By Peter Mills, Tax Assistant Manager at Menzies LLP
Complex new rules restricting corporation tax relief for interest expenses are scheduled to be introduced in November 2017. For companies affected, the introduction of these rules could result in a significant increase in UK tax exposure and they could bring an increased administrative burden as well. Some groups may therefore need to rethink their existing financing arrangements in the UK to ensure they are optimal from both a commercial and tax perspective.
The rules, which are expected to have retrospective effect from 1 April 2017, will be most relevant for UK companies which are members of large international groups but can also affect groups that operate exclusively in the UK.
What are the key changes?
For groups with annual UK net interest expenditure of more than £2m, relief for interest expenditure in the UK will, broadly, be limited to the lower of:
- The higher of:
- 30% of UK tax adjusted EBITDA; and
- The group’s ratio of interest to EBITDA applied to the UK’s tax adjusted EBITDA.
- The group’s consolidated net interest expense.
The rules do however include a £2m de minimis limit and therefore groups will always be able to deduct at least £2m of UK interest expense a year.
There are also a number of elections and reliefs which may be applicable in certain circumstances and the rules also allow unused interest allowances and previously disallowed amounts to be carried forward, subject to certain limitations, to alleviate the impact of any timing issues.
What do the changes mean?
For UK group companies the corporate interest restriction (CIR) rules could result in a significant increase in UK corporation tax exposure, particularly if they are highly geared, and may fundamentally alter the effectiveness of debt-financing arrangements.
The rules also impose further complex and burdensome computational and reporting obligations, which are likely to place additional strain on group administrative functions.
For a number of UK companies who may have historically operated as single autonomous business units with limited sight or influence over the wider group’s affairs, simply understanding and modelling the implications of the CIR rules could be difficult.
There may also be broader commercial challenges due to the requirement to share detailed (and potentially sensitive) financial data between group companies. For example, where those entities are naturally in competition with one another there may be a natural reluctance to share information in this way.
Is it time for simplicity?
Debt financing has long been a common tool used by global groups to manage their worldwide tax exposure. However, in the face of widening complexity and as the cost of debt finance increases, these new restrictions may leave international groups wondering whether now is the time to reassess and simplify their financing arrangements.
The UK already operates a comparably low rate of corporation tax and there may already be instances where interest income is subject to a higher rate of tax overseas than it is saved in the UK.
It could therefore prove more tax effective for profits to arise in the UK, particularly where a parent entity operates in a jurisdiction which has a similar dividend exemption to the UK. Dividend repatriation could also help to simplify reporting requirements by removing the implications of CIR reporting and reducing the need to consider factors such as transfer pricing, thin capitalisation and withholding taxes.
In the right circumstances, a change of financing arrangements may also not limit the ability for parent entities to withdraw capital, given the UK’s relatively relaxed and generous approach to reducing share capital.
Re-evaluating the mix
A number of wider factors should be considered before taking a decision to refinance UK operations. CFOs and/or Boards will need to fully assess the commercial and financial impact of the new rules at jurisdictional and group levels; weighing up the comparable merits of debt and equity as means of financing UK operations. Caution may be needed in scenarios which would result in more of the same income unnecessarily being taxed in two jurisdictions, for example where a parent entity operates in a jurisdiction which taxes dividend income, such as the USA.
As corporate tax regimes around the world strengthen their focus on ensuring tax is ultimately being paid in the right jurisdictions, the benefits of operating a corporate structure with high levels of intercompany debt are decreasing whilst the associated administrative complexity continues to increase.
Depending on their commercial circumstances, now could be the time for groups affected by the new rules to re-evaluate their financing arrangements to ensure their group tax affairs continue to be conducted in an efficient manner.
About the Author
Peter Mills is a tax assistant manager at accountancy firm, Menzies LLP. He specialises in advising corporates and owner-managed businesses on their tax affairs in the UK including corporate transactions, group structuring and managing the impact of changes in the international tax landscape.
Website: https://www.menzies.co.uk/
By Simon Black, CEO, PPRO Group
If we suddenly learnt that the world would end tomorrow, someone would make money from the discovery. At very least, to quote Tom Lehrer[1], Lloyds of London would be loaded when they go.
No matter what happens, someone somewhere finds a way to turn a profit. The trick is, being that someone. With Brexit, so much focus has been on the negatives that we think that there’s a danger that opportunities will be missed.
Here’s our guide to having a good Brexit.
E-commerce and cross-border lead generation
The exchange-rate for sterling has fallen so low, that the pound is almost at parity with the euro. For cross-border e-shoppers from the rest of the EU, that turns Britain into a massive bargain store.
With even a minimal effort at promotion, UK merchants can attract price-conscious EU consumers. In fact, UK SMEs saw their international sales rise by an incredible 34% in the last six months of 2016, three times the increase in the first half of the year[2], due to the exchange rate. If ever there was a time to feature the Union Jack accompanied by the words (suitably localised) ‘Brexit bargains’, in your promotions, it’s now.
That’s great, as far as it goes. Everyone wants extra trade even if we’re effectively selling at a discount. But it’s not sustainable and its continuation cannot, in any case, be taken for granted. At some point the pound will rebound or bargain hunters will revert to their previous shopping habits.
So, what to do?
Turn today’s cross-border bargain hunters into loyal repeat shoppers. Invest now in data collection, strategic planning and customer-experience improvements. Use the data you gather on your new customers to engage them and migrate them to localised version of your site. For now, keep them coming back with price-led promotions but over the next year, try to deepen customer relationship, learn their other purchase motivators and give them reasons other than price to keep coming back.
There is no sign of the Eurozone recovery slowing down; in fact, it’s quite the opposite, with the Eurozone economy growing twice as fast as the UK in recent months[3]. And there are already signs, particularly from the automotive sector, that this is releasing pent-up demand. In theory, there’s no reason why UK retailers can’t benefit by servicing this pent-up demand. Successfully doing so — particularly in the face of, for instance, uncertainty over customs arrangements after Brexit — is going to take nerve, commitment, and impeccable customer focus. But it is possible.
FinTech, the City, and a country that loves to borrow, spend, and invest
Brexit threatens a sizable chunk of the UK financial-services industry. Much of the business conducted by UK financial services, most obviously the Euro-clearing markets, relies on access to EU markets. That’s a fact. We can’t wish it away.
But neither Brexit nor the EU are everything. To take a couple of examples, London trades nearly twice as much foreign currency as New York[4], its nearest rival. This trade does not depend on EU markets. Around 60% of the world’s Eurobonds are traded in London[5]. Despite the name, these have nothing to do with the EU and the trade is not fundamentally threatened by Brexit. Similarly, the £60 billion-a-year London market for commercial insurance draws a third of its clients from North America, a third from the UK and Ireland, and a third from the rest of the world put together, including the EU[6].
The UK FinTech scene has the world’s biggest financial centre at its disposal. And if Brexit threatens to erect barriers that will hinder UK firms trading on the continent, the same is true in reverse. UK FinTech s will enjoy privileged access, in geographical and regulatory terms, to the enormous b2b market that the City of London gives them access to.
They will also have privileged access to the UK’s highly competitive retail finance market, worth £58 - £67 billion a year[7]. And there are signs that leaving the EU could help invigorate at least some segments of that market. A recent article in the FT[8] — not by any means a Brexit cheerleader — reported that small-to-medium UK providers of retail banking services are actively looking forward to Brexit in the hope that it will free them from onerous EU regulations designed for huge ‘too large to fail’ banks but now applied to all financial institutions, even smaller ones.
Taken together — along with the ready availability of investment for FinTech start-ups in London, and the UK’s sympathetic regulatory environment — these facts clearly signpost a potential future for the UK as a global B2B and B2C FinTech incubator.
But this won’t happen by itself. Right now, we’re still faced with the threat of a FinTech exodus. To make sure the UK’s FinTech motor doesn’t stall, the British government must work out a transition deal with the EU27 that gives London-based FinTech firms an incentive to keep at least some of their businesses here for long enough to see what opportunities Brexit and a post-Brexit UK could bring.
And as an industry, we need to lobby as hard for that transition as we have for a PSD2 that’s fit for purpose. Recognising that there are profound risks associated with Brexit does not stop us also looking for opportunity in it. Why should it? For as long as the world hasn’t ended, there is still business to be done.
Website: https://www.ppro.com/
[1] https://www.youtube.com/watch?v=frAEmhqdLFs
[2] https://www.paypal.com/stories/uk/open-for-business-paypal-reveals-online-exports-boom?categoryId=company-news
[3] http://ec.europa.eu/eurostat/documents/2995521/8122505/2-01082017-AP-EN.pdf/940abad8-436d-4758-b9d2-2156173a2c77
[5] https://www.lseg.com/sites/default/files/content/documents/20170105%20Dim%20Sum%20Bond%20Presentation_0.pdf
[7] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/587384/IPOL_BRI(2016)587384_EN.pdf - Page 4 of 12
[8] https://www.ft.com/content/4e2967a4-8991-11e7-bf50-e1c239b45787
For our October front cover story, Finance Monthly reached out to Joseph Pacini - the CEO and Co-Founder of XIO Group. He is responsible for the strategy and management of the global multibillion alternative investments and research. Headquartered in London, XIO Group also has operations in China, Hong Kong, Germany, Switzerland, United Kingdom and the United States.
XIO Group’s strategy is to identify and invest in market-leading and high-preforming businesses located across Europe and North America, and to help these companies in capitalizing on untapped opportunities in fast-growing markets, especially those in Asia. Here Joseph tells us more about it.
What have been the alternative investment trends in Hong Kong and globally in the past twelve months.
What we have seen is that there has been a tremendous amount of competition in the market for high-quality assets. To differentiate ourselves from our competitors, we have sought to uncover untapped opportunities and proprietary deals, in order to generate substantial returns for our investors.
What were XIO Group’s beginnings?
I had known Athene Li for many years from Asia and from when I was Head of Alternative Investments at BlackRock. Initially, we were planning to work together under the BlackRock Alternatives team, but after a variety of personal/firm decisions, we decided that it would be a great opportunity to set up our own firm with a specific strategy to invest in market-leading businesses and take them to Asia.
What considerations do you look at when identifying a business to invest in?
When we look at businesses, we want to have a market leader that is already dominant in their home market, but may not have achieved that globalization to the degree that they want. We then assist the company and help them grow. We can help them grow in many regions, whether that’s in North America, Europe or Asia. However, our particular expertise is in growth into China.
What challenges would you say you and XIO encounter on a regular basis? How are these resolved?
The challenges that we and XIO face on a regular basis are connected to the intense competition on the market. There’s also a misconception that we focus solely on Chinese companies, which couldn’t be farther from the truth. In fact, we do not invest in China at all; our growth opportunities are bringing companies from the West into global high-growth markets – and specifically China.
How does your experience in alternative investments inform your decision-making strategy at XIO Group?
Having worked at large firms previously, such as Bain Capital, JP Morgan and Blackrock, I understood how large institutional players assess and go after certain markets for alternative investments, so this has given me a great foundation. However, I think running your own firm is very different, as you are an entrepreneur as well and it forces you to be “scrappy”. Effectively, you fight harder when it is your own firm because you own your destiny – whether it be success or failure.
As CEO, how do you ensure you are directing the company in the correct direction? How do you advise your team to make the correct decisions for the company?
I would simply state that as CEO, my job is to set broad goals and principals, and then allow my team to work within our framework to achieve those objectives. For example, looking at where we want to diversify our business, how we want to grow our platform, the types of businesses we look for and how we build out our portfolio – these are the strategic areas I focus on. For other decisions, we allow that to be done more on a deal team basis. I look to give our colleagues the knowledge and responsibility, as well as opportunity to bring forward their ideas on what a good investment platform would be. With that also comes the accountability.
What does a typical day look like for you? What daily challenges do you encounter and how do you overcome them?
I tend to be travelling for 2 weeks of the month but my days are similar. I start with calls to Asia for the first few hours, then I deal with meetings in the UK and in the afternoon, and then I deal with calls back to the USA. My time is divided between approximately a third spent on client type of items, a third on existing portfolios and a third on new and potential investment opportunities.
The main challenge as a CEO is how to prioritise. You have to take in a lot of information and really prioritise what’s the most important thing that only you can deal with at that time and then delegate the remaining tasks to others.
What are your strategic goals and vision for XIO’s future?
Our goal is to continue to grow out our platform, at first in private equity. Our long-term objectives are related to eventually diversifying into other alternative assets classes, similarly to how I have done it at other firms and overtime, really build a diversified alternative investments platform.
About XIO
XIO Group is a global multi-billion dollar alternative investments firm headquartered in London, United Kingdom. XIO Group’s strategy is to identify and invest in market-leading and high-performing businesses located across Europe and North America and to partner with management to help these companies in capitalizing on untapped opportunities in fast growing markets, particularly those in Asia. XIO Group has operations in the United Kingdom, Germany, Switzerland, Israel, Hong Kong, Mainland China and the United States of America.
About Joseph Pacini
Joseph Pacini is the Chief Executive Officer and Co-Founder of XIO Group. Prior to XIO Group, Joseph was Managing Director and Head of BlackRock Alternative Investors (BAI) for Asia Pacific. Based in Hong Kong, Mr. Pacini was responsible for developing client-focused alternative investment strategies as well as the continued growth of BlackRock’s USD $24 billion alternatives platform and product offering in Asia.
Prior to joining BlackRock in 2012, Joseph was the Head of JP Morgan Alternative Investments Group in Asia. In that capacity, Mr. Pacini’s responsibilities included the business development, origination, due diligence and structuring of hedge fund, private equity, real estate and direct deal opportunities for its USD$10 billion platform.
Before moving to Asia, Mr. Pacini was a member of the JP Morgan Private Bank Alternative Investments Due Diligence Team based in New York. Prior to joining JP Morgan in 2003, Joseph was an Analyst at the private equity firm Bain Capital, LLC. in London, England.
Joseph received a Bachelor of Science in International Business from Brigham Young University where he graduated with University Honours.
Website: http://www.xiogroup.com
Business travel has its own set of wonderful perks. An opportunity to get out of the office and see the world, corporate exploration allows you to do business in a brand-new city, as well as having some fun while you’re out there. But where are the best destinations in which to do business? Here, Irma Hunkeler at BlueGlass, brings you ten places for your consideration.
10. Instanbul
Instanbul, Turkey. Photo: Moyan Brenn/Flickr
It’s a cliche but it’s true: east meets west in Istanbul, and this is particularly true when it comes to business. The city has acted as a central connection point for companies from different ends of the globe, making it one of the world’s most diverse and thriving corporate destinations. It’s also a place full of beautiful ruins, amazing street food and fantastic people. Put your negotiation skills to the test with a haggle at a street market.
Main industries: Textile production, food, oil, electronics
Where to go: Hagia Sophia, Basilica Cistern, Aya Sofya
9. Frankfurt
Frankfurt, Germany Photo: Pixabay.com
Long known as a major city for aviation - it has one the largest airports in Europe - Frankfurt is also establishing itself as a place for a number of other industries. With Frankfurt the seat of the European Central Bank, the German city is of international importance when it comes to the European financial services industry. It’s also a fantastic place to come and do business in.
Main industries: Financial services, telecommunications, IT, biotech, creative services
Where to go: Stadel Museum, Kaiserdom, Frankfurt Stock Exchange
8. Hong Kong
Hong Kong Photo: Pixabay.com
Alongside London and New York, city-state Hong Kong is one the globe’s leading business destinations. A combination of the free flow of information and free market policies make it a place conducive to running successful businesses, so it’s not hard to see why so many companies have activities here. What’s more, Asia’s most popular city for international business is one of the least corrupt economies in the world.
Main industries: Financial services, trading, tourism, professional services
Where to go: Victoria PEak, Hong Kong Museum of History, street markets
7. Mexico City
Mexico City, Mexico Photo: Pixabay.com
The heart of the Americas is one of the most thriving corporate destinations in south America. Named as one of the world’s best start-up hubs, Mexico is known as a great place to do business, chiefly because of the city’s sociability. It’s an easy city in which to set up shop and get to know people, so it’s no surprise that companies from the US are starting to call Mexico home.
Main industries: Pharmaceuticals, technology, financial services, manufacturing
Where to go: National Museum of Anthropology, Chichen Itza, Palacio de Bellas Artes.
6. New York
New York City, US Photo: Pixabay.com
Where to start when it comes to the Big Apple? This metropolis is home to companies from every part of the globe. Almost every big name has a presence here, in some form or another. As well as established players, the city also has an emerging start-up scene. After a day spent hustling in Manhattan, head to one of New York’s world-class museums before seeing a Broadway show.
Main industries: Financial services, media, technology
Where to go: Central Park, Empire State Building, Museum of Modern Art
Click next to see our top 5 business destinations
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According to today’s reports, UK GDP grew by 0.4% in the third quarter of the year, relatively better than expected, and up from 0.3% growth from the second quarter. The UK’s manufacturing sector also returned to positive growth, with output rising by 1% during the quarter. Below are some comments Finance Monthly had heard on the matter.
Rebecca O’Keeffe, Interactive Investor’s Head of Investment, had this to say: “With expectations still rife that the Bank of England will raise interest rates next month, today’s GDP figures will be closely scrutinised to see whether they give any excuse for policymakers to hold fire or if they support their hawkish intent. Uncertainty about Brexit, the relatively fragile state of the British economy and fears over personal debt and household incomes could all be making Mr Carney think twice about whether now is the right time to start the process of raising rates. However, the prospect of delaying could lead to accusations of the MPC crying wolf again and severely dent sterling. Rocks and hard places abound, and the Governor will be keeping his fingers crossed that today’s figure gives him a valid excuse either way.
“Lloyds bank, which has more private shareholders than any other UK company, has become a stalwart income play for investors, with a dividend yield of close to 5% and optimism that this yield could increase. Although there was no new comment on dividends, Lloyds confirmation today that they expect to ‘deliver a progressive and sustainable ordinary dividend for the full year and the Board will give due consideration at the year end to the distribution of surplus capital through the use of special dividends or share buy backs’ is music to the ears of income investors.”
Emmanuel Lumineau, CEO at BrickVest, said: “Today’s announcement is good news for the economy and will bolster the case for higher interest rates for the first time in more than a decade. For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”
Mihir Kapadia, CEO and Founder of Sun Global Investments, has said: “While the 0.4% is still below the UK’s long term growth rate, it certainly contributes to a positive momentum, and means that the economy has not yet rolled into a recession that was largely predicted over Britain’s decision to leave the EU. The UK’s annualised growth is now sitting at 1.5%, a subpar score against a formidable looking EU economy.
“Sterling has risen on the back of today’s growth report, up 0.25% against the US dollar to $1.317. The City is getting into a more hawkish tone, expecting that the pick-up in growth raises the chances of a UK interest rate rise next month. The third quarter has been particularly difficult for the UK economy, with inflation ringing 3% while wage growth has been subdued. Consumers are facing an increased squeeze in living standards while the city has been brought to its knees by the increased uncertainty over Brexit proceedings.”
While Apple reportedly struggles to get the iPhone X off its feet and into the market, stumbling on obstacles it knew would come about, such as developing proper facial recognition and delivering on its aggressive production schedule, global stock markets are fluctuating on the back of several factors, from the disastrous hurricanes to bad European weather and Brexit talk. Black Friday, Cyber Monday and Christmas are still ahead of us however.
Here Lee Wild, Head of Equity Strategy at Interactive Investor, provides an overview of the current global stock economy, as US markets and Japan’s Nikkei put London into perspective:
“The mood on many global stock markets might well be described as exuberant, but not irrational. Yes, it took less than six weeks for the Dow Jones to add the last 1,000 points to top 23,000, but latest US company quarterly earnings are beating expectations - look at IBM's fightback overnight - and president Trump's tax plans could still deliver a boost to the bottom line.
“Japan's Nikkei has just hit a two-decade high, but exports there have risen for a tenth straight month amid demand for Japanese technology.
“That puts what's happening in London into perspective. Investors are right to be concerned about a recent spate of high-profile profit warnings, and Brexit presents its own set of special circumstances, but many companies are delivering strong results and valuations are not excessive.
“Of course, the market will correct at some point. Chatter has picked up in recent weeks following profit warnings from blue-chips GKN, Mondi, ConvaTec and Merlin, but this bunch are not a fair indicator of the market as a whole.
“Unilever's highly-rated shares have come off the boil as bad weather affected sales of its Magnum and Ben & Jerry's ice creams in Europe during the third-quarter, while hurricanes in Florida and Texas held back the Americas. However, underlying sales in emerging markets still grew 6.3% and volumes were up. With just a few months of the financial year left, annual group underlying sales are still expected to grow 3-5% and profit margins improve.
“Don't be surprised to see a pullback between now and Christmas in some markets which have raced ahead this year, but it's unlikely to be the crash everyone is predicting. While inflation is currently outstripping wages growth, the UK unemployment rate is at its lowest since 1975 and any small rise in interest rates will not pull the rug from under this market.”
According to the Consumer Prices Index (CPI), inflation in the UK hit 3% this past September, a level not seen since April 2012, climbing from 2.9% this August.
Overall this rise in inflation means a more assured likelihood of increased interest rates, which currently sit at 0.25%. State pension payments will also rise in line with inflation figures in April 2018.
Most rumour surrounding the inflation rise speaks of the Brexit pound drop and the subsequent increase in the cost of imported goods.
Below Finance Monthly had heard from a number of reputable sources, experts and analysts in the financial sphere, with your Thoughts on the current inflation high and what it means for Britain and beyond.
Emmanuel Lumineau, CEO, BrickVest:
The UK’s relative economic strength post Brexit has now waned as consumers begin to feel the impact of rising inflation. Higher interest rates should be coming for the first time in more than a decade. For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices.
We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market.
Matthew Brittain, Investment Analyst, Sanlam UK:
While far from being a watershed moment, today’s announcement that the rate of inflation has reached the 3% point does pile more pressure on already squeezed living standards. For people up and down the county, the pound in their pocket now feels a little less valuable. Inflation is now confidently outstripping wage rises, which have tended to be around 1-2%, meaning that people’s disposable income is in decline and many will have to take on more debt or save less in order to maintain their living standards.
Our view is that current levels of inflation are nothing to worry about – it’s simply a case of businesses passing on higher import costs, brought about by a fall in sterling, to their customers. Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it. This view is not necessarily shared by the Bank of England, and today’s announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control.
Stephen Wainwright, Partner, Poppleton & Appleby:
While the level of corporate insolvencies are at an all-time low, personal insolvencies have jumped to their highest level in almost three years. It is no coincidence that the increase comes as incomes are squeezed and failing to keep pace with inflation at 3%.
The level of annual inflation is anticipated to peak in the next three months, but while companies are trying best to absorb the increase in material costs due to the weaker pound, this can only be absorbed for a short period. Therefore don't be surprised to see higher shop prices in the near future, which in itself will cause yet more inflationary pressures.
To compound matters, the BOE have made it clear that interest rate increases are on the radar which will impact on the £ in the pocket. We as a practice have seen a significant increase in advisory work which will inevitably lead to an increase in business failures.
The slow down is currently being concentrated in the consumer-led businesses such as retail and hospitality sectors. Recent data suggests that the construction industry has seen a downturn. The sale of motor vehicles have seen a steady decline in the last six months so clearly people are reluctant to spend on big-ticket goods.
While this sounds very negative, we must remember that the economy has been the fastest growing in the G7 for a number of years and unemployment is at its lowest since 1975. This has all happened during some of the most financially challenging times in living memory.
Has anyone tried to get a good plumber or electrician lately? Well, believe me, there is still a lot of confidence in the economy, and we are as a nation are very resilient.
Owain Walters, Founder & CEO, Frontierpay:
UK inflation figures have continued their rapid rise to 3%, coming in way above the Bank of England’s target of 2%. Sterling had a small spike against all major currencies following the inflation release, but the gains were short lived. The markets reacted accordingly to the announcement, with the pound falling throughout the day to 1.1212 and 1.3174 against the euro and US dollar, respectively.
Investors are expecting the BoE to respond by raising interest rates at its next monetary policy meeting in November, but this could be a very slow and soft approach, with rates potentially remaining at those levels for a couple of years. This has the potential to hinder any sterling strength over the coming months, with Brexit also still firmly holding the pound down.
Daniel Ball, Director at eProcurement provider, Wax Digital:
With inflation on the rise, procurement teams need to consider how to mitigate against price rises from their suppliers. Exchange rate fluctuations and rises in inflation are difficult to predict, but organisations can take steps to actively protect themselves from sudden price increases:
Be proactive
It’s important that procurement professionals, particularly those with an overseas supply chain become more proactive and disciplined when it comes to their sourcing and tendering activities. This will enable them to lock down pricing for a given period of time so that they are exempt from any cost or exchange rate fluctuations.
Collaborate with finance
Large multi-national enterprises, who do much of their buying overseas are adept at mitigating exchange rate and inflationary pressures, using complex management instruments borne from operational necessity. But if you’re a smaller organisation that only does a portion of business internationally, protecting against inflationary or exchange rate hikes won’t necessarily be a core competence.
If nothing is in place it may be time for procurement to raise the topic with the FD – most of the large banks can offer FX and inflation hedging tools. If your organisation uses these instruments already, then procurement needs to collaborate more closely with finance to discuss how to extend these current arrangements into more areas of purchasing, not just perhaps direct expenditure, but into indirect categories at risk too.
Assess risk
Supply chain evaluation needs to include risk matrices which cover not simply the core KPIs around financial stability, performance etc, but in the case of overseas suppliers then factors such as geopolitical, logistics and currency metrics too. Procurement professionals need to understand their supplier tiers, from the critical strategic ones that support production or service delivery, to the mid-tier in the larger spend categories and into the long tail invoicing infrequently. They then need to decide which parts of the supply chain will need a secondary wave of potential suppliers lined up to mitigate risk if things change significantly. This alternative supply chain may be more expensive, but will minimise the impact to business as usual if there are significant changes to the exchange rate.
John Calverley, Lecturer, London Financial Studies:
Britain’s headline inflation rate rose to 3% in September, well above the Bank of England’s 2% target. But this rise is entirely due to higher import prices caused by the devaluation in Sterling after the Brexit vote. Unless Sterling slumps again – unlikely as it is already historically low - inflation will drop back to 1.5% or below in 2019.
The conventional view is that when unemployment falls to a certain level the labour market heats up. Workers and unions are emboldened to ask for higher wages and companies become willing to offer higher wages to attract workers. For the UK (and US) that level has long been put at about 5%. In Britain unemployment has fallen from 4.9% to 4.3% since the Brexit vote which suggests wage growth should start to pick up. That is the Bank of England’s view which is why a programme of gradual interest rate rises is likely over the next year.
But some economists fear that the conventional view is wrong. Around the world wages are not responding to low unemployment the way they used to. In Japan the labour market has been tight for some time and yet wage growth is zero. In the US unemployment is also almost down to 4% yet wage growth is stuck at 2-2.5% pa, the same as in Britain. Exactly why wages are quiescent is disputed, but most put it down to the combination of weak unions, fearful workers reluctant to push for a pay rise and the competitive pressures of globalisation.
Inflation hawks fear that we have been lulled by these considerations. They worry that very soon wages and prices will start to surge, creating a serious inflation problem. The best outcome would be for a very gradual lift in wages even as unemployment falls further. After all unemployment typically stood at 2-3% in the 1950s and 60s so perhaps that is possible again today. And if wages lift only gradually this would support consumer spending while keeping the Bank of England in gradualist mode, raising rates but not too far or too fast. At the moment this seems the most likely outcome which is why, after 2017, 3% inflation may not be seen again for some years.
Katharina Utermoehl, Senior Economist for Europe, Euler Hermes:
Inflation reached three% in September, the highest rate seen in more than five years. The sharp acceleration from around one% a year ago has been largely driven by the sharp depreciation of the pound following last year’s Brexit vote which made imports more expensive. In addition, increases in food and transport prices further pushed up annual headline inflation from 2.9% in August.
For 2017, we expect UK inflation to come in at 2.7% before slowing slightly to 2.6% next year. Consumers will continue to feel the pinch with inflation easily exceeding sluggish wage growth which is close to two% and showing no sign of a pick-up.
We expect UK GDP growth to slow down to 1.4% this year and one% in 2018, down from 1.8% in 2016. The pronounced pick-up in consumer price inflation is raising the probability of the Bank of England (BoE) increasing the benchmark interest rate from the current record low of 0.25% for the first time in over a decade. The BoE has long tried to strike a balance between supporting economic activity and ensuring price stability, but with inflation now registering a full percentage point about the BoE’s two% price target the latter objective will likely take priority. We expect an interest rate hike to be announced as early as this year.
Mihir Kapadia, CEO and Founder, Sun Global Investments:
The rising inflation is largely due to the fall in value of the pound over the Brexit uncertainties. With increasingly abrasive negotiations underway in Europe, along with political cracks appearing within the British parliament, the period of uncertainty is long from over. Therefore, we can expect that the inflation figures will only be climbing northward though the foreseeable future unless and until the UK political machinery brokers a viable deal with its European counterparts and thereby douse the uncertainty which is inflaming the markets.
Meanwhile, the pick-up in inflation raises the likelihood of an increase in interest rate from the Bank of England, which is currently at 0.25%. That being said, we would argue against a premature rate rise, considering the current political uncertainty. An interest rate rise now, which increases prices for millions of mortgage holders and could dampen economic activity, could just be the final blow to the squeezed out UK consumer.
Greg Secker, CEO, Learn to Trade:
It’s no secret that the UK’s divorce from the EU has left the economy vulnerable to more persistent price pressures, which has had a negative impact in the short term for consumers. This hike in inflation rates has tightened the squeeze on British households. The rise in the cost of everyday goods means workers are seeing the value of their pay packets weaken in real terms.
Over the next coming weeks, UK businesses will continue to take a ‘business as usual’ approach of experiencing higher costs from exports and cutting costs where possible to ease the pain of a potential decrease in business profits and power to purchase. Yet, while it may seem like doom and gloom this winter there is a light at the end of the tunnel. We expect the pound to strengthen in the long term, increasing buying power and easing those tight purse strings, but this will be dependent on the trade agreement and movements within the Brexit negotiations.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
New report from national law firm Mills & Reeve highlights the defiant ambition of the mid-market despite serious challenges, and demands for sustainable growth finance.
Mid-market businesses remain ambitious and confident in their growth prospects despite an unstable economic landscape, the impact of Brexit and an unsupportive funding environment, according to new research from national law firm Mills & Reeve.
The study, ‘Defying Gravity’ - based on the opinions of 500 leaders of medium-sized businesses in the UK – reveals that 83% of mid-market businesses plan to increase turnover in this financial year (2017/2018) by an average of 22%, and two thirds of leaders aiming to grow (62%) are willing to bet their house on meeting this target. This is not unrealistic, with the new research also revealing that two thirds (66%) of medium-sized businesses grew turnover last year, at an impressive average of 20%.
However, mid-market businesses face serious challenges to growth. Three fifths (59%) of mid-market business leaders do not believe that the economy is strong and stable. Two thirds (64%) of mid-market boards are concerned that there is now a real risk of recession, and that economic uncertainty will disproportionately affect the mid-market (66%).
With single market access “critical” for three fifths (60%) of mid-market businesses, Brexit looms large on leaders’ list of concerns. Three in five (61%) mid-market leaders are concerned that the UK failing to reach an agreement with the EU would cause “significant damage” to their business, and 60% are concerned that regions outside London will be disproportionately affected by Brexit. More than half (55%) of leaders are concerned that implementation of Brexit is a serious threat to their ability to recruit both specialist and low-cost talent.
The external funding needed to supercharge growth is also found to be lacking: almost three in five mid-market leaders (58%) say that their company can’t achieve its growth potential without better long-term finance options. More than half (56%) of business leaders stated that mid-market finance is not “fit for purpose”, with two thirds (63%) believing that the UK funding environment is great for start-ups, but not for mid-market firms.
Claire Clarke, managing partner at Mills & Reeve, comments: “Despite very real challenges, it is encouraging to see mid-market leaders remaining defiantly ambitious about growth, determined to beat market conditions and to hold their position as the driving force of the British economy.
“But these businesses are being hindered in their efforts to realise their ambitions. Accessing growth finance suited to mid-market needs is a significant challenge, and the unstable economic and political landscape is causing some businesses to refrain from making the investment necessary to grow.”
The findings are released today ahead of a series of reports from Mills & Reeve championing the mid-market and exploring the current challenges faced by business leaders.
The research goes on to reveal a perceived lack of support from Government, with two thirds (65%) of medium-sized business leaders frustrated that the Government “keeps presenting obstacles to mid-market growth”. Three-quarters (74%) cite a lack of targeted policy support, with 61% concerned that Brexit will distract Government from supporting regional development and infrastructure.
Jayne Hussey, head of mid-market at Mills & Reeve, adds: “The mid-market is the unsung powerhouse of the UK economy, and we are hopeful that medium-sized businesses can continue to overcome the barriers to growth formed by uncertainty. The events of the recent past may have rocked the nation’s confidence, but the resilience, strength and ambition of mid-market business leaders appears to remain intact.”
(Source: Mills & Reeve)
With an ever-growing need for property, renting in the UK has become go-to game for many home seekers who can’t quite make it into the mortgage market. But what does this mean for the letting side of property? Fareed Nabir, CEO of PropTech platform LetBritain discusses for Finance Monthly.
Over recent weeks we have seen the UK’s two largest political forces host their party conferences. Along with inevitable, frequent mentions of Brexit and a fair amount of scrutiny for both the Labour and Conservative leaders, it also became clear that access to housing is at the top of Westminster’s agenda at present. In this respect, the private rental sector faces particular challenges in providing homes for a growing proportion of the country’s rising population. With the UK population projected to reach 70 million people by mid-2027, PWC estimates that an additional 1.8 million households will enter the UK’s private rental sector over the next eight years.
Central to the growing importance of the private lettings sector is the rising costs associated with purchasing a home. The average value of properties in London has risen by a whopping 78% in the ten years since the onset of the 2007 global financial crisis. Add to this further figures around rising prices for Manchester, the East Midlands and Scotland and a clear picture emerges. Whilst the UK property market may be a fruitful asset class for many investors, more and more UK residents are now coming to rely on the private rental sector as the bottom of the ladder rises out of their reach.
Recognising the value of renting
Reacting to the rising number of people moving out of homeownership, leading political figures have focused on addressing feelings of insecurity expressed by voters. Both the Conservative and Labour parties share a target of building one million new homes by the end of the parliament and are considering the possibility for longer tenancies to become the norm. Labour has taken this one step further and has embraced a policy pursued in cities including Berlin, Stockholm and New York, whereby the government intervenes in various ways to restrict rents.
However, we must also remember that for many people, renting is an extremely attractive option. One of the most attractive aspects of renting is the greater flexibility offered by tenancies relative to ownership. For example, if you have to move to a new city for work, it’s nowhere near as difficult as having to list a property and wait for a sale to be processed. With the UK workforce now more globally and nationally mobile than ever before, we must remember the historic advantages of renting if we are to effectively adapt. The reasons that made renting an attractive option in the past haven’t gone away; in fact they are now truer for more people than ever.
To this end, the emergence of a rising number of tech platforms within the property sector holds significant promise. A property market that was once dependent on bricks and mortar agencies, endless reams of paperwork, lengthy phone calls and poor transparency is fast becoming more efficient; as a result both landlords and tenants are coming to expect more. It’s now possible to begin the process of securing a rental property from anywhere in the world and engage directly with a landlord or their instructed letting agent.
In short, tech has meant that the process of letting a property can be made quicker, cheaper and more transparent for all involved. Commonplace in other aspects of people professional and personal lives, people in the UK today expect tech – everything from bespoke software and apps to slick online platforms and web support – to make hitherto laborious processes far, far easier.
Delivering choice and security
Recent LetBritain research into this emerging development found that 31% of UK adults, the equivalent of 15.92 million people, now think that using high street letting agents to rent out a property is outdated and overburdened by paperwork. A further 25% were found to be relying upon unregulated online-only alternatives to source and secure a rental property. Whilst a number of challenges remain in managing this transition, the scale of public sentiment is resoundingly favourable towards harnessing the power of tech to more conveniently and efficiently facilitate property rentals.
The challenge remains for the sector to deliver choice and security across the letting market. Landlords should not feel the need to put their property at risk by renting to an unreferenced tenant just because they were sourced online, and tenants deserve to know that their legal rights will be observed. If this is achieved, the private rental sector should be able to manage the demand that it’s set to face in the years ahead, with landlords and tenants alike incentivised to be communicative, transparent and forthcoming with all necessary documentation.
As more of us move around or find it difficult to buy in our desired location, digital solutions that enhance and protect the interests of landlords and renters are vital. So while political leaders are focusing heavily on turning Generation Rent into Generation Buy, it is equally important that they promote more progressive approaches for serving all those in the rental market.
As the traditional saying goes: In life, only two things are certain – death and taxes. Whilst death is inevitable, there are those who unfortunately try to avoid paying tax. This is evident from the ‘current list of deliberate tax defaulters’ collated by the Government (Gov.uk). It details 209 separate cases of businesses/individuals who have deliberately made errors in their tax returns or failed to comply with their tax obligations.
Turnerlittle.com, who provide financial services, assessed the governmental data by breaking it into eleven defined categories:
Manufacturing/wholesale, property, construction, transport, professional, retail/grocery/convenience, other, individual’s in multiple ventures, hospitality and health/animal health.
By breaking it into categories, the data revealed the following:
- Businesses/individuals working in manufacturing/wholesale, collectively avoided the most amount of tax at £12,128,233.71. Included in this figure was a wholesaler of alcoholic goods based in Eastleigh (Hampshire), who alone avoided paying an astonishing £5,527,014.00 in tax.
- Those businesses/individuals in property were the next biggest avoiders, collectively accumulating a hefty £7,215,182.44 tax bill - this figure includes property developers as well as landlords who have not paid tax on income earnt from a property or properties they manage. Information for immediate release Turnerlittle.com
- Anyone working in the field of health or animal care ranked at the bottom of the list, with the least amount of tax avoided at £194,243.06. The individuals cited in the list consisted of a surgeon and medical consultant, both from London, who together contributed £132,162.06 to this figure. Second from the bottom were those businesses/individuals working in hospitality (hotels, nightclub etc) who collectively avoided paying a total of £464,290.56 in tax.
- ‘Other’, which was mentioned on the list, included those businesses/individuals who could not be clearly identified in a specific category - such as a dancer, diver and a children’s play centre. ‘Individual’s in multiple ventures’ were those who had more than one occupation or traded/involved in multiple businesses of different kinds.
James Turner, Managing Director of Turnerlittle.com commented: “The findings from this research are certainly fascinating. The amount of tax purposely avoided is astronomical. It’s certainly unfair on those who pay their fair share of tax. From a greater perspective, tax revenue is now more important than ever to the government. With the uncertainty of Brexit lurking and the government struggling to effectively manage their resources, greater tax revenue would allow them to allocate more funding to improve essential public services such as the NHS. It’s therefore essential every business/individual be prudent with their accounting and lawfully adhere to their tax obligations.”
(Source: Turnerlittle.com)
Lord Alan Sugar is best known for his long tenure as host of the BBC’s hugely successful show The Apprentice.
His qualifications to sit across from hopeful candidates in the boardroom have been built up through years of diverse business experience from heading up an early computing giant (Amstrad) to more recently acquiring a lucrative property empire.
A self-made man with an innate sense of corporate strategy, Sugar rose from humble beginnings in a council flat to being appointed the UK’s Enterprise Tsar through tenacity, savvy and a tell-it-like-it-is attitude.
However, his rise from obscurity to celebrity wasn’t without its setbacks and stumbles. Here is the story of one of Britain’s most influential businessmen.
(Source: ABC FINANCE LTD)
Eleesa Dadiani, Founder and Owner of Dadiani Fine Art, recently became the first Fine Art gallery owner in the UK to accept cryptocurrency as payment for works of art, including bitcoin and five others. Here she delves into the prospects of the fine art and other luxury markets investing in the proliferation of cryptofinance.
The luxury market is often seen as stale and self-serving, an opaque world that is difficult to penetrate and resistant to change. I should know – I’ve owned a Mayfair art gallery for three years and I have witnessed it at first hand.
Earlier this year, I decided to introduce something new to the market. My gallery - Dadiani Fine Art - became the first in Britain to accept Bitcoin and all other leading cryptocurrencies. I have since launched Dadiani Syndicate, the UK’s first and only cryptocurrency luxury goods exchange, which will allow luxury assets and commodities such as diamonds, hyper cars and bloodstock to be purchased in digital currency.
This will broaden the market, bringing a new type of buyer to art and luxury. The cryptocurrency market is currently worth over £110b and there are cryptocurrency millionaires who now want to use this wealth to buy assets.
However, this is not an entirely demand-driven move. I am doing it because I am evangelical about cryptocurrencies, the Blockchain technology that underpins them, and the profound impact they will have not only in the art world but in every sphere of business and our everyday lives. This is a revolution that goes far beyond the art and luxury markets.
Examples of work found at Dadiani Fine Art
I realise that there is still a great deal of scepticism about cryptocurrencies and it needs to be confronted head-on. The first objection people always raise is that it provides cover for criminals and encourages criminality, that it’s used on the dark web to buy drugs and the like. There’s no doubt in the very early days of Bitcoin there was a criminal element involved, but the landscape has changed a great deal since then. Furthermore there are plenty of criminals with conventional bank accounts laundering money, so let’s not pretend mainstream banks aren’t affected by the same issues.
The mistake most people make is to think of cryptocurrency as a currency. It’s not – it’s the internet of money. Money is just one of its applications, but it’s not the most important. It’s the technology behind it that is revolutionary and the coins represent the technology; that’s what people are investing in. The technology will allow us to re-claim power, paving the way for de-centralised, peer to peer transactions without the intervention of an intermediary.
People accept structures that make no sense just because they have known nothing else – they pay interest to banks and pay fees for sending money abroad just because that’s always been the way things have been done. A decentralised exchange eradicates that.
In time, cryptocurrencies will change the world of business completely, but I understand there will be resistance just as there is with every innovation. However, when traditional markets – and the art world is one of the most traditional of them all – start to embrace it then we will see real, transformational change.
Are the art and luxury markets crying out for this change? Of course not. These markets will run themselves as they choose. But once you invent the infrastructure you create the demand. Before the car was invented we happily travelled by horse; we didn’t know any better. If you are travelling on a muddy path a horse will serve you well, but on an asphalt road you would choose a car over a horse every time. Once we all used cameras to take pictures, we had no alternative; then the smartphone was invented and it killed Kodak.
For cryptocurrencies to be recognised on a global scale you need to make a start somewhere; if you can start with a market that doesn’t need to adopt them but does it anyway that sends out a powerful message. It’s a bridge to other industries and markets.
This will be a new epoch. It does not mean we are going to change the art and luxury markets out of all recognition – the value of artwork and luxury products has been created over centuries and they will always be exclusive markets – but we are giving more people the chance to buy and to do it in a different way. And when that is done peer to peer, person to person, without the intervention of a centralised authority taking big transaction fees it demonstrates the power of decentralisation. The old world remains but is powered by new world technology.
Blockchain is a smart contract; it does not to have be verified by a central authority. Once we have embraced the concept of a mathematical model that has been designed to run itself we will wake up to its possibilities. Digital ledgers will give us back control; if only we could understand that we are not in control of our money when it’s sitting in a bank.
I understand that the world fears change and there will be plenty of cultural hurdles to overcome, but this is an exciting moment. I want to be in the vanguard of this change and see the art and luxury worlds lead the charge.
Eleesa Dadiani, Founder and Owner of Dadiani Fine Art
