 leading car makers have committed to the scheme which extends only to the first 300,000 cars bought under the scheme. The caveat is that the industry has to provide £1,000 of the £2,000. I cannot help feeling that again an opportunity has been missed as scrappage has worked well on the continent to support sales - dealer discounts are already heavy so will we end up paying more because the dealers will withdraw the discounts to favour this scheme? I wonder.

- Personal Tax

For those earning above £100,000 a year, their personal allowance will be halved while those earning above £150,000 a year will have their allowance removed and see all earnings above that taxed at 50% - together with NI changes this constitutes over 60% tax for some earners. It will mean that firms may well look at alternative ways of rewarding their top earners with greater dividends offered or stock options or deferred bonuses. There has been much howling about this as 'manifesto reneging' and even Tony Blair believes it is folly. Some are concerned it will cause a new drain on top talent. Who knows, but it is something that I think all companies will get 'creative' about and I don't think it will raise as much tax as Ministers think as those around the various marks will simply take the offending portion as something new.

A nasty piece of work is the scrapping of the top rate tax relief on pension contributions. I would suspect that most companies who care about this will simply put it as an employer contribution instead and take it off the salary bill. I just think it sends all the wrong messages about savings.

With this, at least the ISA limit has gone up for personal annual tax free savings to £10,200 (for over 50s this year and everyone else next year - why wait?). For the clever minded there are OIC schemes which allow you to use Capital Gains allowances in the same year to maximise tax free investment. Get good advice from your IFA on all this as my wife (who is an IFA) has just done the same for me.

There is also going to be a reform on tax on profits earned abroad - watch out for this one.

I recently got into an argument on the Linked In IOD Forum with an accountant who asserted that we should 'Choose how much tax we pay' and the statute allows this. He defended the likes of Philip Green saying he had done nothing against the law.

That's as maybe but I think that those wealthy people who deliberately go out to avoid paying a fair tax on what they earn are morally corrupt. So much so, I have opted out of that discussion group and it's the last reason I needed to opt out of the IOD which seems to be a knocking shop for such people.

That said I still believe that people should use their allowances and the tax system allows you to be sensible about your future. So those high earners earning around the £100,000 and £150,000 thresholds can take a 'salary sacrifice' and put the offending part of their salary into their pensions. Of course, that means it cannot be spent but it is about time that we had a good reason to save for retirement. Also, this needs to be clarified as new tax rules may frown on such an option - which I cannot see any wrong in doing.

Another scheme I have seen is deliberate tax avoidance which is setting up a limited company and taking the earnings as dividends and so tax is lower and using non-earning spouses and children's allowances. I think, again, this is wrong but according to the IOD accountant, perfectly legal.

Entrepreneurs

There has been much uproar that this was budget against entrepreneurs, in that it discourages people from taking risks. I don't see the logic in this - The Sunday Times Rich List has JK Rowling worth over £400 million yet she pays full tax and lives in Scotland. For the person willing to get up and work hard on their ideas, you will still be rich at the end of it. Maybe a bit less so, but rich.

Here's my logic. An entrepreneur in the UK starts here not initially to get rich but to make an idea work. For that they need market conditions, customers, access to markets and an environment ripe for their product or services' success. If they went to Cyprus to make that happen I would assert that they have less chance of success. If they went to the US, probably the same unless you have experience of the US markets. The simple fact is, entrepreneurs use the markets they are in to create their success - no market, no success.

Peter Hargreaves, the Financial Advice magnate, says he is going to Monaco or the Isle of Man - fine, go there. To get that rich on the back of financial advice then he probably gave interesting advice and I wonder if the majority of his clients are as rich as him to be able to make the same choice. But he has made his millions and he could not have made it without his customers who are here in the UK. No market, no success. So what does he want? To live in the Isle of Man and then start up another high earning business? He couldn't do it without having his customers at his doorstep, unless he was creative enough to know how to do it - and then he wouldn't be bleating about it.

So it seems that these people want more than being rich despite the fact it is normal, honest, tax paying people like you and I who have made them rich by buying their products and services. Perhaps if they had told us that before they touched us up for our money we would not have bought from them. Stelios is a prime example of this, always bemoaning 'Fat Cats' like Barclaycard who took a percentage of his take or the airport charging for things. He made millions and declares himself non-dom to avoid paying tax. So who exactly is the fat cat?

It is infuriating to think that such rich people think the country owes them more than they deserve and the customers they sell to. Makes you wonder why we buy their products with that kind of disdainful attitude. Remember that the next time you want a pension or walk into an Arkadia store like TopShop.

How To Avoid Tax - Get Rich

At last a credible figure in the world of celebrity has come out and identified the need for greater transparency in the tax system (should have mentioned public servants' expense accounts but maybe that's for next week). None other than Dragon Den's star, Duncan Bannatyne, in his column in Today's Telegraph identifies that super rich people are the ones who most easily avoid paying tax in this country - sometimes none at all.

Lord Levy and Lord Sainsbury famously paid naff all tax at least one year and then became Government Ministers. Now we have the raft of bankers, and board directors of conglomerates who either award themselves large tax free entitlements like pensions or some other form of cleverness. At least two people knighted by this Government use the 'non-dom' status to avoid paying huge sums in tax - Easyjet's Stelios and Arkadia's Philip Green are the culprits. Green sets a bit of a record having one single bank loan converted into a £1.2 billion dividend which was paid to his wife, who happens to qualify as 'non-dom'. Neither paid a penny of tax on it, and he is so proud of himself.

It's frankly disgusting. Why on earth we allow it is beyond the wit of sane individuals but, as always, the richer you are the less tax you will pay because you can afford to find ways not to pay your fair share. It has to be stopped - the burden of tax is getting heavier and much of it is thanks to the greed and senseless actions of the richest people in the world who caused this financial meltdown.

Yet they seem to treat Britain as a slot machine with a fault - it always pays out for every go, tax free.

Bannatyne makes a very important point from a business perspective also. Such super rich, tax free people have a competitive advantage over those who cannot claim 'non-dom' status and who pay their fair share of taxes as these people have more of their profits taken by the Government which cannot be re-invested in their businesses. The super rich use this competitive advantage to leverage even greater amounts of money from banks and funds to acquire more businesses and make even more money - and at each turn they cover their tracks carefully.

This Government has granted special tax status to such people and we must stop it. In particular, private equity people are doing more harm than good and the argument they are saving businesses and jobs does not stack up. Every business attempts to do the same thing and has to pay taxes. They have special status for doing so and making vast profits - and in many of the cases their gains are short term as the companies they buy and sell are left to whither.

Yesterday was a chance missed yet again by Brown and Darling. When will we make sure that everyone who makes profits in doing business in this country in whatever form pays the same level of tax as everyone else?

Taxing Conundrum

Well the budget speech had no real surprises for us but Mr. Darling has been surprised by the fact that borrowing has been higher than he predicted and the recession deeper. Fair play, though, he's only running the country's finances.

The only minor shock was the last minute hike in the top rate of tax for those earning above £150,000 per annum to 50%. Of course, anyone earning between £150,000 and say £250,000 will be grinding their teeth and spitting, particularly if they take that as salary or bonus. For those earning above that level, we are into the stratosphere where compensation can come in varying forms from capital gains to dividends or some other contrivance.

In fact, of the 50+ billionaires who are supposed to make their living in the UK, they pay less tax proportionately than those on the average wage.

You see the richer you are, the more creative you can become. And for those in the super-rich bracket, well they know every trick in the book. Sir, and yes he was knighted by this Government, Philip Green made sure he did not pay a bean in tax on a single dividend of £1.2bn that his company did not earn. The dividend was paid by a bank loan and went to his wife who is apparently an non-domicile. Like many hedge fund, private equity and top end traders in the City, Green has the facility to evade paying taxes in the UK - and he is mean-spirited enough to make sure he doesn't pay a penny, not just make sure he doesn't pay more than he has to.

The best part of all that is that this Labour Government have not just allowed this to happen, they have openly supported it and enabled these super-rich people to avoid tax by making our top end system more attractive. Instead of promoting funding for new business ventures, innovation, creativity, entrepreneurship and backing bright ideas, they have allowed billions to be created off buying, revamping and reselling existing businesses and shorting stock prices. Britain is way behind its rivals in terms of injecting capital into good ideas and many of the so called 'Venture Capital' companies plough their money into juicy deals for fast-buck turnarounds rather than back creative new businesses.

What this new hike in tax will do is call into question the raft of high earners who actually have to go to work for their living, selling things, building businesses and creating employment for others. They will be the ones who stick around here not able to afford fancy Trusts like the Labour golden boys and so pay their taxes. So when the opportunity arises to work abroad for a few years or even choose their country of domicile as anywhere else in Europe, like Switzerland, then they will do so.

The whole borrowing and tax situation is only going to get worse. As unemployment moves toward a peak, the strain on the welfare state gets higher and tax revenues decrease - so the majority of us will pay for it. Tax on fuel, because we have to drive to work whereas it is nothing to the super-rich means that once again working Britons bear the brunt of all the tax bill now and in the future.

Why didn't we see 'windfall taxes' for hedge funds or private equity? Why didn't we see a higher rates of tax on future profits on banks as they should pay back the money we are stumping up ahead of us? Why don't we see all senior banking executives having capped bonuses for the future with higher rates of tax applied? Why don't we see scaled Capital Gains Tax for businesses that proportionately rewards owners who have nurtured their businesses over many years vs. those who buy, asset strip and sell in short order?

It's because they won't pay. Tax the hedge funds and they will all register their headquarters outside of the UK, same with private equity. We need a wholesale change in legislation on companies and where they pay their tax and any individual working for them before coming to the rest of us for the price of this mess created by a bunch of ministers who cannot even get the numbers right from day to day.

Once again, this is a budget on the mass of people who regularly cough up and cannot afford to leave the country. The super-rich once again get away without paying. There was a time when Labour represented the party of social equality - but, with their former leader's head so far in the trough of riches, it's pretty obvious that's all in the past.

As a final note, I heard Tony McNulty on the radio today 'defending' himself on his expenses row. He stands by the fact it's all in the rule book. It reminded me of the old Peter Sellars film, 'I'm alright, Jack' - he has got his head so far in the feeding trough he cannot see that his job is no different from the average person who has to commute to London. He claimed £60,000 on a second home that wasn't even his and is less than 13 miles from Westminster. The rule book doesn't say you have to be a greedy, money-stealing swine with no conscience.

But that's what it takes to be a Labour Minister these days - that and skin thicker than a rhino's hide.