50% discussions are overrated….

There has been a lot of talk recently about the 50% tax rate and its impact on entrepreneurs and building businesses. In my view this is a total red herring. The 50% rate has always been symbolic and has had little impact on either revenue raising or wealth creation. Constant focus on this is a waste of time and a diversion from discussions about the real needs of a wealth creating economy.

Very few business plans that I see include salaries for entrepreneurs pitched at anywhere near £150,000 (and if they do these salaries don’t last long as funders will not wear them). Indeed the plans in which I do see such salaries are invariably prepared by ex-corporate types who have not quite grasped that life is a little different in Enterprise Britain to what they have been used to

Most real entrepreneurs and wealth creators have a long term view of financial gain. That is why the various reliefs available that reward investment in growth businesses, such as entrepreneurs’ relief and the enterprise investment scheme (EIS), are so important. They are real incentives that encourage the building of the sustainable businesses that the UK economy will need in future. These incentives, coupled with a business friendly regulatory environment, will create more jobs and wealth than any tinkering with the top tax rate.

Far more pernicious in my view is the effective tax rate of 60% levied on incomes between £100,000 and £112,000, the result of the gradual elimination of the personal tax allowance. This can have a potentially negative effect on the individuals who may not have the entrepreneurial spark necessary to grow a business, but are vital lieutenants, providing necessary back up and support as it moves beyond the start-up phase. It equally cannot be “managed away” as easily as the 50% rate can. I suspect that a FOI request will reveal that this is much more lucrative that the 50% rate is, and as a consequence is unlikely to be changed anytime soon.

The only way that the 50% tax rate is likely to get in the way of entrepreneurial activity is if it distracts politicians from doing what is really required to get such activity moving. Talking about tax can sometimes be as damaging as the tax itself.

P.S. Apparently Belgium has now broken the world record for not having a government. During this time it seems that its economy has grown unhindered. As one would have it in twitter world #justsaying…

An FD’s view of the Budget

Having been inundated with e-mails from various accounting firms providing both the highlights and the details of last week’s budget, I thought I would take a bit of time to digest them all before making any comment. That, and the fact that because of the Easter weekend, the last day to get anything done in the current tax year to mitigate the impact of the new 50% tax rate is actually April 1st.

Of course given that there is an election imminent, any thoughts that I might have could be totally redundant, as could the Chancellor and many of his colleagues. However, as this was probably one of the more SME friendly budgets of recent years, it is worth looking at some of the proposals put forward by the Chancellor last week.

The headline grabbers were the doubling of entrepreneurs’ relief, for those who sell their business, to £2mio, the cut in business rates from October 2010, and the doubling of the annual 100% investment allowance to £100,000. The latter is only a short term cash benefit rather than a subsidy, but very helpful if you were going to undertake that capital investment anyway. If you are only going to do it for the tax break, then the best advice is probably don’t.

There was an extension of the “time to pay” scheme in respect of business taxes for the lifetime of the next parliament (which in the case of a hung parliament may not be that long). This can be a very useful scheme, but its use needs to be used as part of an overall business restructuring plan, and not as a way of delaying the last rites of a failing business. Getting a scheme past the Revenue is also becoming more challenging.

There were a number of schemes aimed at providing loans and investment to smaller businesses, including a new national investment corporation, a new “green bank” and more money for university spin-outs. Reading the small print, many of these new funds are dependent on private sector and European Union funding as well as government money. However, assuming the application process is not too tortuous, these could provide useful funds to early stage businesses.

There will also be yet more pressure brought to bear on the banks to lend, including a “Credit Adjudication Service” who will deal with complaints from SMEs which have been refused bank loans, and who will have legal powers to “enforce its judgements” if credit has been “wrongly denied”. I can’t wait to see this in action, although I suspect the biggest business beneficiaries of this scheme will be the accounting and legal professions.

The elephant in the room for SMEs (and many larger businesses) remains the 1% increase in National Insurance that will kick in from April 2011. However you dress it up, it is a tax on employment, which seems perverse to me given that the economic confidence which comes from having a job will be a vital part of any recovery. 

So yes there were some very interesting proposals in the budget for smaller businesses and entrepreneurs but sadly, given the impending election, they are only proposals and will only be implemented if Labour is re-elected. So in the end the whole thing was possibly a waste of time, money and paper and maybe the government should have just enacted legislation to enable them to continue to collect taxes.

Personally I am looking forward, if that is the right phrase, to a proper budget once the election is out of the way, regardless of who wins, so I can start planning with some certainty. 
Antony Doggwiler

Fundraising made simple…..

Tinchy Stryder, who is apparently something big in the pop world these days and therefore a suitable role model, has been advising young people to invest and save wisely. I think this is a great initiative, and personally believe that lessons in business and finance should be compulsory in all schools from as early an age as possible (as apparently does Ed Balls). However, what particularly struck me when reading about this, is the fact that he partially financed his debut album by selling clothes.

In a world where everybody from pop stars to business people seem to be looking for somebody else to fund their dream, it is a timely reminder that the best way to generate cash to finance investment is to sell something at a profit and then make sure you collect the money that is due to you.

There are countless stories of entrepreneurs who have held down two or three jobs to raise the necessary funds to finance their dream and then have “bootstrapped” (i.e. used funds generated from their own business operations) their way to fame and fortune. The Beermat entrepreneur, Mike Southon, is a big fan of this approach, and it certainly saves the time and hassle of trying to find, and negotiate with, potential investors. Such an approach will require sound and disciplined financial management, but it does mean that you will have more control over your own destiny than if you allowed external involvement in your business.

I know this sounds glib, and yes of course some businesses do require significant development capital which can only be acquired through outside investors. However, I do think that some entrepreneurs spend too much time obsessing about how to raise money and lose sight of the fact that they ought to be thinking about how they should actually be making money.

Business is not meant to be easy, but it is simple, and perhaps business people of all ages could benefit from learning from Tinchy Stryder’s approach to financing their dreams.

Work? Well if you insist…….

A couple of interesting reports caught the eye this week on the future of work and employment.
The first from the New Economics Foundation suggested that the working week should be cut to 21 hours , saying that this would help boost the economy and improve quality of life by easing unemployment and overwork. They admitted that people would earn less, but said that they would have more time to carry out worthy tasks.

I am sure most entrepreneurs when they heard about the former, initially though “21 hour days – that seems about right” but no, the authors really were suggesting that 21 hour weeks should become the norm, with a few additional hours no doubt to carry out some worthy tasks.
The second by Friends Provident suggested that by 2020 we would have an elite group of knowledge workers who, due to the their scarcity, would be able to demand higher salaries, better benefits and a greater degree of professional fulfilment. However, we would also have a growing underclass who would face poor prospects and limited expectations, which could leave UK plc facing a serious skills shortage.

Clearly working life is changing for many of us, and it is interesting to note that more and more young people are looking to control their own destinies, and expressing a desire to set up their own businesses. However the skills question keeps cropping up, and I suspect that personal development will need to remain a priority however many hours we work a week.

Given the above two reports, it is interesting that much of the comment surrounding the unemployment statistics for January focussed on the issue of underemployment, and how measures such as part time working had effectively kept the headline numbers down. Underemployment is one of the big issues of this recession, and many of the statistics quoted do not include those people who are setting up their own business or working as freelancers. Many of these people are working very hard to establish and market their business, but are underemployed in terms of actually earning real money.

All this reflects the changing nature of work and employment over the last decade, and many of the trends, such as flexible working and people starting their own businesses, will be accelerated by the current economic downturn.

Very exciting stuff of course, but what this move away from traditional employment will mean for the future tax take and our yawning public sector funding deficit is another issue, and no doubt the subject of another blog.

Britain’s got (financial) talent….

Businesses fail because of bad financial management. And we are not just talking about businesses that go bankrupt here. We are also referring to businesses that do not make as much money as they could have done. Potential world beaters that get overtaken by seemingly less well resourced businesses.

And yet if you look at most business plans or proposals, while they will provide full details of the sales, marketing, creative and operational talents within the team, there is often very little reference to the finance talent that will be required to manage the money, and provide the financial returns that are faithfully promised to potential investors and finance providers.

In the heady atmosphere of developing an exciting business idea, it seems that financial management is almost an afterthought (as opposed to finance, which of course is seen as vitally important, especially when it is provided by somebody else).

I can recall all too many instances where financial management skills have been reluctantly brought in at the last minute in an attempt to avert a catastrophe. I say reluctantly, as the management still seems to want to haggle over the cost, as if you are a burden rather than the one thing that stands between them and financial oblivion. And yet this is the same management that has probably splashed out vast sums on the other talents in the team (and themselves) with almost carefree abandon. That is of course until the money has almost run out.

So entrepreneurs, if you want the money men to be interested in you, and achieve the best result for yourself, you need to make sure your have somebody in your team at a very early stage interested in looking after their money. Britain really does have financial talent – make sure you use it and value it.