Well Worth The Wait?

A few hundred £billion later on bail outs and £200bn of Quantitative Easing (QE), a fiscal stimulus package worth a few bob, and all the 'right decisions' have 'apparently' been made?!

What do we get for all that money? 0.1% growth in the final quarter of 2009, according to the Office of National Statistics (ONS). Granted, they may 'sex up' that figure later but the reality is that the much-anticipated recovery that Alistair Darling and Gordon Brown got us all salivating over is hardly worth a thing. Given that we spent all that QE money, we had the effect of Christmas buying and pre-VAT surges, the fact of the matter is that we hardly showed a jot of growth.

The majority of the fiscal stimulus has been spent, now we are on the artificial lifeline of delayed spending cuts in order to tackle our ever increasing borrowing - we are in the red zone on the economic barometer. We are in dodgy credit territory and the Government's strategy of 'Hope' in terms of growth has been like a like a firework's touchpaper fizzling out with no bang.

One economic commentator from the FT previously described the economy as like being lit by firelighters and causing a momentary flash of burning but once the firelighter burnt out discovering that the economy is merely glowing not burning.

I said it before - I believed the Government used the strategy of throwing enough manure at a wall in the vain hope that some would stick in terms of the amount of money they spent. There was no focus, no target, no knowledge of the return on the money - just spend as much as possible and hope things would right themselves, all because a bunch of failed Investment Bankers advised them to do so.

It leaves the Government's fiscal policies both before the financial crisis and after in tatters - they were as bad dealing with the problem as the hubris shown in pre-empting it. No lessons have been learnt, banks have not been reformed or restrained, bonuses are being paid as high as ever in the City and bankers still being revered despite the pathetic windfall tax which makes little or no effect.

0.1% represents an economy in crisis still and we have little left to throw at it and a massive budget deficit to deal with. If this is 'prudent' economics as Gordon always told us he was expert in, then we are surely on a slippery slope to ruin.

If I were the Chancellor, I would be almost embarrassed to mention this figure. This is not good news for businesses continuing to hold in a survival pattern, hoping for an upturn.

New Year, New Job

According to research from US 'Retention Firm', Finnegan McKenzie, this is the traditional time of year when firms ramp up their recruitment.

It's a bit of a 'No sh*t, Sherlock' moment as lots of firms have year ends in December and so new budgets are agreed for the new year starting in January - on both sides of the Atlantic. However, 2010 is not just any year. For the UK this will be the first quarter, hopefully, of growth since we lurched into recession and so firms are still very tentative about investment plans and unemployment tends to lag the recessionary quarters. So it may not be the bonanza of new opportunities for career change that traditionally happens this time of year.

From the candidate's viewpoint, it is also a time when many people will be looking for a new job. According to Finnegan McKenzie's research this is very prevalent in senior management. They claim up to 51% of senior executives in the US will have actively put out their CV with the intent of changing job or perhaps to test the water by 1 January. This may be as a result of new year resolutions, a desire to increase year on year money, or just a stark evaluation of the previous year and a realisation that the job was not fulfilling or they did not like their boss. Whatever, I think many people in the UK would identify with this 'New Year, New Job' enthusiasm.

In a good year, this would be 'fish in a barrel' for recruiters. Fresh new CVs from highly paid and experienced senior executives to match to a plethora of new opportunities would be the time for a feeding frenzy of fees. I think that will not be the case this year - recruiters are still down on their luck and many are still suffering as the volume of openings are not rising very fast. Still, it has to be a period of hope.

I would argue though, that this is the point where many companies investing in growth make big mistakes. Because the recruiters match the fresh CVs to openings, corners are cut. Only that 51% of senior executives are moving and they are actively after a job - easy prey for recruiters and, I would argue, not the cream of the crop. In fact, I would wager that if Finnegan McKenzie drilled down on their research, then of the 51% of senior executives that put out their CVs at the beginning of a new year, there would be many of the same names as last year. I even wonder how many are people who actually moved jobs last year and want change again?

I always strongly argue, it is those who are not looking for jobs, who are delivering year after year in roles, who are the ones worth chasing. There is a band of senior executives and senior salespeople who are perennial job-hoppers who have great looking CVs but have delivered little sustainable difference to the companies they have been employed by. You can bet that their names will be known in the industry as that is their real skill, networking. I have been involved in the computer industry for many years and time and again the same names crop up. The daft thing is that many companies will mobilise themselves at the mere mention that one of those names are 'available' and they will be snapped up via clever recruiters masked as 'headhunters' who claim they have 'enticed' that name to move. Easy money.

It's a time to be wary. The growth that will be gained this year will come at a heavy price and will not be for the fainthearted. For many of us who have lived through recessions, there will be a period when firms may 'shoot their bolt' and try to get growth too early. This is a period of cagey moves and it also a time for reassessment of old markets and discovery of new as many firms will have learnt in the last two years that much of their business was tied up in too few companies at too low a price and exposed how little differentiation they have. Recruiters themselves have found that particularly revealing over the last 12 months in particular.

The good news is that many computer distributors are bragging of a very strong close to the year and this is a good barometer as technology will almost certainly lead the way in private sector growth. The consumer end was reasonably strong, accounting for good growth and part of that will be spurred by the VAT change, it is thought. But there was also brisk business in the banking sector.

This month sees the end of the first quarter for computer giant HP, December marked the year end of many large firms, notably Cisco. The first signs are there that technology sales are on the road to recovery and that will mean a general return to growth will follow. However, watch out for the 'Usual Suspect' CVs. There will be a mass exodus from firms at senior level - though be very wary that this year it will be for different reasons and the usual bragging rights associated with senior executives will not be there after a recession. Most will be leaving because they have been found out rather than before they have been found out. Recessions tend to do that.

Again, good luck in 2010 - growth may just be round the corner. I hope you find your fair share.

Big On Talk, Short On Ideas

Some things don't change. Over a year after the biggest collapse in the financial system since the Depression and after six successive quarters of contraction, the best Gordon Brown can do is to talk about growth.

There was precious little about delivery of this growth or how he would 'fairly' cut the budget deficit but the careful manipulation of Peter Mandelson is clearly at work on the puppet strings. After an unlikely recall to the administration and a fast track back into politics via a peerage, Mandelson has become the most powerful man in Britain. Clearly, his help comes at a price and Brown is all but a political husk, but how the gamble has paid off. When Mandelson took his ermines Labour's position at the polls was nigh on on dead. A year later, plenty of talk and little action has somehow got them back into a position where they actually may win again. After all, Blair won the last election with a mere 34% of the the vote and that won him a 167 seat majority.

So this latest 'New Year Message' promises another cycle of 10 years of prosperity - ominous as it abruptly stops after that. It seems we are now to accept that prosperity comes in boom and bust cycles. The speech gives rise to the notion that not just a rich few will prosper - well we would like to see how Brown delivers as in all this chaos and recession, the one sector that has lost little ground is the rich - in fact, most would say that they have fared far better. Sure they may get a few more taxes, but in the new decade the emphasis will be on the money men. Those that can manipulate the vast pool of money in the open markets will be the big winners as always, and they will pay proportionally less tax per pound they earn than anyone else in Britain.

That's my prediction for the new decade. The biggest losers will be those moderately well off who will be defenceless to the pounding of tax after tax - just as we were before but were too dumb to notice.

The problem with this limp message on growth is that after a year there is no detail. It is a strategy of hope. Effectively, our economic recovery strategy has ended with QE switching off shortly and VAT returning to the old high level this weekend. Scrappage is the last incentive left and that is limited to one industry. Deferred tax will be due soon and the hangover of mortgage holidays is yet to kick in - unemployment has yet to peak. Despite all this, the plan is to talk of growth and hope to God it arrives of its own accord.

Labour has a track record of 'head in the sand' governing - it's what got us into this mess as the warning signs about bubbles were clear to people on the ground. Now we are talking about 10 years of the same, led by the same people.

We must be really stupid. Then again, that's what Brown and Mandelson are betting on.

Will There Be A 'Double Dip'?

Of the many questions that face us as we go into 2010, perhaps the most serious is, 'Will there be a double dip?'

It takes a moment to work out what that means, but effectively the climb out of recession is merely a false dawn and we lurch back into recession for another period before finally emerging into real growth. Of course, this would be a huge disappointment to the Government as we have already had the deepest and longest recession on record, so as we clamber up the sides of the slippery slope to growth, it could be disastrous if we slither back down - at least for their re-election chances it would be.

Just today we heard that the rate of growth in house prices has slowed. I actually think this is not such bad news - the return to economic growth would be far more healthy if it was not led by or dependent on house prices. However, there are more serious issues that we face.

Firstly, £200bn of Quantitative Easing (QE) is soon to end - where we have issued new, 'funny money' to buy our own debt. Pretty soon Government bonds will have to vie for real money buyers and that will be a crucial test of Britain's economic health in the eyes of others. The best that QE has done is to ease credit conditions but in reality it has been stored by banks to shore up their capital ratios and some have used it to play the markets again with devastatingly profitable effect. Little has got into the real economy and allowed people like us to get access to credit more freely - or businesses for that matter.

This lack of credit is still an issue. Today, as the recession lingers, businesses have not made big demands on banks for credit - not for growth or investment, at least. Most businesses have reined in costs and tried to decrease dependence on credit, hoping they will get good, easy access to money when the markets recover. That could be a real issue as not only will firms be making their demands at roughly the same time but it will be a crucial test once again of whether QE has worked. Many suspect this will be a tough time for businesses and impair the country's ability to recover and grow.

More importantly, around the same time, as thousands of businesses took the opportunity to defer the payment of tax bills, there will be cash demands on them. By taking up the Government's initiative on 'Time to pay', firms have kept vital cash in the business at a key time rather than have to borrow more to pay their tax bills or for that matter have to make deeper cuts. However, it does not mean that they do not pay their taxes, it merely gave them a stay of execution. The taxman will want his money soon enough. Once again, this will all happen at roughly the same time and companies will have to find the cash at a time when they most need it to grow and take advantage of the recovery. Again, it jeopardises the tenuous period of growth we have.

Similarly, there will be chaos for firms on 1 January as the VAT returns to its old rate. Those firms having their year end on 31 December will have a dilemma as they would normally bill all they can. If they are a distributor, then their customers who sell on to end users may fear receiving an invoice before 31 Dec if they cannot immediately bill the goods - so 'goods in transit' or 'shipped from factory' situations will be areas of uncertainty as the chain of invoices for VAT purposes may have differing VAT rates. While the situation may be clear in some accountants' eyes, I can tell you very large firms are very fearful of the lack of clarity issued by HMRC on the subject. For many firms, who operate on incredibly thin margins, if they are left holding the VAT difference, it could wipe out some or all of their profit on a transaction.

Out in the world of consumers, there is the issue of deferred payments on mortgages. On paper, it was a good idea, but the problem is always about the detail and the time for returning to payment is a real issue. At some point, despite over 1m new claimants on the dole, people will have to start paying again which will make less available to spend in the high street, particularly if house prices have not regained sufficient value as to wipe out the negative equity many are suffering.

Clearly, there are many things to be negotiated in the coming year and some of them have the potential to drag as back into recession. The biggest of them all will be when the Government finally faces up to the inevitable cost cutting it will have to make in the Public Sector. Over the last 12 years, an extra million jobs have been added to the Public Sector as well as all the outsourced contracts. As many as one in four jobs are associated with the Public Sector and it is anticipated that the Government will have to cut back so far as to regain all of the incremental spending it has made over the last 12 years - that is the stark reality we face. A simple argument can be made that all of those 1 million extra jobs created out of nowhere in the Public Sector simply to support bureaucracy and red tape and creating untold inefficiency on inefficiency will have to be lost. It not be that many but there will be big job losses in the Public Sector for sure - that's more people claiming on the Welfare State and less paying tax; the double whammy that keeps knocking the Government estimates on borrowing off line. This, of all factors, has the biggest potential to hit us as it not only puts a huge strain on the system, it also throttles the business of those dependent on the Government for a portion of their profits but most of all it means that our ability to service our national debt is less certain - and this has a corresponding repercussion on the credit rating of the country which affects the price and attractiveness of our Bonds.

It will be a tough year still for businesses and a tough year for Government. If we are to avoid the double dip, it will take businesses to lead us and the Government to ensure there is credit available when needed most. None of that is really certain at this stage.

Finding Neverland

It strikes me that the Pre-Budget Report amounted to nothing.

Largely, we were told that the borrowing will be higher than the Government expected this year - which we expected as they keep getting that wrong. Taxes would rise a little and there were some increases in benefits. A few tinklings here and there and that was it, barring the pathetic headline grabber about taxing bank bonuses.

The Green stuff needs to be applauded - let's hope it translates into real initiatives for people, homes and cars. But that really was it.

The detailed, departmental spending review has been postponed until after the election - VAT was confirmed to rise to the old level and there was an increase in the state pension, all expected.

In the face of the worst financial position since World War II, we seem to be doing nothing. Neither stimulating growth or cutting costs - it's as if it is business as usual and nothing untoward has happened. Am I the only one who things we are in crisis?

I suppose the pattern is set - there will be a few grandstanding taxes on the rich which will raise little tax in the great scheme of things while there will be death by a thousand small incremental tax increases for the rest of us. This follows the pattern of this Government - we already are the most taxed British populations in history, so a few more pennies added here and there will only be mere rabbit punches on an already numb body.

Vince Cable called this a 'Missed opportunity' - that about sums up the last 12 years really. To my mind, it's a lack of decisive action in the face of the biggest financial disaster not caused by a war in the country's modern history.

Predictions For 2010

As 2009 closes out and most of us want to close the door on it as fast as possible, still more bad news wallops us causing Lord Mandelson to shout that the loss of 1,700 jobs at the Corus plant as, 'Galling'.

So our thoughts start to turn to the year ahead - to a world of old rate VAT and the potential emergence, at last, from technical recession although verbally we have been assured the world is fine according to our leaders. I started to do my own bit of research on the subject of what we might expect ahead and I came a across a very helpful prediction site hosted by a bunch of psychics at http://www.psychics.co.uk/. But then again, some of you already knew I would do that.



Read them for yourselves but my favourites are:

• As commanded by Gordon Brown, Osama bin Ladin will die. No doubt Pakistan will be short of spin bowlers and select him, where he will be recognised as a famous terrorist leader and be shot by a sniper.


• An unspecified MP will be caught performing an indecent act in a public toilet. This is a safe bet as surely we have had one a year for a while or are we talking about indecent acts as 'flipping' now?


• A secret human cloning experiment attempts to clone a famous person - I can confirm the person in question will be Bruce Forsyth in order to extend the show beyond his years but wig makers are still dubious about being able to hide the join line.


• Barack Obama expresses an interest in holistic healing and it becomes a watchword in his speeches. He will be seen on live TV sipping his own urine while having his face covered in leeches.


• Britain and Germany make a green energy agreement and a huge new wind turbine farm will be constructed just outside the front doors of Parliament. Plenty of wind coming out of there.


• Quantum physicists will find a way to get electricity from water, and the MP caught in the act in the toilet will claim he was merely testing the theory.


• A celebrity is kidnapped and huge ransom is demanded, but the kidnappers got the name from Ant and Dec's list and so no one has ever heard of them.


• Britain will withdraw all troops from Afghanistan bar a few token ones from the 1st Battalion of Sitting Ducks. Straw prices go through the roof in anticipation of the draw for the short ones.


• A strike by Civil Servants will cause widespread disruption as the country struggles to find out why it has no effect on anything and no one misses them at work.

So here a few of my predictions in the same vain:

• Gordon Brown saves a baby from drowning and wins a landslide at the election as his popularity as a world superhero soars. An independent inquiry 30 years later reveals that not only Lord Mandelson threw the baby in but the real one did drown and Brown saved the plastic replica.


• Bankers agree to give up all rights to any bonuses for 50 years and most take their holidays working in parts of Africa worst affected by drought, starvation and disease.


• England come narrowly close to winning the World Cup when they are beaten in the first round by Algeria and drawing 0-0 with Slovenia after heroically beating USA. But due to a countback on non-qualifying dives, lack of unnecessary referee abuse and no hand balls they are tragically eliminated for lack of unfair play. David Beckham announces his retirement to pursue a career in banking and Wayne Rooney becomes a monk.


• Osama bin Ladin doesn't die but is actually found hiding out on the wing for Scotland's rugby team.


• MPs vote for abolishment of all expenses is a popular move, but go onto a lucrative bonus scheme in aiming to halve the budget deficit by 2014 - Brown earns £10m in 2010 as he hits the first milestone.


• X Factor is syndicated all over the world and Simon Cowell becomes the inaugural First World President by popular vote with Cheryl Cole narrowly missing out in s sing-off. Louis Walsh is condemned to death as a traitor to the cause in the first public decree while Sharon Osbourne is put under house arrest for life as a dissenter.

I'll work on a few more real ones in the coming weeks, but I am sure that unless you were part of the groups who won the £90m Euromillions last month, you just can't wait to see the back of 2009.

A Dark Cloud Gathers

The news that personal insolvencies are up 28% is not a good sign that we are emerging from recession. While the rate of unemployment slowed last month, it still actually rose.

Many people talk about upturns and green shoots of recovery, but at the business coalface, some businesses are only now trimming their cloth after trying to grin and bear the recession. BA have just increased the number of layoffs planned and many of the High Street banks are culling serious numbers in staff despite making very high paper profits.

But perhaps the worst news is that as we exit the recession, hopefully in the next quarter, some of the Government initiatives are due to expire. At the consumer end, VAT is set to return to 17.5%, and there are rumours even of a hike. Meanwhile, for those businesses who have taken up the HMRC's offer to defer their corporation tax payments, pretty soon the calls will come to get those tax bills paid.

Far worse for businesses, much more than not making profits even, is the starvation of cash. It is, indeed, king - the fuel of any business. No bank will lend just to pay tax bills - it's money straight down a drain in their eyes and it is an act of desperation to ask for it. Many small businesses, in particular, will be fearing a call from the HMRC in the early new year. HMRC are notoriously rigorous about their follow up and not very forgiving. Now that the temporary arrangements are over, they will apply all pressure to get payments in. In fact, the tax coffers are so strained at the moment, that the Government is experiencing sharp shortfalls in revenue and this is a contributory factor.

Some suggest that as we come out of recession, there will be a new wave of company insolvencies as the demand comes to settle their tax bills. It may mean a re-invigoration of the rate of growth in unemployment - possibly around election time.

It needs an initiative right now.

Podcasting Our Way Out Of Recession

In the face of the heinous postal strike, our glorious leader has embraced modern technology and launched his latest piece of 'reassurance propaganda' on YouTube to show that, contrary to all indicators, the economy is behaving exactly as it should and he's on top of the situation.

Rather like the superb 'legal' promise that he and his team would halve debt by 2015, he has now pledged that Britain will have an upturn by the turn of the year. No, he was specific, he did mention 2010 for those sceptics amongst you. He got right to the point. Part of the deal was that he would reform banking and make those suddenly, vilified types embrace the kinds of values that we all share - 'hard work, responsibility, integrity and fairness'.

Of course, it does make you wonder why he tolerated such people who earned millions and did not adhere to those values beforehand, but hindsight is always 20:20, is it not? The hollow words of Lord Mandelson must chime in his ears of how Labour did not mind people making loads of money under their regime. How that has come back to haunt them all.

Another piece of late hindsight is that he will clamp down on lending sharp practice like credit card people and those who raise interest on loan repayments putting people into difficulties. He must not use a credit card himself as interest rates on such instruments have always been at least 10 times that of base rate interest, and some are multiples of that again. It is again, one of those stark moments of realisation for the poor PM where he finds out what is going on in the financial world. There is a good reason why the financial industry is almost without exception very well off and that is because they have carte blanche to do exactly as they like. It's nice of him to change this now but, to be frank, if he ever gave a damn other than saving his political neck, he would have stepped in long ago. It is not as if this is an issue that has arisen recently - it has gone on for years.

Just like the whole banking bubble which is busy re-inflating as we speak.

The final call to arms was that he was working with an international melee of leaders to ward off a Second Great Depression. I should imagine he has missed a few headlines as most other countries, including Italy, have returned to growth while Britain languishes bottom of the league table for economic dunces. He pleads that 'It would be suicidal to put recovery at risk by suddenly cutting off the funding and investment that is supporting young people, families and businesses'.

The funding and investment he talks about is pretty pathetic. While VAT is reckoned to have had a £12bn stimulus to the economy, profiling how it helps us is in real terms would be an interesting exercise. You see, even in modern monthly bills, power, fuel, insurance, food and school things are high on the agenda which are not affected by the VAT decrease. Meanwhile, consumer items are and that was the aim, to keep the High St going. It wasn't to help families and young people.

Over 1m of the unemployment number are now young people - this whole recession and crisis has affected them worse - so where is this mythical help he is giving to them? As for support to businesses, apart from copying the Continental scrappage scheme on a minor scale, he has done little beyond complex loan guarantee schemes to help business and overall business lending is down by nearly £15bn.

The vast majority of any stimulus money went into saving the very industry he now vilifies - how clever was that?

Perhaps he should have thought of that before he gave them a blank cheque to save their businesses, decrease the value of toxic debts so that they are now bargains again and allowed the banks to rekindle their feeding frenzy at the trough of easy money. Not one single, stupid bank was allowed to fail, sending the one message they all wanted to hear to them - 'If the brown stuff hits the fan, then we will get bailed out. So let's party like there's no tomorrow, we have zero liabilities'.

Perhaps, podcast rhetoric would have been unnecessary had the PM thought of all this before he handed out our hard earned cash to save those greedy bankers and gave the proceeds of all those who earned their money through, 'hard work, responsibility, integrity and fairness' to them to help them preserve their current millions and earn more millions again.

It's like Communism in reverse.

What a fitting epitaph for the biggest failure of a PM we have had, perhaps ever.

It Can't Affect Us Chickens

'Nightmare on Downing Street' could be the title of a new movie on the life of Gordon Brown. It would be a sad story of a man who just could not interpret simple facts and kept muttering to himself, 'It can't affect us chickens'.

Despite the most pessimistic of estimates by the most gloomy of economists who predicted that we would, Britain has failed to emerge from recession for a record sixth successive quarter. The hollow words of our Chancellors, past and present, as they pointed toward how strong Britain's finances were, how we could avoid a recession, how a recession could not affect us so badly and how fast we would emerge from recession are lost in the vapour trail left as France, Germany and Japan left recession status last quarter.

The fact seems a nightmare in itself. Despite spending £175bn on creating new money and £1.4 trillion on bank bailouts, our economy shrank again by 0.4%. There may be some revisions up or down but the reality is that this contraction defied all best estimates. We are getting into the habit of getting sums wrong and forecasting badly as our team seems to continually under estimate our borrowing requirements as each month we have to go cap in hand for more money.

There cannot be any shying away from a stark truth. The country's finances are a mess and the remedies chosen to right the situation are either wrong or simply have not worked. Meanwhile, in the banking sector, which we handily threw a massive lifeline to, they are partying as if there is another credit crisis to come. Banks are reporting plenty of profits, hiring new whizz kids on guaranteed bonuses and swelling their bonus pools, telling us that this is a good thing.

It is now abundantly obvious that Britain's bailout plan actually tackled only one part of the economy - banking. What's worse it righted the part of the sinking ship that had directly caused the credit crunch - it has not had any effect on the kinds of banking required by real people. It has given unlimited chips to the casino bankers to go back to the table and blow it all again, as they inevitably will and then come back to ask for more. Each time they do, the gun they use to point at our heads will be ever more deadly as Britain fast runs out of ways to raise the money.

The chilling fact is that after 6 successive quarterly contractions, Britain is now lurching toward severe danger levels of finance. As of this week, Quantitative Easing is spent and in the new year the VAT decrease is reversed. There is only one place left to go as the Government repeatedly defy the facts of having to make cuts and that is to go back and raid the taxpayers' pockets again.

With an election due in June, it's not good practice. But as time runs out for our finances, Britain needs money and fast. The time for action is actually long past and each day we avoid making tough decisions on saving money or finding new cash will costs us more in the long term.

The economy has been compared by Vince Cable as a person suffering a heart attack and we are now stabilised and preparing for recovery. I would say there is a severe danger of MRSA in the analogy.

This Government has been guilty of monumental mis-management of our finances and their remedies in the face of almost ruin have been wrong. At some point the penny may drop for them but until then, any recovery we have will just be a prelude to another crash. In our analogy to a heart attack victim, should the victim recover, sending them home to continue to eat, drink and smoke in the same way as before will only bring on another heart attack.

In our case, we haven't yet left hospital and we are already smoking again.

Shopping At Iceland

As the financial implosion occurred around us, Gordon Brown manfully rallied around saving worthless banks and helping savers. As he battled to put fingers in the dyke, so to speak, another calamity came from Iceland.

As Iceland melted under its own financial follies, it was found that not only had many UK savers, who had been lured by excellent online savings rates at Icelandic banks, but also many UK Local Authorities had several £billion between them in accounts which were rapidly tending to zero. Brown, warrior-like, thrust an accusatory finger at them demanded the money back or he would sue. Iceland waved a frozen two fingers at him and asked with what shall they pay?

The country was on its knees, virtually bankrupt.

In fact, ministers in Iceland reckoned they could name just 6 individuals who had caused the financial disaster via vaulting ambition, one of whom, a Director at Kaupthing, is under investigation for fraud. Icelandic companies owned many UK High Street shops including Iceland itself and so the knock on effect could be huge. If only we could have named our individuals beyond Gordon Brown himself. The savers in Icelandic banks would have to wait a long while to get any of their money back.

Iceland looked inwardly for salvation. At least it could feed itself if it came to it. Then some bright spark came up with an idea. We have seen before small islands trying to capture specific markets - in Mauritius, for example, there are many high fashion factories for companies like Ralph Lauren, while in the Channel Islands they tried to use VAT loopholes to attract music download business having already attracted CD and DVD distribution. Sooner or later such opportunities dissipate as the world moves on or the HMRC closes the loophole. But Iceland has an ace card.

Today, Iceland produces all its own energy. It is limitless and freely available, all they pay for is harnessing. While Britain scrabbles around laying vast cables between here and Norway to get cheaper electricity, Iceland has plenty for itself and much more. By tapping into the vast heat reserves below its surface, Iceland has access to vast amounts of the most renewable energy of all - the centre of the earth. And it has another unique, lots of cool water surrounding it. This unique combination has opened a credible business opportunity that has powerful selling points. It has already started to build specialist, state of the art premises to house vast server farms. As data grows exponentially, Iceland's unique combination of hot and cold means it can both power the servers cheaply with no impact on the CO2 levels and cool them again as it takes almost the same energy to cool them as power them under normal circumstances.

Banks and companies like Google, who alone is rumoured to have over a million servers worldwide, are already expressing interest and vast fibre cables are being laid to handle the incredible bandwidths required to transport the data to and from the island. Iceland's location means it may not ideal for the kinds of speeds required for certain companies, but for the plain old internet, it is more than acceptable.

As Britain fire-sells puny assets in an attempt to make ends meet that looks like people begging to the homeless, Iceland has a future which is exciting and potentially unique. Of course, there are issues about housing so much IT real estate in one place - it is the terrorist's dream - but if all these can be overcome, Iceland will have an amazing future that makes our pathetic efforts look as they are. We spent all our money to save a few rich people - Iceland is using all its resources to tap into something that can make it rich and powerful.

Icelandic bankers may not be getting fat bonuses this year, but they can at least go home thinking of a future that is worth investing in. Our boys will be rich again this year as they convert rubbish, toxic debt into £billions of profit right in front of our eyes and so just delaying the obvious and the inevitable.

Guess who stands the best chance of a sustainable future?

Different Strokes

China will spend around 2% of GDP on Fiscally Stimulating its economy this year and the same next - USA exactly the same this year, dropping to 1.8% next while Germany will spend 1.5% this year and 2% next. Britain will spend 1.4% this year and zero next.

Germany's biggest issue is that the money it has pledged to stimulate the economy is not being used fast enough, as much of it is for driving renewable energy into public buildings, building more, refitting old buildings and other projects. Such projects are big public spends and their laws mean that tenders have to be written and due process observed. This has bottlenecked public spending and so they have introduced ranges of laws that say spend of less than €100,000 does not have to go to public tender, just a few quotes while some projects up to €1m can avoid the old tender process. In just 14 months, they need to spend €10bn in education alone and the rumour now is they will spend that money on anything that disperses the cash quickly meaning that German schools could become showcases for interactive learning for all Europe. The main thrust is that instead of just a few large construction or IT companies benefiting from the spend, literally thousands of small firms will benefit from the spend.

Along with direct Government subsidies to firms to pay wages in the recession, Germany has deadened the impact and unemployment has not risen appreciably despite spectacular insolvencies like Arkandor. Britain, meanwhile, has seen unemployment rise to over 2.4m and it continues to rise with predicted peaks at over 3m. In the same breath, we have seen tax receipts drop 20% in the last quarter, 3 times the level of drop predicted by the Chancellor, meaning higher borrowing again - rumours abound about Britain's ability to pay for all this debt which could see our credit rating moved down.

For Britain, it was all about saving the banks and stimulus has come only from the VAT decrease which is temporary. Credit was seen as the major issue and so it had to get flowing again. Instead of seeing more Fiscal Stimulus going directly to save jobs, we have seen new money pumped into the banking system via Quantitative Easing to the tune of £175bn and precious little has got down the line. In fact, credit has never been so expensive and hard to get with banks missing their lending targets consistently, loans at multiples of base rate not points above, fixed rate mortgages at a huge premium and loan criteria at their most stringent in years. Yet banks are awash with new cash from taxpayers and money markets again at the cheapest price in years.

What has happened? Why isn't the money getting into the economy at the points where it is needed? The answer is simple - banks are at their high risk games again, with cheap money and an unlimited guarantee against losses underpinned by the taxpayer - they cannot fail to make money, so why give it to us where they would earn comparatively less?

While even Adair Turner is now mooting a windfall tax to prevent excessive bonuses, and bonus schemes are getting a bit tighter but no one is regulating new salaries and inter-bank headhunting of new 'talent' with lavish guarantees and other perks. The fact is that while bonus schemes may look more difficult to attain the old heights on what is certain is that clauses defining that traders MUST get paid even if the banks are making losses are being set in stone. We actually will come out worse, not better thanks to the lack of thought being into the process by non-bankers.

The end result is that technically France, Germany and Japan have all exited the recession while we suffered a further 0.8% shrink in the same quarter. It seems Britain is more focused on fining and locking up music downloaders than tackling unemployment or real crime - it seems we are more keen on bank rolling the real criminals in banks who robbed us of billions to support their high risk gambles and we have allowed them to do it all again with impunity. Meanwhile, the money getting to the parts of the economy where it is needed is minimal, expensive and late.

We have paid the best part of £100m in fees to numb skull bankers and lawyers to plot a way out of trouble that has put money right back into the hands of those who broke us, and they are keeping it to spend on their lavish high risk derivative gambles to earn mega-bucks to lose again later.

It is anticipated that Angela Merkel will breeze the forthcoming election in Germany and she has around 83% of the anticipated votes in polls. Gordon Brown may take real note as she fought him hard on Fiscal Stimulus and bank bail outs at the G20 as did Sarkozy of France. They have been proved to be right, Brown wrong despite his belief he 'saved the world'. They thought about specific programs and directed spend to stimulate the economy and get money into all businesses while we focused billions on banks and the financial system which are failing us yet again as we did not set rules and regulate properly.

Despite the smug, self-congratulations, Brown has been proved to be lacking in real skill in economics and Britain will pay a very high price as a result.

Small Bank plc

It is quarterly VAT time and once again my main customers have not paid on time and so I am left to pay the VAT on their invoices even though they have not paid it to me. As it did last quarter, it got me pondering why I should act as the Government's bank.

My company is in Business to Business Services and as such I do not sell direct to any consumer and therefore I am one of those VAT 'clearing houses' which helps the Government wash its taxes around the system. For every invoice I send out to UK customers, I charge VAT, then I pay the VAT on that invoice to HMRC even if it has not been paid to me. Meanwhile at the customer end they just sit tight until I scream blue murder and then pay the bill when I haven't got any scream left in me and I have gone blue in the face. HMRC is very happy as it got its VAT upon which it can earn some interest, most likely in some Icelandic Bank that pays a quarter of a quarter of naff all interest more than UK banks. Well maybe HMRC don't do that but Local Authorities did.

In a nice quirk of accounting, VAT is one of those taxes that I just pay out regardless of whether I have received the money, or for that matter, whether I can afford it. HMRC are not sentimental when it comes to VAT - they are No. 1 creditor in the line and they will get what's owed first.

This seemingly stupid state of affairs which penalises small companies which are beholden to larger companies to pay their bills on time means that I effectively become a clearing bank for HMRC and I get to pay all the interest if I cannot afford it. Such are the machinations of clever people in Government, that they think by reducing VAT to 15% it has helped businesses like mine. They could not be further from the truth - my issue is having to pay it before I am paid by my customers regardless of how much it is.

Well, we small businesses don't mind it really as HMRC are a forgiving lot and if the shoe was on the other foot, I am sure they would be very fair. If you believe that then you can believe that pigs can catch swine flu.

Scams

The interesting side effects of VAT and its methods of collection are that it is ideally suited to scams. It doesn't take a genius to work out how it can be easily set up. Company A buys a ton of goods, supposedly, from a dummy company in China or the EU. Then Company A sells the goods to Company B in the UK and charges VAT on them. Company B, sells the goods on to another offshore company and charges no VAT. Company A then simply does not pay VAT to the HMRC, while Company B claims the VAT it has been charged by Company A back from the HMRC. Because the HMRC couldn't give a monkey's whether Company B paid Company A, the scheme works nicely. Company B has some cash, while Company A simply shuts down and then forms a new Company A in order to repeat the process. The process is repeated time and again. This scam is called a VAT Carousel and it is easily the most popular scam of them all.

In many cases, no goods ever get moved, while in some, at least to avoid too many prying eyes, there may be a piece of stock such as electronic goods which nominally moves around to keep everyone happy.

Making Scams Work

The reason why such a scam works is simply the way in which VAT is collected. HMRC cannot give a flying whatever if a company does not pay my bills - it just wants the VAT I have invoiced in its coffers at the end of every quarter regardless of my business health. It is this simple notion that is exploited by scammers as if the VAT has to be collected before being paid to HMRC then it would make these scams unattractive. That would have a little more of a trail to it while offshore set-up companies and fictional employees are the usual go betweens which make this all very interesting.

A Fairer, More Secure System

It would be far more sensible to wait until money is received before forcing companies to pay the VAT on invoices. Not only would be it fairer on companies like mine but it would start to narrow the lucrative options for scammers. It's not that they would not find a way, as the criminal mind is a creative one, but at least it would stop something so obvious happening that a 3 year old could think it up and make it work.

How much is the HMRC losing on VAT scams? Between £1.1 billion and £1.9 billion or probably a good deal more than it would cost to allow all the retired Gurkhas to live in Britain if they wished.

A sense of perspective is always nice on a Bank Holiday Weekend.

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.

Retail Confusion

I'm confused. The sharp-eyed amongst you will notice I blogged on the CEBR's report that the Government's decision to reduce VAT in December had produced some £2.1bn extra sales in the first quarter of 2009. They argued that the annual growth in retail sales was higher than expected and this was due to the reduction in VAT of 2.5% which they called to be extended a further 6 months.

Now we have the report out from the British Retail Consortium (BRC) which says completely the opposite. They say that like-for-like sales, which does not include sales in new shops, fell 1.2% in March this year, the ninth fall in sales in the last 10 months.

They also point out that there was a small increase year-on-year in January but this was due to very heavy discounting by retailers. Expensive goods came top of the list of hard hit with furniture sales falling to their lowest level in 9 years. This despite being sent a £400 voucher to use in the 50% off sale at DFS with 4 years free credit, I can tell you from personal experience - even with such an incentive and two dogs who have ruined our suite, we couldn't find anything that a) we liked and b) had sufficient quality (that plus the sales staff either were too busy sitting in the centre of the store talking or sinisterly stalking us and pretending to move signs as we made our way around).

Meaningful information was limited by the fact we had a very cold March and the data does not include Easter sales which are usually very high.

A partner from KPMG pointed out that there was cause for some Spring optimism as there was a small increase in the number of women's shoes bought and clothing. However, the barometer must be not working in his office as I can assure him that my wife bought only two pairs of shoes since Christmas despite the incredible sales, and the two pairs she did buy were bought in Milan.

As many will know, this is drastically down year-on-year in like-for-like purchasing and the en-suite bathroom converted to shoe storage has now some free space due to an annual clear out. Purchases of handbags in the same period have also suffered dramatically and, to my knowledge, purchases in the first quarter were their lowest in 12 years.

Let's hope this recession lasts a bit longer yet. I might even get to take a shower.

The Public Sector Time Bomb

I can wax lyrical on the recent revelations on MP Expenses which I firmly believe are just the thin edge of the wedge. There are over 600 MPs in the main House alone who are running personal and departmental expense budgets larger than the total budgets of a great proportion of Britain's raft of small businesses, who are currently struggling so hard to survive this recession.

But that really isn't the half of it - by a long, long chalk. This recession has crippled British business and the private sector has taken almost the entire brunt of it. This week, Teachers will be the next sector to demand a 10% pay increase and they are getting peaky already over other issues like Sats for 7 year olds - if they can strike for that, then surely striking for pay is a short hop. Meanwhile out in the Neverland of council workers, The Tax Payers Alliance revealed this week that many Council chiefs received pay rises of above 10% last year, while over 1,022 public servants earn in excess of £100,000, a number which swelled by 27% in a single year, and 16 of these people now earn above £200,000 a year - a salary that not even Gordon Brown enjoys.

We can get uptight about these figures indeed - the inefficiency of public sector organisations is just stupid - and it isn't just salary bills. Many public sector organisations, the total of which now account for 1 in every 4 jobs in the UK, employ a raft of contractors through 'outsourced' contracts for certain work rather than directly employ them plus many new infrastructure investments like the NHS database have an enormous number of external 'consultants' swarming over uncontrolled and spiralling projects. You would then start shuddering at the rise in the number of politicians we directly fund in the new tiers of Government from European Parliament and the Commissioners down to Assemblies and Councils and other related bodies we just don't think about.

Sharing The Pain

Largely all those jobs have continued as normal with just a few minor cuts here and there. As the burden of Unemployment increases on the Welfare System due to the raft of workers laid off from private firms, and the ever-increasing sums being pumped into our sorry financial system, the Budget Deficit is rising alarmingly, much faster than anyone thought from Government to research institutes. About the only place that got it right was the IMF who all along said this was going to hit Britain harder and for longer than most other places.

It is easy to see why when such an enormous proportion of Government spending goes on keeping politicians and civil servants in jobs. But these are not just any jobs. These jobs have the most lucrative pension schemes outside of Fred Goodwin's. A 10% rise in salary in one year for Council executives earning so much has a truly massive effect of the requirement to fund the same people's future pension dues.

In the recently published accounts of the NHS alone, the pension deficit is currently running at £212 billion.

The whole Public Sector pension requirement is a ticking Time bomb of nuclear proportions and it is not included in any of our borrowing requirements today. But you can be very certain of one thing, we will have to pay for it.

Pension Hurt

I am one of the vast number of people in the UK who regularly saves a significant proportion of my earnings, while my employer also contributes. However, my current outlook on any future pension is looking as dreadful as our general economic position. But it is actually far worse. As one of the private sector workers, I will be paying disproportionately more of my money to fund not just the salary increases of the Public Sector but the vast rift between what the Government has set aside for pensions and what is needed to pay them. It means that my future earnings will be far less in order to pay for this and I don't think much of that has been factored into the current gloomy talk about public finances, national borrowing and future tax liabilities.

The Institute of Fiscal Studies (IFS) paints a very gloomy picture about the rise in the budget deficit after the release of lower tax revenues and higher bail outs. Adding it all up, the IFS reckons that UK debt will be 77% of GDP by 2013.

The Time Bomb

While we talk of ever increasing amounts of spending, at some point the whole issue of public finances has to be sorted out and right across the board. Right now, we have too many jobs in too many places in the public sector which are just superfluous. We have too many uncontrolled contracts with third party firms which are sumps for money with no visible results. We have, across the board, a pension and benefits scheme for public workers which is wholly out of kilter with the private sector (with few exceptions depending on your position) and we have a private sector that will be called on in ever greater amounts to pay for this.

We are developing a 'Ruling Class' of bureaucrats akin to the latter day Soviet Union which makes sure those who are employed by the state are more protected in terms of job security, money, expenses, pension and the law than the rest of society who are at the grunt end of generating the GDP. The similarity is beginning to grate on me - privileged jobs with spanking benefits and allowances, international travel for fact finds, expense fiddling goes unpunished and peers who transgress the law are treated better than everyone else.

The picture of modern day Britain is far from the 'Cool Britannia' we were promised unless you are employed by the State.

The Green Shoots

The Centre for Economic and Business Research (CEBR) tells us that the VAT cuts have actually boosted our economy with over £2.1 billion of increased sales since 1 December 2008. It argues that the 2.5% cut which is due to expire in January 2010 should be extended for 6 months. The CEBR argues that annual growth in retail sales was higher than expected and this can only be attributed to the VAT decrease.

If, like me, you have consciously reviewed your finances and selectively decreased your spend then the rise comes as a bit of a shock. As a small businessman, I can certainly say that the VAT decrease has no effect on my sales at all while I have cut back on unessential purchases. I would expect in the business-to-business sector this is exclusively the case - VAT is just a money collection service on behalf of the Government for small businesses, in fact due to companies extending payment terms unilaterally, I have had to fund VAT payments through the business cashflow in the last quarter - it has actually cost me more.

The CEBR findings don't seem to fit the observations of most who are experiencing this recession, unless those who are losing their jobs are actually spending more.

Of course, such effects may be short lived. The Government plan was to actually raise VAT to 20% and it has an upper window of 25% allowable by the European Union. Will they use the full scale of charging for the future?

Well someone has to pay for all those public service expense accounts and pensions. As anyone would tell you in the Private Sector, there is no such thing as a free lunch.

Show Me The Money

All small businesses are exposed to the risk of slow or even no payments from clients. When you are a service business like mine, very often it is prudent to insist on upfront charges or faster payment. But sometimes, no matter what the contract says, if a large client pays late, there is little you can do but grin and bear it.

The inequity of the system is brutal as very often the very client who withholds money on you, is a company who has a cash business at the front end.

Large Companies Can Be The Biggest Sinners

I recently highlighted the problem showed in the Panorma Show where Boots plc had unilaterally, without warning, changed the payment terms for its suppliers.

I have experienced the same but without the courtesy of a letter - it just happened.

For most small businesses, while it would be great to actually slap a writ on a client, in practice it is not possible to get too heavy. A large client is, after all, providing a source of revenue and profit. However, this month things changed for me, when my largest current customer held payment on invoices dating back to before Christmas and has paid only the smallest invoices as a show of good faith which merely covered expenses not fees since. Having crossed the boundary of VAT due dates, I have now paid all the VAT on those invoices and without any cash in, so salary costs to my contractors and myself have been delayed.

However unacceptable I may think this is, and there have been plenty of urgent communications to get this sorted out, in reality I cannot get too angry and throw my toys out of the pram as they have shown in the past that they eventually pay, their credit rating is good and they are one of the lucky companies who are enjoying growth in recessionary times. It is the sort of client I can ill-afford to be without.

I suppose I should just thank the Lord my business is not dependent on the Public Sector who, despite the rhetoric of Mr. Brown, are the worst payers in business by a long chalk.

The Prompt Payment Code

The new Prompt Payment Code (PPC) was devised in and introduced in December last year. Any company can sign up to it and it is purely voluntary with no recourse in law - usual rules apply. Signatories sign up undertake to:

1. Pay Suppliers on time - within agreed terms at the outset of the contract, without attempting to change payment terms retrospectively and without changing practice or length of payment for smaller companies on unreasonable grounds.
2. Give clear guidance to Suppliers - by providing them with clear and easily accessible guidance on payment procedures and ensuring there is a system for dealing with complaints and disputes, which is communicated to Suppliers. Suppliers must be advised promptly if there is any reason why an invoice will not be paid within agreed terms.
3. Encourage good practice - by requesting that lead suppliers encourage adoption of the code throughout their own supply chains.

The PPC is being monitored by a festoon of organisations like the Institute of Credit Management, the Federation of Small Businesses and the Forum of Private Business. Sadly, none of these organisations have any real teeth and none have good membership from larger companies. The trouble often with such initiatives is that they look good on paper but because you do not have to buy in and cooperation of large businesses or Government Departments, then it is likely to fall by the wayside.

Our Worst Nightmare

I have been doing a lot of business in Italy of late and the one thing that strikes you is how businesses survive over there. Credit terms are generally understood to be 60 days at the very minimum but are often at least 90 days and more like 120 days and yet more with Government Departments regularly taking 6-9 months to pay bills. This, of course, has a massive ripple effect as it cascades through the supply chain. You might think that correspondingly prices are higher in Italy to compensate for this but the reality is the opposite - if anything, competition is more keen.

For companies entering the Italian market, if at all possible, do so via a partnership or Distribution and just make sure they are financially solid enough to manage your market on your behalf, even if that costs some extra discount as is likely.

Britain, in my opinion, is fast becoming the same way. Large firms are using suppliers as a source of credit as banks are not so easy with their money any more.

Spin And Guff

Professor Nick Wilson of Credit Management Research Centre at Leeds University believes the PPC is just PR spin both from the Government and the signatories and it has all been seen before. There have been similar attempts at codes in the past but Government did not get behind it and impose its rules - Government even withdrew funding for the Better Payment Practice Group which really said it all.

Wilson agrees with me - in his opinion, the situation has worsened considerably for smaller businesses over the last 10 years.

Your Rights

In 1998, the Late Payment of Commercial Debts (Interest) Act gave small businesses a statutory right to interest on money owed to them by large companies or the public sector and to claim debt recovery costs. However, it is a case of cutting off your nose to spite your face as few companies resort to the law for fear of losing their clients' business.

It is a real Catch 22 situation.

Naturally, when the rights were extended to big businesses, they had no problems enforcing it. For many smaller businesses, it means they are getting squeezed at both ends - larger suppliers giving them aggressive payment terms which they are penalised heavily for if they transgress while large companies refuse to hold to their payment terms who are their customers.

Also, a case in question is VAT payments. In the case when a large customer has not paid on time and you cross a VAT quarterly boundary, and if a large supplier has held off paying for 60 to 90 days, you can end up paying all the VAT without money coming in. The Government sees only you and not your customer, who they are happy in the same quarter to reimburse the exact same VAT you have charged them.

The system is a complete mess and penalises the company that has not been paid.

In reality, there is little that can be done about the situation. SMEs are right in the middle and we make up over 90% of the volume of companies in this country and account for 13m employees yet we have a minor say in how the process should run and no voice when it comes to large company customers and Government not paying.

Companies Signing The PPC

Notable companies like Asda, British Gas and John Lewis have signed the PPC code had little to say when contacted on the subject and this bears out Wilson's PR spin accusation. It's all for show. Asda, for one, has actually implemented some good schemes to help. They have won awards for their supplier schemes and 'Where's My Invoice?' is one which allows suppliers to go online and track their invoice through the Asda payment system to be able to tackle issues which may delay payment as and when they occur not when the money is overdue.

Real Experiences

The large customer I refer to has not signed the PPC and is not interested in doing so. Just this morning in answer to my latest protestations, an accounts clerk has asked me to send a Statement of Account, then having denied receiving it despite a read-alert warning telling me they had not only received it but read it, they then claimed they had not received any of the invoices despite me having read-receipts for them all.

Of course, calling them liars does not help the situation and may well jeopardise future business, but I don't think this is at all unusual for small businesses. We are at the mercy of the system and until Government actually puts their money where their mouth is on this issue like cleaning up the VAT payment scams, then we will always be at the bottom of the food chain.

I hope Lord Mandelson gets to read my blog - his ears should be burning at least!

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.