Will Amazon finally pay it’s fair share?

“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. 


Are we right to be optimistic about the UK economy?

Is the glass half full or half empty? It’s one of the oldest questions (and clichés) there is. But right now you could be forgiven for thinking that as far as the UK economy goes the glass is not just half full, it’s completely full. 

The last few weeks have brought us a steady stream of good news. Post-Brexit the UK has agreed – or is very close to agreeing – trade deals with Norway, Iceland and Australia. According to recent reports International Trade Secretary Liz Truss is aiming to sign a free trade deal with New Zealand ‘by August.’ 

Manufacturing growth is at a 30 year high and even car sales – which were hit so hard by the pandemic – have recovered. The UK “optimism index” is at a six year high, and recent figures showed the average price of a house in the UK rising to record levels. 

Optimistic forecasts abound, with the CBI predicting that the UK economy will grow by 8.2% this year, up from a previous forecast of 6% and taking the economy back to pre-Covid levels. The economy will grow by a further 6.1% in 2022, the CBI forecasts, up from a previous figure of 5.2%. 

Still not convinced? The UK is now officially home to 100 “unicorns” – new tech firms with a valuation of more than $1bn (£721m). Tractable, an artificial intelligence start-up building computer vision tools became the latest, joining companies such as Skyscanner (from Scotland), Durham-based challenger bank Atom Bank and Darktrace, based in Cambridge, which uses AI to develop cyber-security solutions.

There are, of course, areas for concern. All is looking up, apart from the fact that ‘Freedom Day’ – originally scheduled for June 21st – has been pushed back. Apart from the fact that the UK could well face a third wave of the virus as the seemingly more infectious Delta variant holds sway. Apart from the fact that many UK businesses – especially in the hospitality sector – are struggling to re-open because of a shortage of staff.

The simple fact is that there is likely to be a mixture of good and bad news for the foreseeable future. This good and bad news will be reflected in stock markets, not just in the UK but around the world. So the only certainty is that regular contact with your financial advisers will be essential – and that your financial planning will need to be flexible and regularly reviewed. 

Yes, there is an increasing amount of good news but no economy – either in the UK or anywhere else – is out of the woods. We will continue to keep you up to date with developments and keep your financial plans under regular review. 


Will the four day week become the new normal?

The effect the pandemic has had on people’s mental health has been well documented. Many people have been juggling work, a home, a family, a relationship, as well as elderly relatives they haven’t been able to see, or daren’t take the risk of seeing. 

Unsurprisingly, the pandemic has changed attitudes to work and life, with millions of people now saying that they would accept a shorter working week – and less money – in exchange for a better work/life balance. 

But is that possible in the real world? Could people really move to a four day week? Or would that result in a loss of productivity and subsequent blow to the economy that would prove to be too much? 

An experiment has taken place in Iceland which suggests that a four day week may well be the way forward. The trial took place between 2015 and 2019 and was run by Reykjavik City Council and the national government – so comes with the caveat that it largely concerned public-sector workers. 

The trial covered 2,500 workers – around 1% of Iceland’s total workforce – and saw them move to a four day week with no loss of pay. The working week was reduced from 40 hours to, typically, 35-36 hours. The trial was hailed as an ‘overwhelming success’ with workers reporting less stress and burnout, better health and an improved work/life balance. 

Similar trials are now taking place in countries including Spain and New Zealand. Whether a four day week could be applied across all sectors of the economy remains a moot point. What is clear is that the pandemic has unquestionably changed working patterns and what people want from work. It seems clear that employers would like the majority of their staff back in the office: it seems equally clear that millions of people prefer working from home – spending more time with their family and less money on commuting – and want that to continue. 

A story published in mid-July suggested that staff may win the work from home battle. Zoom – which has become a staple of so many people’s lives over the past 16 months – has bet billions on hybrid working continuing, even as the Government urges us to return to the office. 

Zoom has struck a £10.7bn deal to buy cloud-based call-centre operator Five9. Zoom boss Eric Yuan says it will allow customers to “re-imagine the way they do business” as Zoom prioritises its cloud-calling product Zoom Phone and the conference-hosting Zoom Rooms. 

Whatever happens – and employers are going to find it very difficult to insist that people come back to the office – one thing is certain. The pandemic and the relentless march of technology has changed the face of work forever.


What lessons can businesses learn from Gareth Southgate?

In 1996 England went out of the Euros on penalties. The man who missed the crucial penalty was Gareth Southgate, now the England manager. 

Speaking about the miss recently he said, “I’ve had a couple of decades to think about it. I was a volunteer. The type of character I was, I felt you should put yourself forward.” 

As we all now know, England also lost the final of Euro 2020 on penalties. Football was not scheduled to come home – unless you live in Rome. But throughout the campaign – and the subsequent inquest – Gareth Southgate has won widespread admiration for his approach. It is not always easy bringing players from different clubs together, but as BBC pundit Karen Carney put it, “This isn’t a team, it’s a family.” 

So is it just football that can learn lessons from Gareth Southgate? Or can his approach be applied more widely – perhaps also in the business world, as the UK looks to recover from the pandemic? 

Everyone agrees that Southgate is modest and approachable. He has a clear vision and he communicates it well. These are key traits in any successful business leader. 

There is, though, an even more interesting point about the current England manager. He is prepared to surround himself with ‘non-football’ people. It’s something you often see in professional sport and in business: if everyone in your management group thinks in the same way and comes from the same background, you are by definition limiting your options. As the old saying goes, “If everyone thinks the same, no-one thinks very much.” 

From the start of his time as England boss in 2016, Southgate has surrounded himself with people who think differently. At the time of writing the FA’s Technical Advisory Board includes Sir Dave Brailsford, former performance director of British Cycling; Colonel Lucy Giles, from Sandhurst Military Academy; Kath Grainger, an Olympic rower; the rugby coach Stuart Lancaster and the tech entrepreneur Manoj Badale. 

“I like listening to people who know things I don’t,” Southgate says simply. “That’s how you learn.” 

Listening seems to be another of the England manager’s key strengths. Anyone watching the tournament couldn’t help but be struck by the number of conversations Southgate had with Steve Holland, his assistant manager. More often than not, it was Holland doing the talking and “the boss” doing the listening. 

Will those strengths of Southgate’s – a clear vision, an ability to communicate, an acceptance of new ideas and a willingness to listen – be enough to finally see England succeed in the 2022 World Cup? Who knows? You suspect Italy, France, Brazil and Argentina might have other ideas…

What is certain though, is that those characteristics are absolutely essential in business. As the UK slowly recovers from the pandemic, they’re traits every business leader needs to adopt. 

…And perhaps we can throw in one final character trait: bravery. Gareth Southgate was brave enough to take a penalty in 1996, as were five young men a few weeks ago. As Italian legend Roberto Baggio famously said, “Only those who have the courage to take a penalty miss them.” 


Is the north east the new London?

When Chancellor of the Exchequer Rishi Sunak delivered his Budget speech in March much of the focus – inevitably – was on the economy’s recovery from the pandemic, and the cost of all the support measures. 

But Sunak also announced a host of new initiatives including freeports and a new campus for the Treasury. One of the freeports was at Teesport, the Treasury campus is to be in Darlington. Throw in developments in the private sector and the Prime Minister’s commitment to “levelling up” the UK and many people are wondering if the North East could soon rival London and the South East as one of the UK’s key economic areas. 

Freeports allow goods to be imported without paying the usual tariffs: the tariffs are only payable if the goods are then moved elsewhere in the UK – but they can be shipped back overseas without any tariffs ever being payable. 

The first, and biggest, freeport in the UK will be at Teesport, in a move that will “turbocharge Teesside’s recovery” and bring thousands of jobs and a reported £3.4bn boost to the local economy. 

The decision to relocate as many as 1,000 Treasury officials to Darlington may not have the same economic impact on the region, but it was a significant sign that the Government appears to be committed to areas outside London. It is expected that around 300 staff will have moved within a year, and that they will be joined by staff from other departments such as Business and International Trade. 

All this was swiftly followed by Nissan announcing a £1bn investment and major expansion of electric vehicle production at its car plant in Sunderland. This will create 1,650 jobs, plus thousands more in the local supply chain. 

July then brought planning approval for Britishvolt’s gigafactory which will eventually produce enough lithium-ion batteries for 300,000 electric cars a year. It will be based at Blyth in Northumberland. It is expected that this will create another 3,000 jobs, plus those in the supply chain. 

The title of this article is, of course, slightly tongue-in-cheek. The North East will likely not become the “new London.” What is possible, however, is that direct Government action can help to rebuild regional economies in the UK. Equally, companies are seeing that London and the South East is not the only answer if they are looking to expand. 

The next step, perhaps, is to persuade the tech giants – such as Facebook and Google – that their UK headquarters do not need to be in London. After all, Amazon now has more than a dozen fulfilment centres in the UK, stretching from the south to Inverclyde in Scotland. 

With many people now looking to escape to the country in search of a better work/life balance after the pandemic, it may be that the Government’s commitment to levelling-up has come at just the right time – for both the economy, and for people’s wider mental health.


Will Biden’s huge Stimulus Package work?

When Joe Biden was inaugurated as President back in January there was much talk of his proposed stimulus package for the US economy. The figure generally talked about was $1.9tn (£1.36tn), an eye-watering sum of money. To give you a comparison, the National Audit Office in the UK is currently saying that the Government has spent £372bn on Covid-19, with £150bn of that going towards support for businesses. 

By May, however, $1.9tn was looking like small change: when Joe Biden presented his Budget he revealed $6tn (£4.3tn) of spending commitments, largely funded by tax rises for wealthy Americans and business. Unsurprisingly the spending plans were condemned by the Republicans as “insanely expensive,” with claims that they would lead to record levels of debt. 

So what is the President planning to spend the money on? How will he pay for it? And, most importantly, will the huge level of spending work? 

Joe Biden’s budget is aimed at growing the US economy “from the bottom up and the middle out.” It includes more than $800bn for the fight against climate change, free school places for all three and four year olds, two years of community college for all Americans and massive investments in both physical and digital infrastructure. 

As we have noted above the plans have been fiercely criticised, and there is a chance that some members of the President’s own party may side with the Republicans over some of the proposals. The chief criticism, though, has centred on debt, with estimates that the proposals could add $14.5tn of debt over the next decade, taking US Government debt to 117% of GDP by 2031 – a level not even reached during the Second World War. 

Will the plans work? Your opinion on that almost certainly depends on your view of Joe Biden. Republicans are fiercely critical of something they see as taking US debt to a whole new level and – very possibly – driving up inflation. The Biden administration argues that inflation will stabilise at around 2% and that the higher taxes will see the whole programme paid for within 15 years. 

In 1996 Bill Clinton famously said that the “era of big Government is over.” Joe Biden appears to have brought it back. While his plans still have to go through Congress and the Senate, it seems certain that enough of his spending commitments will remain to make the fiscal hawks in both parties wince.


Where will high street banks be in 10 years?

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.


Is cash too safe?

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.


Why is Cazoo worth Billions?

We have all seen the headlines: “XYZ Company valued at £3bn in latest funding round.”

Very often, it is a company we have never heard of. Almost always, the company has yet to make a profit. And yet, here it is, valued at billions of pounds (or dollars) and raising sums of money that make the amounts asked for on Dragons’ Den look like petty cash.

How? And why? How is it possible for a company that has never made a profit to raise that much money? And why do they attract such sky-high valuations, often way in excess of the valuations attached to companies that have premises we can walk into, and that have a long track record of making real profits?

A good example is Cazoo, founded in the UK less than four years ago. Cazoo’s business is simple: it sells cars. But what Cazoo is doing is “disrupting” the traditional car dealer/car salesman model. You buy your car online: Cazoo deliver it – and if you don’t like the car they’ll pick it up again. The company is very high-profile: it sponsors the shirts of Premier League clubs Everton and Aston Villa, and has just done a sponsorship deal with the Football League, giving it access to the clubs (and fans) lower down the football pyramid.

The company made a loss of £19m in its first year, but has just posted a profit of £3.7m (on turnover of £113.9m) for the first quarter of this year. But does that level of profit make the company worth £1.83bn – the valuation placed on it in October last year when it raised £217m in its latest funding round?

Perhaps we should explain the term “funding round.” Traditionally businesses borrowed money based on their track record of making profits and offered security for any loan taken out. There will be many business owners reading this who have had to offer their home as security for a business loan.

But when a start-up business, or a very new business like Cazoo, wants to borrow hundreds of millions, that becomes totally impractical. It has no track record, it generally isn’t making a profit – two years ago Uber famously warned that it “may never achieve profitability” as it geared up for a stock market float with an expected valuation of $100bn (£70.5bn at today’s exchange rate). And when his business is borrowing that much money, the founder’s house certainly won’t be adequate security.

So the company embarks on a funding round, giving outside investors the opportunity to invest cash in exchange for equity and/or partial control of the business.

For the investors, these early investments can sometimes pay off spectacularly. In 2004 Peter Thiel put $500,000 ($352,000) into Facebook when the company was valued at $5m (£3.52m). When the company went public in 2012, Thiel sold 16.8m shares for approximately $640m (£451m).

What investors are paying for is not profit – they are not expecting old-fashioned dividend income. They are paying for market share and/or a potentially dominant position in a lucrative market. In Cazoo’s case, for example, investors are paying for a potential pole position in the car sales market. In addition, a model which works well in one country will work well in another: one estimate puts the value of the used car market in the US at $2.15tn (£1.51tn) by 2027.

…And it looks like those investors who valued Cazoo at £1.83bn back in October may have got a bargain. By February the company was reported to be looking at a merger with its main rival in the US, and a stock market float potentially valuing the company at $£6bn.


Who will pay the bill for Covid-19?

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.