Author Archives: Peter Rogol

We celebrate our clients’ success!

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 5th July 2013

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How does one measure success?

IRR? Turnover growth? Website hits? Publicity? Staff satisfaction?

The ways are myriad, but in the world of commerce, the assessment by disinterested parties might well be the most reliable. And in that regard, since 1997 there’s always been Real Business Hot 100 listing of Britain’s best performing companies.

Criteria are simple – take all private company accounts filed at Companies House, exclude any with turnover under £10m and EBITDA under £1m, then identify the 100 companies with the best compound growth over the past four years.

And we’re proud to be associated with the success of two of our clients, Polar Group Ltd and City & Country Group Plc, 83rd and 100th respectively in The Hot 100 2013 listings. They may be very different businesses – Polar’s success is based on international trade and the exploitation of the burgeoning aspirations of the growing middle classes of the far east, whilst City & Country’s is based on award-winning redevelopments of heritage buildings here in the UK.

No businesses can achieve sustained compounded growth at greater than 25% p.a. over four years without having excellent business models rigorously enforced. Even in pre-financial crisis times, ensuring expansion at those levels was difficult enough – to achieve it in the current climate speaks volumes for the skillsets of their management teams.

We’re proud to have played our part in their success. Frank Zilberkweit, MD of Polar – “Our success is underwritten by the support we get from Goodman Jones. Their expertise and advice is indispensable. The very best sounding board.” and Helen Moore, Managing Director of City & Country [and a lady the business world would be well advised to take note of] – “The team at Goodman Jones have been very influential in guiding our Group into the Top 100 – with the combination of their indispensable support and our own expert and passionate team, we are aiming to stay in the Hot 100 and indeed move up the rankings!”.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Fully approved, fully effective tax avoidance – time’s running out …

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 20th February 2013

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Everyone knows what’s meant by a low risk investment. It’s one where there’s minimal risk of losing any part of your stake. You want safe? – government bonds, National Savings, bank and building society deposits up to £82K. You won’t lose your initial stake, but in the current climate you will most certainly lose value. With the likes of Halifax paying 0.11% on deposits over £25K, and inflation running at around 3%, “safe” has taken on a new meaning – you can sit back and relax as your savings “safely” whittle away to nought.

Probably the last thing anyone would categorise as “safe” is investment in early-stage start-up business. You’re almost guaranteed to lose the lot.

Or are you?

For the “right” investor the extraordinary tax breaks available this tax year ensure that whatever you lose on your investment under the Seed Enterprise Investment Scheme [SEIS] will be more than compensated by the tax savings it offers.

It’s important to understand what’s meant by “right”. First, it’s a taxpayer who’s made a capital gain this year on which tax will be payable. Second, that taxpayer has to have a sufficient income tax liability this year to cover the upfront tax relief SEIS offers. Third, in the event the investment does what you expect – fail – in the year of failure the taxpayer should be exposed to a sufficient level of income tax at the maximum rate to have it mitigated by the availability of loss relief.

An example: Joe has made a capital gain on the sale of a second home of, say, £70K. Because he’s a higher rate tax payer, the CGT bill comes to £16.8K. He will have earned £90Kin the year, on which he’ll be suffering £26K of income tax. Because SEIS investments qualify for a 50% income tax relief, he invests £52K in a SEIS business – precisely to ensure he wipes out his income tax liability . His tax bill on £52K of his gain vanishes, as does his income tax bill. So his £52K investment will actually cost £11.4K.

Joe’s anticipating a significant uplift in his income profile over the next couple of years, such that he’ll be exposed to something over £50K of tax at the highest rate of 45%. When the investment he’s made does what we all expect, and becomes worthless, he gets income tax relief on his loss. For income tax purposes his loss is the initial £52K less the income tax relief he received at the time of £26K – a loss of £26K. He gets tax relief at 45% on that loss, equals £11.7K.

So a high risk investment that cost £11.4K goes sour – leaving him £300 better off.

And of course, there’s always the possibility, however remote, that his investment doesn’t do what we expect, and becomes the next Facebook.

Rather changes the concept of what constitutes a low risk investment.

But this only works for investments made this side of 5th April – so time is running out ……….

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Inward Investment – affected by a EU referendum?

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 24th January 2013

Categories:

International

David Cameron’s EU referendum proposal has put the cat amongst the pigeons, but what real impact is it likely to have on inward investment in the UK?

I’ve commented previously that the UK is the ideal gateway for business into the European Community. I’ve enumerated the following advantages:

It’s quick and cheap to set up here
It’s not within the Eurozone
Its internationalist outlook – a polyglot nation if ever there was one
London’s status as the world’s most important financial centre
The flexibility of its labour market
Its business sophistication and innovation
The dependability of its legal system

The UK’s pragmatist approach to the EU and its oft-expressed view that the EU’s greatest attribute is the Single Market attracts a substantial level of support from within the EU itself – one need only read Angela Merkel’s balanced comments to realise that even within the Eurozone, there is a recognition, perhaps grudging, that the UK frequently has a point. Amongst non-Euro members of the EU, the UK’s stance that the Single Market is the EU’s primary purpose is well-regarded.

The EU currently comprises three distinct groupings – existing Eurozone countries, countries committed to joining the Eurozone, and those with no such commitment. There are divergent positions within each of these groups.

Most obviously, within the Eurozone, there are industrialised successful economies such as Germany and Finland, there are the wannabe’s with varying degrees of problems led by France, and there are the strugglers – Greece, Spain etc. Concerns about the future of the Eurozone may be making less headline news today than they were last month, but they haven’t gone away. Solutions need to be found to tackle mass unemployment in the periphery and a hugely burdensome welfare structure that threatens all. The problems are economic – the solutions are political. That’s seventeen countries attempting to find compromises between each that their political leaders can sell to their own electorates. No-one knows how long it might take, and no-one has a clear idea of what the outcome might look like. So if you’re an inward investor, how certain can you be that the location you choose today will still prove to be the right one tomorrow? You can’t. You’ve no real idea what you’ll be getting into.

Whatever the compromises Eurozone members conclude between themselves, inevitably they will impact on the EU as a whole. So non-Eurozone members need also to participate in the compromise process. And as the non-Eurozone members are an even more diverse group, what form might those compromises take? What impact might they have on individual states? Will they incline an inward investor toward Bulgaria, perhaps, as opposed to much more highly developed – and relatively expensive – Poland? Will either or both be within the Eurozone itself by the time the dust has settled? There are no answers to these questions. Uncertainty reigns.

Inward investment is by its very nature long-term. The rationale for it must always be economic, and that requires there to be a degree of certainty about the longer term. One could surmise that in the longer term the Eurozone will become the EU, but that’s simply not going to happen within any reasonable estimate of what might be a foreseeable timescale. It is inconceivable that either Denmark or the UK – the two countries not committed to ever join the single currency – would choose to do so in the next 10 to 15 years just as it’s inconceivable the other EU members could eject them from the EU against their wishes.

So to come back to the original question, what real impact is the promise of a referendum on a renegotiated membership terms likely to have on inward investment in the UK?

It’s worth bearing in mind Stephanie Flanders’ recent post. Currently Germany’s largest trading partner is the UK – not a relationship either Germany or the UK would want to lose. Given Germany’s status within the EU and its role as paymaster for the ills of the Eurozone, it will ensure such steps are taken as are necessary to enable a future Conservative government to present a renegotiated treaty to a referendum. A referendum to either continue with the known, but on better terms, or to step into the unknown. It would be a seriously failed government, supported as it would be by all but the foaming at the mouth diehards, that couldn’t sell that to the UK population.

So – the conclusions I reached in my earlier posts remain the same – the UK is still the gateway to Europe. The pigeons were there anyway, squabbling as per usual – all Cameron’s done is to place the cat needed to give them a fright.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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And now – the case for the Prosecution

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 19th December 2012

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Many UK-based businesses, particularly at the smaller end of the SME market, support the aims if not the conduct of UK Uncut and applaud the politicians playing a form of class warfare against multinationals over their failure to contribute “fair” levels of Corporation Tax. Are they wrong?

They are. What they’re missing are two fundamental ingredients to the argument – they pay more Corporation Tax than they need because they don’t make full use of the panoply of allowances and structures larger corporates use, and when it comes to the smallest businesses, what they pay in Corporation Tax is merely a replacement – usually discounted – of the Income Tax they would suffer were the company profits taken as personal income.

Why not use the allowances? Fundamentally, most tax breaks are against costs incurred. If the tax break is only worth 24-odd % of the cost incurred to obtain it, only a fool would incur that cost unless there was a sound business reason for doing so. And smaller companies, particularly owner-managed ones, are either reluctant or unable to incur significant extraneous cost – so they don’t get the associated tax breaks.

If, like Starbucks, you give away equity in your own business to your employees, you’ll get a tax break. How many SME’s would contemplate doing that? If, like the same company, you’re prepared to fund an office infrastructure in Switzerland to handle all your purchasing requirements, then some part of your overall profits will be attributable to your Swiss location – hardly realistic for most SME’s.

If you’re prepared to move your corporate headquarters to Eire, incur the establishment costs over there, pay the exit charge on leaving the UK, then yes, you can benefit from the lowest Corporate Tax charge in the EU. But it is hugely complex and comes with an enormous price tag, both in terms of cash and time.

Better still, move to Mauritius. Get a really, really low corporate tax rate. More complex still.

If you think you’re going to be making Capital Gains, emigrate to Belgium – no CGT!

If you’re looking at VAT on distance-selling, try Luxembourg.

Work all over the place, but not in Hong Kong? Get yourself employed by a Hong Kong company, make sure you become resident there, you’re home free! No tax!!

And if you’re French resident, own your own company generating income from Intellectual Property and taking remuneration and dividends in excess of £800K pa – quick! – get out!! – cross the Channel and save yourself, and your company, a fortune!!!

And that’s the case for the Prosecution. It’s nothing to do with the taxpayer, it’s everything to do with the competition between countries to entice business into their territory. Why do they do it? Because business creates employment, and the vast bulk of government revenues are extracted by taxes on income and taxes on expenditure. Better by far to have more than 700 Starbucks here employing 9,000 people than have another 700 empty stores and 9,000 more on the dole. It pays no corporation tax? Legitimately? Not an issue.

There’s nothing “fair” about tax. It’s whatever each government wants it to be. A revenue-collecting device. An enticement. A discouragement. You don’t get foreign companies setting up in your jurisdiction by discouraging them from doing so. One can hear voices off-stage shouting “hurrah! Let them go!! We don’t want those nasty multinationals here!” – they’re plain wrong. We want the employment prospects, and as consumers, it seems we want what they offer.

Where the UK gets its taxes:

Income tax	£155 Billion	26% of tax revenues
National Insurance	£106 Billion	18% of tax revenues
VAT	£102 Billion	17% of tax revenues
Corporation Tax	£44 Billion	7% of tax revenues

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The Case for the Defence

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 18th December 2012

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Some years back one of my clients established an Indian subsidiary to undertake ongoing programming work that had been undertaken in the UK. My client was a loss-making business, VC backed, in a technology sector, and it decided to outsource these functions to India to reduce its cash burn rate.

We were staggered to receive a report from the Indian division of a Big 4 firm advising that the profits the Indian authorities would expect the Indian subsidiary to declare were the profits that would be made by a US firm providing the same service. That sounded to me like nonsense – if the notional US firm made a 10% uplift on a $2m cost base comprising staff cost and little else, the Indian authorities, on a cost base equivalent to no more than $400K, would be required to make a 50% uplift. I couldn’t believe that independent software companies in India were winning overseas business that would generate anything like that kind of number.

And so it transpired. Working with another Indian accountant, we identified a collective of local independent software businesses offering the same type of service. We analysed their results, we adjusted them to reflect the fact that our Indian company was fully protected by its parent against almost all business risks to which they were exposed, and we concluded the profits the Indian company should declare were equivalent to a 10% mark-up on cost.

Strictly in accordance with OECD guidelines. Obviously we’d have been on stronger grounds were India a member of the OECD, but at least we had a result based on an analysis justifiable by internationally recognised standards. Importantly, we had a result that would be acceptable in the UK as well as being defensible in India.

Roll the clock forward a few years, and what do we find? Here, in the UK, a founder member of the OECD, we have politicians grandstanding about global companies not paying their fair share of tax, we have protest movements invading multinationals’ retail outlets and cajoling consumers to purchase elsewhere. Why? Because the global companies concerned, operating strictly in accordance with OECD guidelines on Transfer Pricing, appear to suffer a lower rate of Corporation Tax on UK-generated business than that suffered by indigenous businesses operating only in the UK.

Take Amazon as an example. It has significant UK turnover – £7.6Bn in the past 3 years – on which it’s paid next to no Corporation Tax. It achieves that turnover because large numbers of UK citizens rate its service as excellent – it’s simply that much better than its competitors. But does it earn its profits here? Its business is predicated on its technology platform, which wasn’t developed here, isn’t owned here, and isn’t maintained here. Without that platform it has no business. It works on tight margins only improved through global purchasing procedures, again not based here. So why should profits attributable to facilities operating outside the UK be taxed here? The simple answer is they shouldn’t. If the UK seeks to tax those profits here, then what about the territories where those profits are being earned? Should they just accept a UK unilateral declaration that it is taking over taxing powers on profits attributable to them, or should they turn round to Amazon and continue levying tax as they do currently? Should Amazon be required to pay tax twice on the same profits?

Exactly the same scenario applies to Google. It’s the world’s favourite search engine, but it isn’t here and an insignificant proportion of its profits are attributable to UK activity. So why should it be subject to anything other than an insignificant amount of UK Corporation Tax?

But the grandstanding doesn’t stop at multinationals. The latest in the firing line is The Ritz Hotel. Mentioned in a BBC article. Why? Because its shareholders aren’t resident here, and the company, whilst profitable, pays no Corporation Tax.

But the UK business tax regime has never taxed profits as they appear in a company’s accounts. It taxes adjusted profits figures, and once those adjusted profits are determined, it allows tax losses in one group company to be offset against tax profits of another. Has that suddenly become a sin?

It’s time the media and the politicians found some other outlet for their spleen. Seeking to tarnish the names of legitimate commercial enterprise because the result of their obeying the rules doesn’t satisfy some ill-thought-through sense of what’s right simply establishes in the observers’ mind the sheer stupidity, even cupidity, of the protagonists.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Early-stage business in London

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 23rd November 2012

Categories:

UK Business & Entrepreneurs

Despite all the economic doom and gloom of the last few years, something’s happening out there.

I attended an Angels in the City event yesterday, ten pitches from hi-tec start-ups seeking funding to take mainly pre-revenue businesses through the next stage of their development.

I’m the wrong generation for most of it – I don’t use Twitter, I’m not on Facebook, the thought of using either frankly horrifies me. But rock music horrified my father – didn’t stop its onward march, any more than my distaste for new media will impede its progress.

Like so many of my generation, I simply have to accept there’s a new world out there that I’ll never understand, but which will inevitably generate a wide array of new commercial opportunities. Many will fail, but some won’t – and a few of the latter may become stellar success stories. Problem is, when you’re as removed from the technology as am I, how do you ever pick the winners?

Several of the pitches were from people with a proven track record of success in tech start-ups – three had created businesses subsequently sold for significant (in one case, $55m) sums. They all had highly credible management teams. But I still have absolutely no idea which might succeed – although I do have an expectation that four of them will fail. I’m left with six that might make it, that could, possibly, be tomorrow’s multi-million pound success.

To a degree, it needn’t matter. All ten were pitching for SEIS funding. Currently, if you’ve the right profile, you can’t lose – the tax breaks add up to more than the investment you make. London Business Angels are pushing to extend those tax breaks for a further year. If the Chancellor listens, the opportunity to take a de-risked punt will be there for a while longer.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The UK is the gateway to Europe – part two

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 5th September 2012

Categories:

International

Some weeks back, I talked about the UK being the best place in the EU to set up business. My principal comparable was Denmark, because these two nations are the only EU members neither in, nor committed to joining, the Euro.

It seems the great and good agree. The World Economic Forum has recently published its Global Competitive Index for 2012-13, in which the UK was ranked 8^th, with Denmark ranked 12^th – a swing from last year where Denmark was 8^th and the UK 12^th.

Ranked above the UK are three non-EU states (Switzerland – 1^st, Singapore – 2^nd , USA -7^th ), and four EU member states, Finland, Sweden, Netherlands and Germany. With the exception of Sweden, yet to join but committed to do so, all members of the Eurozone.

Given significant concerns about the viability of the Euro, and the inevitable but unmeasurable fall-out on continuing EZ member countries should any Eurozone country leave, that effectively places the UK as the best place to establish if one wants to tap into the EU market.

The UK scored particularly strongly on labour market efficiency, business sophistication and business innovation. It also ranked first for legal rights. It’s no surprise the UK’s principal weaknesses relate to the size of government debt and budget deficit, and the sheer scale of imports.

One statistic did surprise me – according to the report it takes 13 days to set up in business here. Nothing like that long if you do it through us!

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The UK is the Gateway to Europe

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 17th May 2012

Categories:

International

A little over 330 million people live in the Eurozone, a further 170 million within the EU but outside the zone. GDP per capita of Eurozone countries is marginally greater than that of EU citizens outside the zone, but the range covered by each is enormous.

Within the zone, the lowest GDP per capita of a member state (Estonia) is just 48% of the highest (Netherlands) [ignoring Luxembourg – a country with a population of just over 1/2 million, with per capita GDP over double that of the Netherlands]. Interestingly, the best estimate for per capita GDP for Greece puts it at 68% of the Netherlands – not great, but there are several worse.

Outside the zone the range is far wider – Bulgaria’s per capita GDP is only 35% of Denmark’s.

We are all too aware of the fundamental faultlines within the zone, caused by debt-fuelled expansion facilitated only by association with the economic powerhouse of Germany. The devaluation option open to most struggling nation states doesn’t exist, and without fiscal transfers from wealthy states to poor, there appears to be no end in sight to the downward spiral over-indebted Eurozone nations will suffer. Rather than economic convergence, the reverse is happening – Germany’s economy continues to grow a’pace, as it benefits from an exchange rate far below that which would apply were it still using the Deutschmark.

So why does this make the UK the ideal gateway to what remains a huge marketplace?

Within the EU, there are just two countries that aren’t committed by treaty obligations to ever joining the Euro – Denmark and the UK. Both retain sovereignty over their currencies, enabling each to react flexibly to changing market conditions. Those are huge ticks in the box for any inward investment. Both have highly educated workforces, stable political systems and robust legal systems.

Denmark scores over the UK in some respects – for example, its GDP per capita is greater, its indiginous population is multi-lingual – but it loses out in many more. It’s smaller by far, and its transport links are more constrained. More importantly, the minimum Share Capital requirement for a Danish private company is €10,000 and VAT registration is compulsory regardless of turnover levels. It has a light-touch employment regime with lower employer social security contribution rates than in the UK, but typically on higher salaries. Employee representation on the Board is obligatory for all but the smallest companies.

The UK’s great strength is its internationalism. London in particular is home to representatives of almost every nationality in the world. It is the world’s most highly developed financial centre, and is regarded by many as the safe haven in uncertain times. And setting up business in the UK is quick and cheap. With no minimum share capital requirement other than the issue of 1 share that needn’t cost as much as £1 and no compulsory VAT registration until certain turnover thresholds are breached, access to the EU market place coundn’t be simpler.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Angel Investment

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 26th April 2012

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I attended a “Pitching Event” close to the City yesterday – 15 businesses, each with a 6-minute pitch slot followed by a brief Q&A session. By the end of it, I’m not at all sure who was more exhausted – the entrepreneurs, or the audience.
Of the 15 opportunities, just one was “old-world” business. The other 14 were technology based, a few simply replicating old-world business with a teccy interface to boost customer flows and cut costs, but the majority exploiting social media advances to create businesses that even Asimov at his best couldn’t have dreamt of.

The prize for most oft-used word undoubtedly goes to “App” – Apps for fashion, Apps for finance, Apps for logistics, for cycling, for – well – anything.

Some were pre-revenue, most weren’t. Some were aimed at SEIS, most were targeting EIS. Some were targeting very narrow sectors, others more broadly based. They all (with one exception) told a very good story, many of which left me thinking “that could work” or “I can see how they’re planning to exit”, and one, simply, “brilliant!”

Of course, a 6-minute pitch followed up by instant Q&A doesn’t really give you any opportunity to understand the business, its strengths, its weaknesses. But it does give you the chance to consider whether or not you want to find out more.

These events are restricted access – you have to meet certain criteria to attend. But if you can, it’s worth it on several levels:

You get to meet some very imaginative people
You gain a better understanding of the sheer breadth of opportunity that new technologies afford
On a day when the ONS announced we were back in recession, you do get to realise it ain’t all doom’n’gloom

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Tax Avoidance – the next target for banker bashers?

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 11th April 2012

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The media found a new target. This time it was people whose tax bills are reduced as a consequence of totally legitimate and laudable behaviour.

Let’s deal with “laudable” first. The country apparently approves of philanthropy. There is widespread support for charitable causes, from the arts to medical research, from help for the aged to charities for kids, good causes command respect.

The country also apparently approves of risk-takers establishing businesses that provide people with employment opportunities that might otherwise not exist.

Given these are perceived “good things”, governments of different hues have sought to create structures over the years to promote them. And because these good things involve individuals spending money, the structures have of necessity been money-related – which inevitably involves use of the tax system.

The Gift-Aid system is designed so that when a person gives money to charity, the charity can claim from the Treasury the basic rate tax deemed to relate to the donation. £10 donated becomes £12.50 to the charity. And a higher-rate tax payer is entitled to recover by way of tax relief the difference between his higher-rate, be it 40% or 50%, and the basic rate of 20% imputed into the donation. So a £400K charitable donation is worth £500K to the charity – and the donor gets a deduction for tax, if he’s a 50% tax payer, of £150K (50% – 20% times £500K).

Shock, horror! £150K tax saved! UK Uncut will have a field day!

But it’s cost him £400K to get it.

Don’t know about you, but personally, I’d rather not blow £400K simply to save myself £150K of tax. I’d grit my teeth, suffer the tax, and party on the net £250K I’d saved myself.

Similarly, the risk-taker might be making substantial losses in the business he’s set up. Horror of horrors!- he might get a tax break!

But the value of the tax break will only ever be a percentage of the losses that caused it.

The Chancellor now wants to cap unlimited tax reliefs at £50K or 25% of income, whichever is the higher.

Let’s look at an example. Let’s assume the person who gave £400K to charity had gross income of £1 million. Under the present regime, the charity gets £500K, a net £250K from the donor, and £250K from the Treasury.

Going forward, the individual can of course maintain his level of donation at £400K, but as his tax break will cease at £250K, he’ll more than likely cap his contribution at that level. In which case the charity will get £312.5K and the donor’s tax break will fall by £56,250. The charity will be £187,500 worse off, the Treasury £93,750 better off (£56,250 from the donor’s tax bill, £37,500 from the reduced top-up it pays the charity). The difference between the charity’s loss and the Treasury’s gain (£93,750) sits in the donor’s pocket.

Maybe he’ll give the extra away without a tax break – anything’s possible, however unlikely.

The same applies to establishing new businesses. The tax consequences of risk-taking are very much a part of the decision-making process as to whether or not to take the risk. Remove the tax break, you increase downside risk, making the risk-taker much more averse in the first place.

The media initially got this one completely wrong. Not surprising, given all it did is following the claptrap spouted by UK Uncut. And the Chancellor simply bought into this populist message, because frankly, it suited him – the less that goes to charities, the less business risks people take, the more tax revenues go to the Treasury. It’s just those “good things” that suffer.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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