Friday, 5 October 2012

Offshore Investment Breaking the Weakest Link

1967: The Graduate - Nichols
Offshore investing can be a very wise strategy for investors, however much caution is needed. The over-arching principle should be simple - placing money offshore means it grows free of tax until it is brought back to the UK or anywhere else - at which point it will be taxed appropriately. In its proper place, offshore investment is little more than delaying tax. In an ideal world (for the investor) you bring funds back to the UK when your rate of tax is more favourable. To my mind there is nothing morally or ethically wrong with this. It is not tax evasion, it is tax delaying - and not in the sense of paying HMRC late, but as appropriate (when the money is in the UK).

So it is disappointing to note that The Times has today reported that various well-known people have been named once again in an offshore scheme (Liberty Tax Strategy) that is so aggressive in its approach to create artificial losses that it potentially could be regarded as tax evasion. This is of course up to HMRC to decide, not The Times. However I do wonder what on earth some advisers tell their clients. I would like to think that everyone has been advised appropriate or suitable investments that they can understand. However it must be particularly important for those in the public eye to avoid any suggestion of improperness when it comes to tax. Certainly irrespective of fame, our clients are not put in a position where they may have to do some serious explaining to the HMRC and possibly the media. Yet this is precisely what journalist, BBC Watchdog and The Weakest Link host Anne Robinson has read today in The Times. She's not alone either - several members of the "boy band" Take That are also caught in the crossfire. There is believed to be around £1.2bn invested in the scheme by around 2,000 investors.

The heart of good investing is making sure that your investments are suitable to your financial plan. It is very hard to believe that the sort of "investing" that I've outlined above is in any way helpful to a good financial plan - and certainly not a great one. Your financial plan should reflect your values and be structured around your requirements. Tax is a part of the investment discussion, but it should never dictate the terms. It would appear that as in the film "The Graduate" a certain Mrs Robinson, journalist and Watchdog consumer champion, might have known better. Our clients won't get exposed to this sort of thing.

Impartial Investment Portfolio Advice

1939: You Can't Cheat An Honest Man
I spent the first half of this week at the annual IFP (Institute of Financial Planners) conference. The IFP are to my mind the leading professional body for proper financial planners. It is a fairly "top drawer" group who share ideas and work with a set of shared values and ethics.

At one point, I was talking with fellow advisers about investments for clients. We are a pretty open and honest bunch, some do the investment themselves, whilst others outsource the service to a Discretionary Fund Manager or DFM. A DFM has the ability to trade and deal without asking permission from the client (other than at the very outset of the relationship). They are effectively a stockbroker. Some are pretty good, but many are pretty hopeless (and believe me, some are really very hopeless). Many advisers have been switching their clients across to DFM services, because they have been concerned that to invest money for clients carries compliance risk and many don't possess the skills or time (or both) to look after portfolios. One of the most significant problems is evaluating performance and getting DFMs to properly outline their understanding of "risk", "long term investing" and "volatility" and keep to the brief outlined for the client.

Several of us agreed that one of the problems with DFMs is that despite the fact that advisers don't manage the portfolio, they still get paid by the the DFM for effectively adding little of value to the client (it is clearly valuable for an adviser to review the performance of the DFM - and ideally establish the parameters). Another problem is that as DFM's focus purely on investing, they tend to trade a lot, creating liability for capital gains and income tax, perhaps without regard for the full picture which is a significant advantage that advisers should have. Indeed due to VAT rules, this sort of service can be even more expensive to the client. Those that I spoke to admitted that they struggle with the ethics of advisers being paid the same amount if they hand off the work to a DFM rather than doing it properly themselves. This is one of those topics that simply doesn't get talked about in clear terms, but it is refreshing to find advisers at the IFP that have high standards.

It would seem that the regulator tends to agree, having announced today that advisers cannot be paid by DFMs (but they can be paid by the client). I can see the logic and wisdom of this, but I'm now also concerned that as a result of this formal decision a couple of things may happen. If advisers don't get paid by a DFM, I imagine that those that have told clients to use a DFM may find excuses to bring the money back under their management and would probably discourage their clients from using a DFM. I have already acknowledged that a DFM may be suitable for some clients, so a carte blanche "I never use DFMs" would seem to my mind to be very unwise and contrary to being impartial. This dilemma could all be avoided with properly agreed fees - something that we have always done with our clients.

Thursday, 4 October 2012

Business Owners & Execs - Car Benefit Scheme

1977: The Car - Silverstein
If you are a business owner or executive with a company car and a salary sacrifice scheme, it seems that life may get a little more complicated and probably more expensive. The online accountancy media are suggesting that those with salary sacrifice and company car schemes are going to get more expensive due to a European Court of Justice ruling. This is due to VAT which employees have had to pay on non-cash goods provided by employers in exchange for income, a service, which is VAT liable. This has been the case since January 2012.

The ECJ basically ruled in agreement with HMRC that the salary sacrificed is a supply of services in return for payment and therefore subject to VAT. This careful fine twist in the rules has wider implications for any salary sacrifice scheme. You should certainly take this matter up with your Accountant and I would urge you to read the HMRC guidance which you can find here.

Nobody should be under any illusion that HMRC is a soft touch, the Coalition Government are very clear that all tax must be properly collected and HMRC must deliver results and effective measures to ensure that this happens. Whilst there are advisers and accountants that will always push at the edges of tax avoidance into evasion, you need to be clear that tax evasion can carry serious penalties, including a custodial sentence. Whilst we assist clients reduce tax and plan appropriately to do so, it is important that such actions do not contravene the law or the direction of the law.

Monday, 1 October 2012

Banks Leaving Financial Advice to IFAs

1990: Tie Me Up, Tie Me Down
Banks have been declaring their hand for the new financial world from 1st January. Last week Santander announced that they would only be offering investment advice to those with £25,000 or more and only from the range of products that they produce. In short they sell what they make. I'm always amazed that anyone would actually go to a bank for financial advice, but hopefully from January at least it will be clear how little a part of a proper conversation they are even able to entertain.

This was on the back of Lloyds also announcing that they are scrapping their services to anyone with less than £100,000 - again, why would anyone with £100,000 go to Lloyds for investment advice is beyond me. Barclays had already announced that they will not offer financial advice, except via its wealth management team, who focus on ultra wealthy (and presumably fairly easily pleased). HSBC will scrap their tied advice and provide execution only services (meaning you order what you want and they sort it out), they intend to remain whole of market, though frankly I don't see how this will work in practice. Royal Bank of Scotland has abolished its independent arm (if you could ever find it) and going for a restricted model (limited financial products). Nationwide, one of my favourite Building Societies, is going to give it a go at offering fee based advice. It will be interesting to see how they get on and I imagine that the other Banks will be watching carefully.

So in summary, the new rules about providing advice mean that the vast majority of people living in Britain will not get any form of independent advice. They probably won't get an awful lot of option for restricted advice either. That of course is one way to solve the problem of mis-selling and scandal (reduce the choice) but it doesn't seem terribly well thought through to me. We need a society with better financial education and greater access, not less.

Friday, 28 September 2012

The Death Star of Tax Departments

2006: The Unit - David Mamet
The wealthy need to make sure that their tax records are right up to date. HMRC are now focused on the wealthiest 500,000 people in Britain. They even have an "Affluent Unit" which was set up a year ago but have recently reduced the "ticket price" from wealth of £2.5m+ to £1m+. Mind you this is not high net worth according to HMRC who have the department of departments, the ingeniously named "High Net Worth Unit" which looks at those with wealth of £20m or more. Since it was set up in 2009, it claims to have collected £500m in extra tax - rather more than even HMRC thought they would get.

Its a fairly "big" job for the HMRC, so to help the Coalition has arranged for another 100 inspectors and specialists to be recruited. I dare say that they will command quite significant salaries for their expertise, which may help account for the cost of the projects at £917m... with the expectation that this will achieve additional tax collections of £7bn by 2014/15.

The HMRC (Gareth Hills the ARC President to be precise) seems keen to suggest that each inspector generates 30 times their cost, which is surely a pretty good return if its true. There is some considerable debate about where to focus resources and whether specific departments are necessary, perhaps merely creating bureaucracy. Mike Flemming, tax Director at Straughans is reported as saying that HMRC should focus on £22.3bn in lost taxes due to VAT fraud and incorrect Self-Assessment tax returns - which covers pretty much the rest of the population. So be warned, getting your tax return in on time is important, but not as important as getting it right.

Wednesday, 26 September 2012

Has Clegg implied the means-tested State pension?

1938: Test Pilot - Fleming
The LibDem conference concluded with Nick Clegg's speech. You may have seen him on the news last night talking about cutting some of the free benefits to rich pensioners. He said "it is difficult to explain why Alan Sugar's free bus pass should be protected when housing benefit is being cut". Now I don't want to get too political, but I doubt that Alan Sugar uses the bus and if he has been sent a free pass, I suspect it is in the bin and never been used (wild speculation on my part). 

One would have thought it would be wiser to ask people to apply - hang on a moment, according to the DirectGov website you only get a free bus pass when you apply for one and the same is true for the London freedom pass. So I very much doubt that Lord Sugar has ever applied, which begs the question what on earth does Mr Clegg mean? Perhaps he is suggesting that there should be no free bus passes? let's face it, anyone with a car is less likely to apply and they are only available to people with disabilities or of State pension age with modest to low incomes. I'll take a wild guess that Mr Clegg does not wish to alienate these groups.

So what of the Winter fuel allowance? to which he also referred  well this is paid to households that are in receipt of a State pension. It isn't really claimed, it's paid as a bit extra, with a couple of exceptions - those claiming child benefit, council tax benefit or housing benefit all need to claim it. It's worth £100-£300 dependant upon age and the number of people that you live with.

I'm therefore perplexed at what he is really meaning. It occurs to me that this is merely a warming up of a notion that may gain momentum. The notion being that some people are wealthy enough not to need State support or benefits. If I might suggest this would possibly include the State Pension, which is probably the only "benefit" that most "wealthy" retired people could receive. There is probably some mileage in this, after all a similar thing has happened to child benefit. However, if this were to become practice, it would mean that the State Pension would become means-tested, which if the case begs the question of why pay national insurance? and where is the line drawn? Whilst I'm not wishing to stir the pot (well, maybe a little) I suspect that Mr Clegg has inadvertently indicated the way in which his or the Coalition Government's thinking may be going. Any thoughts? How about those with final salary pensions like the NHS paying a pension of over £35,000 a year? how much "guaranteed" income do you think might render you ineligible for a State Pension if it became means-tested?

Tuesday, 25 September 2012

Lawyers Expect A Close Shave With HMRC

2011: The Lincoln Lawyer - Furman
It may be many years since the UK launched a proper taskforce, but HMRC is effectively going out all guns blazing in its campaign for collecting owed taxes. At the moment they are focusing on Lawyers . It basically works like this, HMRC know roughly how many clients each practice has, therefore it can look at average revenues and spot those that look a little bit low on their declared income. Previously HMRC has attacked Doctors, Dentists, Tutors and Coaches, however Lawyers are the first "high risk" group being attacked by the taskforce.

Other "high risk" groups include the hair and beauty trade in the North East, thought to owe around £3.5m in tax. Restaurants in the South East and Solent are also under review (£2.5m), the Scottish motor trade (£3m) and the grocery and retail trade (£7m). There are now over 30 HMRC Taskforces in operation, all launched since May 2011.

There are various ways to legitimately reduce your income tax. The most obvious being to make pension contributions, which attract tax relief at your highest rate of tax. Charitable Giving is also a way of reducing tax burdens and of course means that your money goes to a source that you are concerned about. If you are need assistance do get in touch, otherwise perhaps some of the no win, no fee cases may be concluding earlier.

Party for £4billion?

1993: The Last Party - Levin
You will be aware that the LibDems are in Brighton for their conference. Today Danny Alexander is expected to announce that the Coalition Government are making progress towards their pledges to clamp down on tax dodgers. He is expected to announce that £4bn has been recovered this year, which is on the way to the £9bn target by 2015. Whilst this is good news, I'm not entirely sure that doing the job of collecting owed taxes is something to shout about - anymore than one would praise a ticket inspector for checking people had tickets.

The LibDems also seem to be discussing and widely supporting the break up of RBS and Lloyds Bank, two of our national banks. I doubt that many would disagree that it would make sense to use public banks to fund the economy, however the detail of such agreements is rather vital. Simply taking over other debts so that businesses can borrow from the usual culprits again is little more than a game of pass the parcel. As with most political conferences, there's a lot of razzle and dazzle - no doubt over the next 2 months we shall witness a pretty grim display of this at its worst in America. Hopefully amidst all the glitz and bunting are some good ideas about how some of the world's economic problems will be tackled positively. Something that we look to politicians to take the lead on implementing, but at the same time aware that ultimately we are responsible for our own actions and need to play our part in economic life.

Monday, 24 September 2012

Hoping For Long Term Results

2012: Hope Springs - Frankel
I'm a fan of Meryl Streep - but her latest film "Hope Springs" is not as advertised (in my humble opinion). The radio and tv adverts suggest that this is a hilarious comedy. Whilst it has its comedic moments, this is actually a story of an empty nest couple who have a marriage without intimacy. Weathered by the years it is a well observed, but all-too sugary unveiling of lives built upon functionality, which becomes dysfunctional. This film lands some tough punches, but ducks the really big questions.

At the weekend I was at a family celebration for a 50th wedding anniversary and the week before a 25th. We all probably have a reaction to these "landmarks" however whilst I am very much an advocate that relationships must be worked at in order to thrive, (often the work is hard) there is a degree to which there is a portion of luck involved. For starters, that both desire to want to work at the relationship and perhaps that time is not cut short by events way beyond our control. Luck, it might therefore be acknowledged, however "small" is perhaps a vital ingredient. Turning this to the world of investment, I'm not a fan of "luck" yet often those that have the best stories to tell were frankly, lucky - the sort of luck that does not get repeated regularly. Fund Managers work to get their research to a level where one would observe that perhaps investing is nothing more than a science, yet the truth is that the research is little more than a basis for decisions, not a crystal ball. Interpretation is an art and sometimes they get lucky and sometimes they don't. Many of them are bright and skilled at what they do, but over the longer term, the "luck" tends to average out as performance reverts to "average".  This is why, my clients are encouraged to take a long-term view of investments, we don't think that its possible to consistently beat the market (unless you cheat or the market is rigged). As with relationships, the quality is in the effort made to gain understanding, to meet expectations and work together for the same ends.

Dictum Meum Pactum

1953: Latin Lovers - LeRoy
I have to admit that I often feel "plebeian" in my dealings with my Bank. Whilst I know that Banks are massive impersonal organisations, the promise (and payment) for a personal service differs considerably in understanding between my Bank and I. I tend to expect personal to mean, handled by a person - with whom there is a relationship that is based upon understanding beyond box ticking, to my Bank it seems that whilst this is their claim, every phone number provided is an automated call centre with a rabbit warren of PIN, alphanumeric options and "let me put you through to a different department" responses. Despite the heavy rain and falling temperature, my office reached boiling point yet again following another lengthy blow by blow regurgitation of my problem and attempt to find solutions. It is with a degree of sadness that I find much fault in my Bank. As with many Banks they seem to display an attitude where customers serve them not the other way around.

It is amusing to note the folly of the Conservative Chief Whip over the weekend. The truth is plain for those that wish to see it, as sad as it is. The depressing state of  those "in power" are giving "leadership" a very bad name and displaying none (or very few) of the necessary qualities, choosing instead to apologise for things they did not do and ignore the things they did. Many of our leaders should win gold medals for their gymnastic agility with meaning-less words. I was at Public School too, Prep School in particular was a place where the term "pleb" was used in a derogatory fashion (by certain staff and pupils) perhaps fed by a schoolboy's poor grasp of very limited Latin, which otherwise was a struggle. Thankfully I know better, (and was reasonably ok with my Latin) because I grew up and don't spend time (as far as I'm aware) with people that have such attitudes. Radio 4 had an interesting insight into the term "pleb". However, perhaps I should be less quick to judge. I can be demanding and rather impatient when things don't go my way, most obviously displayed by bad banking and bad driving. Holding my tongue is a life lesson that I know I need to work on too, particularly when it comes to reading some of the nonsense in the financial pages. So sincere apologies to anyone at my Bank that caught my ire and those drivers that I accuse of cutting their license off a packet of cereal. mea culpa. As my Latin Master once wrote "must try harder".