Does the tax on businesses make any sense?

I recently read through the very interesting report from the Institute of Directors (IOD) entitled “Tax the weighty burden 2012” which discusses the true tax burden on UK businesses and how this is way beyond just the headline corporation tax which everyone thinks of.

Their point is that UK businesses are far too heavily taxed and that this in turn deters enterprise and risk taking. They may just have a point.

A number of key issues come out of the report which really makes you think:

• In addition to corporation tax at between 20 and 24%, companies also pay the following taxes: business rates, employers national insurance, road fuel duty, climate change levy, irrecoverable VAT, insurance premium tax, vehicle excise duty, and so the list goes on! Most of these are not influenced by profitability or the ability to pay as taxes on profits are.

• The impact of this is that businesses effectively pay between 32 and 41% in tax, meaning that the first four to five months of their annual profits are for the benefit of the state and not their stakeholders!

• That this overall rate of tax increases with the size of the business. So the more successful you are the higher the rate of tax you pay!

Does this make any sense? Is it fair? Does it encourage enterprise? The IOD argues that it doesn’t and that it is counterproductive. In fact a lower tax burden would encourage businesses more and overall the economy would benefit.

There are many elements of the tax system on businesses that do not make sense and certainly could be argued not to be fair. Business rates are proportionately much higher than Council Tax, yet businesses only use a fraction of the services that private residents use. In fact they drive economic prosperity to the area where they are located. Through employers national insurance employers are penalised for growth and taking on extra employees. Something which will be even worse with the introduction of auto-enrolment pensions.

One other nonsense area of business taxation which the IOD report does not cover is the huge differential that exists now between the owners taking income and the capital gains tax they pay should they sell the business. Presently with Entrepreneur’s Relief available on up to £10m of lifetime gains, a business owner will only pay 10% tax on the sale of his business. However, if he chooses to continue to run his successful business and income he takes out will be taxed up to the highest rates of 50%, plus national insurance. This seems to be a huge incentive to sell rather than build further for increased prosperity.

It really does seem that the tax system is working against the huge need for smaller enterprises to grow to get us out of the doldrums!

The Euro according to Blackadder

Baldrick: "What I want to know, Sir is, before there was a Euro there were lots of different types of money that different people used. And now there's only one type of money that the foreign people use. And what I want to know is, how did we get from one state of affairs to the other state of affairs"

Blackadder: "Baldrick. Do you mean, how did the Euro start?"

Baldrick: "Yes Sir"

Blackadder: "Well, you see Baldrick, back in the 1980s there were many different countries all running their own finances and using different types of money. On one side you had the major economies of France, Belgium,Holland and Germany, and on the other, the weaker nations of Spain, Greece, Ireland, Italy and Portugal. They got together and decided that it would be much easier for everyone if they could all use the same money, have one Central Bank, and belong to one large club where everyone would be happy. This meant that there could never be a situation whereby financial meltdown would lead to social unrest, wars and crises".

Baldrick: "But this is sort of a crisis, isn't it Sir?".

Blackadder: "That's right Baldrick. You see, there was only one slight flaw with the plan".

Baldrick: "What was that then, Sir?"

Blackadder: "It was bollocks".

With grateful thanks to Nigel Cook and apologies to Richard Curtis and Ben Elton I suspect!

Is there a safe haven?

One of the very interesting and diverse aspects of our work here at Insight Associates is the huge variation in the fortunes of our clients. At any one time we can be working with businesses which are distressed where we are helping nurse them to health again (often including intensive cash management), and the others doing very well and generating cash.

This has perhaps been even more noticeable in recent years.

It is the second of these areas interestingly that is presenting a challenge at the moment. We have clients who are holding reasonable amounts of cash, generated through profitable trading. They are naturally risk adverse, so want somewhere to hold these funds and also get a reasonable return.

The big four clearing banks have in the main forgotten what it means to pay interest on deposits, with many offering such low rates it is hardly worth their while doing it. There are exceptions but mainly for long term bonds etc.

So, if you want to get any return worth talking about (and we should be looking at the very least keeping up with inflation) then you need to move the funds to other banks and institutions. Most of these are overseas or have significant overseas interests or ownership. Then are you looking at risk?

I have just this week had an interesting exchange with a senior manager with the UK arm of a certain red Spanish bank (an excellent manager incidentally, so this is no reflection on him). This bank are offering very strong rates for short-term deposits, and have been for some time. On the face of it attractive. But what of their exposure to the rather shaky Spanish economy?  They show very compelling statistics and facts about their rating and how the UK is ring-fenced, which yes shows that they would not fall if their parent in Spain fell or had difficulties.

However, I say, banking is based entirely on confidence. No-one can argue that the confidence in the UK bank would not be badly shaken, at best, if things happen in Spain, and regardless of the facts that may well lead to a run on the UK bank. No bank however strong can survive that can it?

So are there any safe havens left?  The financial world is a very uncertain place at the moment.