A taxing issue

The mention of corporate tax often raises conflicts in opinion. Currently the standard rate of corporation tax stands at 26% and is confirmed to continue to decrease up until 2013 to 24%. Whilst this shows that the current government recognise the issues of having higher then average corporation tax levels this does not address or prevent large corporations so blatently avoiding their tax obligations altogether.

From having direct experience of working with in a small/medium fairly young business I have felt the frustration of the effects of the tax man. Along with the basic tax rate ,companies are obliged to pay further charges such as VAT and national insurance. This all takes it toll on overall profit margin. Moreover once a salary or dividend has been taken from the company by the main shareholders, that will also be taxed through income tax providing a double hit to business owners. The strain of these charges often prevents business start ups and slows or prevents business growth quite drastically. Although tax reliefs are available to small businesses the upper limits mean that the difference between medium and large corporations are few and far between making the present system arguably unfair to smaller businesses. But there always has to be limitations and whilst busniesses are ultimatley there to make profits they too are taxable members of society. But should this be the case?

More increasingly we are seeing businesses be more tactical in a bid to avoid paying tax altogether. Whilst the morality of this is questionable the reality is that done in the correct way this is completely legal.

Sir Philip Green owner of the arcadia empire and the richest man in the UK has succesfully avoided paying his taxes for many years now. However controversial this decision might be Sir Philip has still remained extremely succesful, well respected and in 2009 was even knighted. Dividends are paid out to his wife who resides in monaco and is listed as the companies direct owner. Sir Philip has still made many positive contributions to the british economy. Not only has he provided it with thousands of credible jobs throughout the UK he has also opened his own fashion retail academy. Furthermore he is passionate about providing opportunities to young people who are from less fortunate backgrounds as well as the redevelopment of british trade in the fabric industry.

In the defence of Sir Philip and other companies who avoid the UK tax system why wouldnt they? Comparable to the rest of the world the UK corporate tax rates are higher then average however not the worst. The biggest issue for the corporate tax payer is the support are rather lack of it that is currently provided by the state. The income tax payer when faced with crisis i.e job losses is provided with housing and benefits whilst the corporate tax payer recieve neither. Unless the governement are prepared to help reduce rising rent and rates or provide support in this climate then businesses will continue to move onto other countries or decease to trade on the high street. I believe that corporation tax is actually more damaging to the economy then it is beneficial. The small video below explains this concept. 

http://www.ft.com/cms/s/0/1562f4a4-50de-11e1-939d-00144feabdc0.html#axzz1nWsUhqNy

http://www.ft.com/cms/s/0/0500282c-abc4-11df-9f02-00144feabdc0.html#axzz1nWsUhqNy

However much businesses can be lucrative this

http://www.ft.com/cms/s/0/0eb5cab0-5bb4-11e1-a447-00144feabdc0.html#axzz1nWsUhqNy

http://www.telegraph.co.uk/education/educationnews/8181487/Sir-Philip-Greens-flagship-Topshop-forced-to-close-in-tax-avoidance-protest.html

http://www.guardian.co.uk/world/2010/nov/29/philip-green-protest-alleged-tax-avoidance

Raising Capital whats the best option?

In todays climate raising capital, cost effectively, is a common goal for most if not all companies within the market place. From the small business to the large firm all are looking to invest their cash as efficiently as possible. Often the battle of equity to debt financing can be subjective. Some business types are better suited to higher gearing while others rely on strength through their own equity.

Debt, in most instances, is more cost effective then equity. This is for a multitude of reasons but simply due to the fact that debt has tax saving benefits in that annual interest is reduced from taxable profits. In doing so the weighted average cost of capital (WACC) is likely to be reduced, making the business have greater flexibility in their investments.

In any insatnce though, it is important that a business ensures it is not so highly geared that it becomes unfavourable to investors or that shareholders and investors demand greater returns for the increased risk of liquidisation. In an ideal situation a firm should be financed completely by share capital in an efficient market place. This is because share price value will reflect the risk bared upon the investor otherwise known as the shareholder.

Often companies use flotation as a way of raising finance first, before taking out heavy and more risky forms of debt such as loans and bonds. For example a huge company about to debut on the stock market is Facebook. Co founder Mr Zuckerberg will still own absolute control thanks to his 28.7% stake, making this source of finance even more desirable to the companies current main shareholders.

Another more typical newcomer is pharmaceutical company Pfizer who plan to raise $3bn through a part floatation of its animal health division. Interestingly in the Pfizer case, choosing to float a division, rather then sell it off is proving more and more popular as businesses continue to become more cost savvy. For a business like this, selling off divisions can help to focus on better performing areas and save on costs. In city terms this is known as a partial spin off. More over Pfizer have chosen to list the division rather then sell for the $18bn estimated value, as a tax saving method. In effects the capital is still raised and responsibility is still diluted amongst perspective new shareholders saving two burdens.

This is a great example of how companies can play around with equity and debt to make it more favourable for themselves. Ultimately measures like WACC, gearing and the CAPM are useful to investors and shareholders a like. However each situation is unique and therefore can be ambiguous in outcome. It is crucial therefore, that organisations have the best finance managers and leaders at the top of their businesses in order to survive. Pfizer are showing that they are capable of weighing up the alternative options in todays market place.

http://www.ft.com/cms/s/2/6d26b93a-4d20-11e1-bdd1-00144feabdc0.html#axzz1mrruAZfk

http://www.ft.com/cms/s/0/5be17b12-59a3-11e1-8d36-00144feabdc0.html#axzz1mrruAZfk

Are share prices a fair way to judge a companies worth?

Efficient market hypothesis relies and reacts upon the announcements made by participating companies. In an ideal world this sounds, not only reasonable, but also the most simplist way to judge a companies present share value. More over reactive pricing is the only method the stock market can adopt as it is impossible to predict the future.

Often however companies can find themselves unfairly positioned within the marketplace. This is often as a result of being too transparent or hiding the whole truth from investors. Striking the right balance can prove to be difficult. This can be the known affects of behaviourial finance. More specifically when investors make systematical errors or mis judgements.

A good example of how markets can be manipulated from lack of disclosure in the case of sports direct. Mike Ashley is a known ruthless business man, more so since his controversial presence within Newcastle football club. He has been known to manipulate his companies performance and operations through lack of disclosure. This is likely to be to protect share value. Long term this can be much more detrimental to share value then disclosing a true and fair analysis.

Following the the poor sales performance of Sport Direct in 2007 Mr Ashley did not communicate issues effectively with the shareholders. Prior to profit warnings being released from Sports Direct the company had released information of a 20% sales boost which is inconsistent to the performance later confirmed. When companies fall victim to this kind of dysfunctional behaviour then markets will come down on them harder then ever. In this case share prices plummet further then they would have had the true and fair information been given and later react slower to positive press releases.

This is why in the market place honesty is always the best policy even in instances whereby the share price will temporarily fall. The majority of companies do follow a more honest approach however. By punishing companies in this way the city could be seen to be responding both efficiently and inefficiently at once.

Coming down on companies for not disclosing information fairly means that other listed companies are not likely to do the same promoting better overall efficiency. However being to harsh on companies can mean that the share value will never regain its full potential value. Mike Ashley is known for not holding the best relationship with investors. Following the plummet of Sports Direct share price he crudely labelled city workers as being a bunch of cry babies. 

But in despite of the controversy Mike Ashley has managed to regain strength in the once struggling brand and the increasing share price reflects this, along with his bank balance. Mr Ashley is set to take a 16m bonus in shares for the recent positive results. This supports the notion that despite foul play the share price has recovered suggesting current market efficiency.  

http://media.pearsoncmg.com/intl/ema/ema_uk_he_boakes_portal/podcastsFT/podcasts/podcast_1.mp3

http://www.guardian.co.uk/business/2009/jul/06/jjb-david-jones-mike-ashley-loan?INTCMP=ILCNETTXT3487

http://www.telegraph.co.uk/finance/comment/richardfletcher/9006044/Mike-Ashleys-latest-outburst-fails-to-win-people-over.html

Has the benefits of ecommerce further worsened the economy and should businesses be taking more responsibility rather then prioritising shareholder wealth maximisation

Predominately shareholder wealth maximisation is the common goal for most medium and large corporations in the market place. But as the effects of the economic downturn of 2008 continue to worsen it begs to reason if this is still the right approach.

The ever-increasing egos of todays market leaders demand more and more from their investment returns. The outcome? The new found need for triple line profits. Any less and the fickle market place throws out its companies regardless of their historical or social presence.

We have seen popular even iconic brands like Woolworths, habitat, Jane Norman and La Senza fall victim to the drop and run mentality of the collapsing market place. It seems that markets are just not willing to hold onto respectable long serving brands unless they are seeing the best possible returns. Shareholders prefer to quit when the going gets tough, rather than riding the storm. This is prolonging the current downturn rather than tackling inefficiency. 

The hype behind shareholder value and wealth has become so central that the overall needs of the economy and stakeholders has been side lined. The ruthless closure of some of these brands has further increased unemployment and further broadened the north south divide.  Furthermore experts are witnessing a ‘dying’ high street particularly in smaller out of town areas adding to social problems.

The increasing presence of the online retailer doesn’t help.  Ecommerce offers the marketplace the chance to squeeze even more profit from the benefits of the lower overhead costs websites can provide. The running of websites requires less staff and even fewer need to be professionals.

Popular marketing expert Mary Portas has joined forces with the new government to try and recover some of the failing high streets out there today (http://www.bbc.co.uk/news/business-16156971).


 However ultimately the control still lies within the hands of the shareholder who are less than empathetic of the needs of their employees and the high street.

What the shareholders are failing to recognise is that if there is no high street then potentially, there will be no market place. As unemployment subsequently rises, society will not be able to afford the services or products available. As each market crumbles another will prevail until eventually we are living back to basics. Trends are already pointing towards an increase in a 'do it' yourself mentality with people growing their own produce and making their own clothes.

Mothercare is a great example of how having a strong store portfolio is, these days, a risk to potential shareholders rather than a reward. As we see Mothercare dwindle into uncertainty following pre tax losses of £81.4 million at the last half, it begs the question as to what could have possibly gone wrong for this long serving retailer?

Chairman Alan Parker has pointed towards a 'structural and operational review' of the business suggesting internal issues. Perhaps that of the separation of ownership and control following the departure of Chief Exec Ben Gordon. But Mr Gordon isn't your typical greedy board member. Other than perhaps an unnecessarily extravagant party held in canary warf last year to celebrate Mothercares 50 year anniversary, the long serving directors slate remains clean.

 More likely is that issues at the source of this companys struggles are that of weak competitive strategy not managerialism. In mothercares case the lack of online presence - again returning to the argument I touched on earlier; is it right for mothercare to then ruthlessly shut down stores and focus on the more profit savvy Internet business? Or is this in the long term going to cause more issues?


This issue highlights the limits of value maximisation. Shareholder wealth can be a good score keeping method but ultimately it does not take into account a businesses value or presence. Kiddicare has fast became Mothercares biggest rival despite only being available online. By doing so they can offer greater discounts due to lower overheads.


Already Mothercare have closed 110 stores causing 250 redundancies. Although they have managed to redeploy, how many more stores are we going to see lost before there can be any improvement? As unemployment worsens and high streets continue to be boarded up, how can the economy ever improve with such a reliance on the retail sector for jobs?


This is why I believe that in order for the UK economy to ever recover our business leaders need to be less concerned with shareholder wealth, instead taking on Jensons Enlightened approach. Society relies on the retail sector and we can not afford to lose the presence of the high street both socially and strategically.

If markets want the UK economy to return to its former glory there needs to be more investment across all business sectors. This can only happen if share value is not based on squeezing the most profit out of an already weak situation. Value needs to be greater placed on presence and value to communities.

The government should consider greater investment in small businesses and rent relief for struggling established businesses. But with unemployment continuing to rise government funds are already being stretched by increases in benefit payouts. The cycle continues.  

Responsibility must therefore lie within the business sector who have benefited greatly by consumerism by the tax payer for many years. Its time that organisations gave something back to society and without their investments I fear we can never recover.   

(http://www.guardian.co.uk/business/2012/feb/04/north-south-divide-job-loses)
(http://www.bbc.co.uk/news/business-16881291)
(http://www.thisismoney.co.uk/money/news/article-2083537/The-High-Street-suffers-online-sales-boom.html)
(http://www.bbc.co.uk/news/business-16156971)
(http://www.guardian.co.uk/business/marketforceslive/2012/jan/27/mothercare-competition-fears?INTCMP=SRCH)
(http://www.ft.com/cms/s/0/1996d6ea-2cd4-11e1-b485-00144feabdc0.html#axzz1lYYgQ38q)
(http://www.ft.com/cms/s/0/3e1b263c-10fb-11e1-ad22-00144feabdc0.html#axzz1lb4y33lZ)
(http://www.ft.com/cms/s/0/7db30eae-f418-11e0-8694-00144feab49a.html#axzz1lb4y33lZ)
(http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8820299/Profile-Mothercares-Ben-Gordon.html)
(http://www.ft.com/cms/s/2/fb379578-80f0-11dd-82dd-000077b07658.html#axzz1lb4y33lZ)

(http://www.bbc.co.uk/news/uk-politics-13942976)