Author: richard

“Only two things in life are certain,” as the old saying goes: “Death and taxes.”

But of late it seems that taxes could be replaced by something else: headlines about Amazon (and other tech giants) not paying enough tax. Every year it seems to be the same: the companies make millions – if not billions – in profits, but pay less tax than a reasonably successful small business. In 2020, for example, Amazon had a sales income of €44bn (£37.7bn) in Europe but declared a loss of €1.2bn (£1.03bn) and therefore paid no corporation tax.

Could all that be about to change? There has long been talk of an international tax agreement to tackle abuse by the tech companies, and – while months and possibly years of talks are still needed – it moved a significant step closer after the recent G7 summit in Cornwall.

What did the G7 agree?

There was agreement on two principal points. First, that countries can tax the companies on revenue generated in that country rather than where the firm is located for tax purposes. So the UK Government could in theory tax Amazon on its UK revenue, despite the company being based in Luxembourg.

Secondly, the G7 committed to a global minimum tax rate of 15%. This was lower than the 21% suggested by President Biden, but the inclusion of “at least” in the G7 deal means the rate could be negotiated higher.

Which companies would it apply to?

The obvious targets are the tech giants but the plans for a global corporation tax rate could capture up to 8,000 multinationals, including oil giants like BP and Shell, and banks such as HSBC, Barclays and Santander.

How much would the tax raise?

The OECD estimated last October that tax revenues of $81bn (£58bn) could be raised by the proposals, with the Institute for Public Policy Research suggesting that the UK’s share (albeit from the 21% tax rate favoured by President Biden) could be up to £14.7bn annually.

Could the tax be avoided?

The simple answer is ‘yes.’ Countries such as Ireland, Hungary and Cyprus all have corporation taxes lower than 15% – but the G7 are hoping that their combined economic might will bring such countries into line, especially if the minimum rate is agreed with the G20, which includes China, Russia and India.

In theory, therefore, the deal appears both doable and likely to raise significant revenues. But like all international agreements, there will be a lot of talking and it won’t be done quickly. It will also need to gain regulatory approval in the relevant countries, giving ample time for delay and lobbying. Most experts believe that ultimately there will be some form of agreement – but don’t expect it to happen in the next 12 months.

It may not have appeared on your radar, but the week of June 14th to 18th was Loneliness Awareness Week.

We’ve heard a lot about loneliness over the past 15 months. Mental health in general has, rightly, occupied a lot of column inches during the pandemic. Understandably, there has been a focus on the mental health of NHS staff and frontline workers, as well as those people living alone. Much has been written about people unable to visit elderly relatives – or avoiding the risks associated with visiting them.

Little, though, has been written about the mental health of entrepreneurs and business owners. We’re not talking here about people running multi-million pound businesses: rather the small shopkeeper, the pub landlord wondering if and when the doors will reopen, the startup entrepreneur wondering if they’ll be able to persuade their staff to return to the office…

These are the people the Government are hoping will rebuild the UK economy and – one day – pay the bill for Covid. Are they going to be in the right state of mind to do that?

Over the last 15 months owners and directors of SMEs have faced challenges they could never have anticipated: the first lockdown, wrestling with the complexities of furlough, losing clients and customers, wondering when it might all return to normal, unprecedented levels of borrowing, the easing of lockdown, and that was all before the second wave…

Even now, with the vaccine roll-out and the prospect of ‘Freedom Day’, there are difficult questions to answer. “Should I insist that all my staff get vaccinated? Am I legally entitled to do that? Can I insist that everyone comes back to the office?”

Much has been written about a return to normal. It seems increasingly certain that a “new normal” is far more likely. But for people running the UK’s SMEs, the definition of “new normal” seems to change on an almost daily basis.

Small and medium sized businesses are the lifeblood of the UK economy. According to the Federation of Small Business (FSB) there were 5.94m small businesses in the UK at the start of 2020. They account for 60% of the employment and half the turnover of the UK’s private sector – estimated at £2.3tn by the FSB.

If the economy is to recover to pre-Covid levels then the health – especially the mental health – of the people running these businesses is crucial. Let us hope that in the coming months the problem is more widely acknowledged in Government, and covered by the mainstream media.

You will likely have grown up knowing the ‘big four’ banks and their presence on every high street. Barclays, NatWest, Lloyds and HSBC (which you may remember as Midland Bank) were prominent in almost every town. If you needed a loan – especially if it was for business purposes – then your first port of call was the bank manager.

Gradually, the image of the ‘big four’ began to slip. They were beset by scandals, notably the PPI (Payment Protection Insurance) mis-selling scandal. According to an article published in FT Adviser in August 2019 the scandal will have cost the industry £50bn, with Lloyds the biggest culprit having – at that time – paid just over £20bn in compensation. To put that figure in perspective, the market capitalisation of Manchester United, the UK’s biggest and best-known football club, is around $2.5bn (£1.77bn) at the time of writing – making the PPI compensation bill 28 times the value of Manchester United.

So not surprisingly, public faith in the banks was starting to wear a little thin. What has really threatened the “old” banks, though, is the rise and rise of fintech (financial technology).

Many people will have heard of the so-called ‘challenger banks’ such as Monzo, Metro, Revolut and Starling. The millennial generation (roughly, the generation that came of age around the turn of the century) and Generation Z (the generation after millennials) have very quickly taken to fintech, using the various apps for transferring money, investing and saving and everyday banking. We’re now seeing the start-ups going mainstream, with Starling Bank advertising its business account on TV.

But perhaps the most compelling evidence is anecdotal. You talk to so many people now who say they simply cannot remember the last time they went into a bank branch. So what will we see in ten years’ time?

A huge reduction in bank branches is almost certain. While that may cause problems for town centres already suffering from shop closures, it is hard to see any alternative. Bank branches are expensive to maintain and they demand something that is even more costly than bricks and mortar – people!

Will this cause problems for some groups of people – the elderly, for example, who are disproportionately reliant on cash? Possibly – but while the UK may be lagging behind Sweden who are on course to be a cashless society by 2023, it seems inevitable that we will use less and less cash in the future.

Fintech will continue its inevitable rise. There will be more challenger banks, and you suspect they will increasingly define their target markets – business lending, for example, and specialise in them.

And those expensive people? Sadly, they are going to be needed less and less. Looking into the crystal ball it seems inevitable that if you are dealing with a ‘bank manager’ they will be online, on your phone or on your wrist and making lending decisions based on artificial intelligence and machine learning.

Government borrowing is at its highest level since the Second World War. According to the Office for National Statistics it reached £303.1bn in the year to March – nearly £250bn higher than in the previous year. Borrowing in March was £28bn – the latest month to set an unwelcome record. Borrowing in the year to March was 14.5% of Gross Domestic Product: at the end of the War it was 15.2%.

Many pundits are expecting a spending boom: depending on which article you read, we “accidentally saved” between £100bn and £125bn during lockdown. Nationwide, for example, have reported that customers’ savings “more than doubled” to £10.6bn during the pandemic.

With the lockdowns now easing, surely this money will be spent, kick-starting the economy and fulfilling various predictions of the fastest growth since the Second World War?

Perhaps not: a recent survey suggested that the army of accidental savers lockdown created has plans to stay prudent. As the BBC report put it, consumers are likely to “play it safe” as the UK emerges from lockdown. Neither can the Chancellor expect a windfall from Corporation Tax: with the pandemic having hit the profits of many, many companies’ tax receipts from business are certain to be reduced.

But at some point the Chancellor has to start paying the money back. So just who will pay the bill for Covid? And how long will they be paying the bill for?

It hardly sounds like a prudent way to run a country but perhaps the UK will never pay back the debt. In the last 100 years the UK has never not been in debt: in the last financial year (before Covid struck) the Government was planning to borrow £160bn – of which £100bn was to pay back old debt.

Some of you – brought up with a strict understanding that debt must be repaid – will recoil in horror, but Government borrowing is not like a credit card: the debt (at least according to the experts) does not need to be paid down as quickly as possible.

Borrowing is cheap at the moment, with interest rates at historic lows – so low that last year the Government issued negative-yield bonds. Effectively, institutions that bought the bonds were paying the Government to look after their money.

What the Chancellor really needs is a healthy dose of inflation. In years gone by, when annual inflation was in double digits, that very quickly reduced the “real” amount of Government debt. But even though inflation increased to 1.5% in April, a sustained period of high inflation looks very unlikely.

Your grandmother would not approve, but for now it looks like the Chancellor’s emphasis will be on servicing the debt, rather than paying it back – and on keeping his fingers crossed the predicted rebound in the economy really does happen, finally starting to swell his tax coffers.

One of the great themes of the past 15 months has been accidental savings: the amount people in the UK have “saved” by the simple expedient of not being able to go out and spend.

“Thrifty Brits stash the cash in lockdown” has been a typical headline, quickly followed by an estimate of how much cash we might have “stashed” through not going to the pub, eating out or buying new clothes. One estimate put the figure at £160bn, with the Bank of England suggesting that up to 5% of this could be spent, and hence boost the UK recovery, as lockdown eases. Economists at Deutsche Bank went further, suggesting that around 10% could be spent on nights out, holidays, cars and more.

“Would I be shocked by £20bn of extra spending? No,” said economist Sanjay Raja. Spending on this scale would comfortably add between 0.5% to 1% to UK GDP.

But however much is spent, that still leaves a huge amount of money that is not spent – a huge amount of money that remains “accidentally saved.” According to Peter Flavel, the CEO of Coutts, however, we are not saving wisely.

Looking at it from the point of view of an Australian who has lived and worked in several countries, and is now in the UK, Flavel makes a simple point. The UK’s Individual Savings Account (ISA) is “potentially the best medium term savings product globally.” But, he argues, “they are not used very well, [in fact] they are used badly.”

As you may well know, a couple can invest £40,000 per year into ISAs. Junior ISAs have a limit of £9,000 per year. The products enjoy tax advantages and give immediate access to your cash if it is needed. Small wonder that Flavel describes the ISA as a “World Champion” amongst saving options.

According to recent statistics around 20% of the UK adult population have invested in an ISA – but what concerns Flavel is that the overwhelming majority of these ISAs (76%) are held in cash, meaning that with low interest rates and inflation, the real value of the ISA could actually fall over time.

We take a balanced approach to financial planning. It’s often a good idea to keep some money in cash, after all none of us know when we will need access to our “emergency fund.” But Peter Flavel makes a very valid point: it is important that we don’t allow a disproportionate amount of our savings to accidentally accumulate in cash. It runs the risk of unbalancing your overall financial planning portfolio, giving you a more cautious approach than you might otherwise want or need, and, with low-interest rates likely to be the norm for some time, it also risks poor returns. Of course, where that balance lies is different from one individual to the next.

If you are interested in finding your own balance then do not hesitate to get in touch with us. While “I’ve accidentally got too much cash” doesn’t sound like a problem, in financial planning terms it very well could be.

This March saw the prices of residential properties rising at the fastest rate since just before 2007’s financial crisis, with the average price of a home in the UK increasing by 10.2% in the year up until March. The stamp duty holiday introduced by the Government certainly played a part in this development. Having been introduced to encourage people to move home after the first COVID-19 lockdown in 2020, it seems to be doing its job. The threshold at which stamp duty, the tax paid when purchasing a property at a percentage of the property price, is due was temporarily raised to £500,000 in England and Northern Ireland and £250,000 in Scotland and Wales. With that holiday coming to an end on the 1st of July, many would-be buyers are rushing to take advantage of the tax break that could save them up to £15,000.

The growth rate of 10.2% in March is up from 9.2% in February and, according to the Office for National Statistics, is the highest annual growth rate the UK has seen since August 2007. The average property price in the UK, as of March, was £256,000 which is a year-on-year increase of £24,000. In addition, according to the ONS, the average price of detached properties actually rose by 11.7% in that time period, whereas flats and maisonettes rose by a smaller but still significant 5%.

These percentages can be seen in real terms in the soaring demand experienced by estate agents. CEO Vic Darvey of online estate agent Purplebricks also believes that the market will remain buoyant beyond the tax break, stating, “I don’t think it [the housing market situation] will change materially. If you look at where we are today and what the market is forecasting, the likes of Rightmove and Zoopla are forecasting as many properties to come to the market this year as last year. We think that the market is in a strong position and will continue to be.” So the future still appears bright, with Darvey adding that “the Government’s recent mortgage guarantee scheme is also going to help.”

Purplebricks has reported that over 60,000 customers downloaded their app in the third quarter of 2020, for reference, that’s a 300% increase on the same period in 2019. The company saw a 12% lift in its instruction numbers in the year up to May, and even paid back £1million in furlough relief cash, thanks to their strong performance.

You may have come across the recent story of Jonathan Frostick.

Mr Frostick is a contractor, managing a team of 20 people for HSBC. In the middle of April he sadly suffered a heart attack. Starting his recovery in hospital he wrote a post on LinkedIn, vowing ‘to restructure his approach to work’ and confessing that his first thought as the heart attack struck was that ‘it wasn’t convenient: I had a meeting with my manager tomorrow.’

Mr Frostick’s post went viral, gaining more than 200,000 likes and over 11,000 comments – as he said that life ‘literally is too short.’ This story came hot on the heels of young bankers at Goldman Sachs complaining about their ‘inhumane’ working hours – and calling for an 80 hour a week cap.

There is no doubt that the pandemic and the last 12 months have brought working practices under the spotlight. Many people have used lockdown and the new experience of working from home to reassess what they want from life and work.

They’ve realised that they haven’t missed time spent commuting: the same sandwiches from the same sandwich shop. That they’ve enjoyed spending more time with their families, or simply having time to exercise, think and re-evaluate their lives.

Even though many people are now going back to the office, it is likely that the process will continue. It is easy to think that a lot of people will initially go back to the office with enthusiasm – and three months later walk in to see their manager and say, “I need to have a word…”

Of course, we will always recommend investing in long term financial planning. But as we’ve seen above, the last 12 months have shown us that there are equally important things to invest in.

The most important of these – obviously – is your own health. With more limited options for both exercise and socialising, getting out for walks has become a popular past-time over the pandemic. Given all its health benefits – improved posture, a stronger heart, weight loss, improved mental health – perhaps we should all invest in a pair of walking boots! But whether walking is an option that works for you or not, it’s important to take care of your mental health.

The pandemic has been tough on many levels and for a lot of people – especially frontline staff – the true mental health cost may only be seen as the pandemic comes to an end and they are no longer ‘living on adrenaline.’ Juggling work, family, home schooling and perhaps elderly relatives will have taken a big toll.

As the pandemic ends it is important that we don’t simply slip back into our old ways of doing things: of never having enough time and getting our work/life balance completely unbalanced. We need to heed the lesson of Jonathan Frostick!

In the middle of May pubs and restaurants reopened after lockdown. Finally, we could have a drink or a meal inside.

But what was noticeable was the number of pubs and restaurants that didn’t reopen. Speaking on the BBC News, the owner of one establishment gave a very simple explanation: “we cannot get the staff.” After a year of various lockdowns, furlough and uncertainty it would be easy to think people would be queuing up for jobs. The reverse seems to be the case.

One in ten UK restaurants has closed down in the last year. It has been reported that 20% of jobs in the hospitality sector have disappeared. But rather than fighting for the jobs remaining in the sector, it seems that many people have used the last 12 months to rethink what they want from life and work and decided upon a complete change of direction.

Of course, that’s not just confined to the hospitality sector, but the numbers quoted there do show the scale of the problem.

…And, apparently, the opportunity. A record number of new businesses were created during lockdown, as more and more people decided that the change of direction they really wanted was to be their own boss.

You might argue that there was never a worse time to start a business: economic uncertainty, travel restrictions, unable to meet face-to-face. The list is almost endless, but that doesn’t appear to have put people off. More than 29,000 new companies were registered in the UK in September last year, the highest since October 2007 and the third-highest since records began in the late 1980s. New business creation increased month on month from the beginning of lockdown.

Looking at figures for the full year, 835,494 new businesses were registered in the UK last year – a 41% increase on the previous year and virtually double the number registered in 2018.

“British entrepreneurial spirit has been undeterred, despite the challenges of the pandemic,” said a spokesman for Growthdeck, the company which compiled the figures. “People have remained optimistic about starting a business, even in a challenging economy.”

So where are these new entrepreneurs starting their businesses? E-commerce has been the most popular area, with an average of 4,613 online retail businesses set up each month in April, May and June last year, a 66% increase on the same months in the previous year. Second place went to “buying and selling property” and then came management consultancy and “other service activities” including “letting your own property” (where you can suspect the influence of Airbnb).

But who knows? A few years from now a small company’s fund manager might be telling us about a hot new stock they’ve invested in. “Would you believe it? The business started during the pandemic…”

‘Fail to plan, plan to fail.’ It’s an expression that anybody who has worked in management or the military must have heard a thousand times. Like all oft-repeated clichés, it carries a kernel of truth – and in no aspect of human life is the phrase more apt than in financial planning.

Unless you have a financial plan; for retirement, for saving, for long-term investment, for buying your home, for estate planning; then you cannot realistically expect to achieve your financial objectives.

Sceptics may ask ‘What’s the point of financial planning? What’s the point of any planning? We’ve just lived through the most turbulent, changeable year in any of our lifetimes.’

At first glance, it’s a valid point. On March 23rd last year the UK – like so many countries around the world – went into lockdown. Further lockdowns followed. Tens of thousands of people lost their jobs. Businesses which had taken years to build were wiped out overnight. Stock markets around the world experienced tumultuous times.

But 13 months later a vaccine programme is being rapidly rolled out. The economy is rebounding. Many of the world’s leading stock markets actually gained ground in 2020. All the world’s leading markets – with the exception of China, which fell 1% – made gains in the first quarter of this year.

What the last 13 months illustrates is not that there’s no point to financial planning: rather the reverse – that it is more important than ever. Pandemic or no pandemic, house sales continue, we still have to save for our retirement and – with a hefty bill for Covid to pay – the Government is still going to tax us on our savings, investments and our final estate.

What is interesting is that the fundamentals of financial planning have been completely unaffected by the pandemic. If the last 13 months have taught us anything, it is that what we previously thought couldn’t happen can happen – and in many cases happen very quickly – so we need a plan, we need savings: we need a buffer.

It has also reminded us that saving and investing is a long term commitment, and that there will always be short term fluctuations. More than anything though, we have been reminded how important regular contact between a financial adviser and a client is. Plenty of our clients have needed reassurance over the last 13 months: plenty have had questions that needed answering. We have been happy to do both.

There will undoubtedly be changes in the future, whether those are what Harold Macmillan famously called ‘events’ or clients drawing on the last year to re-evaluate what they want from life and their financial planning. We will always make sure that your financial planning is flexible enough to cope and to adapt. But make no mistake: the old adage ‘Fail to plan, plan to fail’ still rings true.

Over the past year we’ve seen tens of thousands of people lose their jobs. We’ve seen businesses up and down the country cease trading and we’ve seen enough uncertainty to last most of us a lifetime.

At the moment the forecasts are that the UK economy will be back to pre-Covid levels by the second or third quarter of next year – assuming, of course, that there is no ‘third wave’ of the virus next winter.

With all that going on – with the UK at one point facing the deepest recession for 300 years – there is surely one certainty in the financial world: house prices must have declined last year. Surely, at last, more first time buyers than ever must have had a chance to get a foot on the housing ladder. After all, there wasn’t just the pandemic, there was also the uncertainty of Brexit…

In fact, the opposite happened. Nationwide’s House Price Index for March showed that house prices were up 5.7% on a year-on-year basis, with the average house in the UK costing £232,134. After a year of lockdowns, house prices were still rising.

For first time buyers – young people looking to get a foot on the housing ladder for the first time – rising prices over the past year must have come as a real blow. In fact – with young people the demographic most likely to have been affected by the pandemic in the jobs market – it has been the proverbial ‘double whammy.’

So is the position for first time buyers likely to improve?

There are some grounds for optimism. The Chancellor’s stamp duty holiday is due to end on September 30th. As a consequence, the Office for Budget Responsibility expects house prices to fall by 1.7% next year. The forecasting organisation Oxford Economics, however, is suggesting that the fall will be between 4% and 5% in 2022.

Will that be the case? Some pundits believe that as the housing market has stood up to the pandemic reasonably well, it will do even better as the economy starts to recover.

There are also regional factors to take into account. Many people have used the period of lockdown to reassess their lives and where they want to live. The BBC recently reported an ‘explosion’ in demand for property on England’s south coast and on the Welsh coastline. First time buyers in these areas are likely to face competition from people buying second homes or relocating from cities and downsizing.

The Chancellor sought to give first time buyers a further boost in his March Budget, with the mortgage guarantee scheme providing government backing for 95% loans on both new builds and existing homes. But as the economy ‘bounces back’ first time buyers may need further help still in order to find a foot on the housing ladder.