Banks again

There is a report this morning’s that the two state owned banks have told the Treasury Select Committee that they are opposed to any enforced break up.

http://tinyurl.com/36wx4vv

They have missed the point by miles. No one is saying that the banks should be broken up in order to increase customer satisfaction, but they are saying that the Government should never again have to bail out any bank.

The reason they are the government had to do this in 2008 was because clearing banks are vital to people’s lives, down to the point that if you can’t get your money out, you can’t eat if you have no other source of finance.

Putting aside the laughable idea that the banks are in any way concerned about customer satisfaction, can Hester and Daniels explain how satisfaction would be reduced with a stand alone clearing bank separate from the investment side.

As important, can they also explain why it is so necessary for the investment bank to be linked with the clearing bank. I think we know the answer, the bank wants the clearing bank capital to gamble with. The very fact that they want to keep banks intact is the reason the taxpayer will want them separate.

As a thought, why does the government as a major shareholder in RBS at least, not sell off the investment banking side and effect the separation?

RBS

The FSA has issued a press release on RBS

http://tinyurl.com/36sa6dh

If you look at the remit they set it was whether any regulatory rules had been broken. And the conclusion was that there were no rules broken and no dishonesty on behalf of the RBS directors, but they did make a number of bad decisions.

None of this is very new and you wonder what the point of the review was, except of course that as no regulatory rules were broken, the FSA cannot be blamed. It’s all very tidy and the FSA has spent thousands on PwC fees proving that they were not to blame. The natural conclusion is that as there was no dishonesty and no law was broken the bankruptcy of RBS can only have been caused by the incompetence of the directors, which is exactly what the FSA concludes.

Of course we cannot see how this conclusion was reached as the report will be confidential. I am at a loss to see how this will instill confidence in the regulatory model even if it changing.

One line in the statement is intriguing:

However, the competence of RBS individuals can, and will, be taken into account in any future applications made by them to work at FSA regulated firms.

Now why would any City firm want to employ a former director of RBS in the first place? We have established they made bad business decisions which would have brought the bank down if the Government had not stepped in, so what possible employment opportunities would there be. Unless as we might suspect, the way the City works is to regard regulation and such like as a minor irritation on the way to lining your pockets and those of your pals.

Disclosure – I am a shareholder in RBS

 

 

Ireland bail out

I have tried to work out the details behind the Irish financial crisis and while it is possible to see in broad terms what has happened, it’s not easy to get any further.

My take on this so far is that Ireland is running a budget deficit, and at the same time there is a restructuring of the capital of the publicly owned banks which over extended themselves in lending, secured on property which is now reduced in value. The Government is unable to fund this from borrowing in the bond markets, and as part of the facilities and loans from EU institutions and the IMF, the UK is to make a bilateral loan of £7bn.

There are certainly questions over the UK borrowing from the bond markets to fund Ireland, when there are cuts in UK spending, but let’s put that to one side as a political issue. The main reason to make the loan appears to be to support the loans already made by the UK publicly owned banks to Irish banks.

There are still questions to be asked here. One of the reasons that the Irish banks are in difficulty is because the Irish government guaranteed all deposits and actively sought transfers from the UK banks to Ireland, which depleted the UK banks’ capital, and now they want our assistance. Secondly there must be a big risk that if this went wrong and the Irish government were to default on the loan, there would be a write off by the UK government and another write off by the UK banks for the same amount. The whole presumption is that the Irish economy will recover and this double dip won’t happen.

It appears that Parliament will need to approve the loans which is good in that it might give some public transparency to the whole business, and in particular let’s see if we can get the following details:

The term of the loan

Interest rate

Denominated currency

Penalties for default or suspended payments

Where the loan stands in seniority to other loans

Any mechanism for public scrutiny of the repayment schedule

If it works it could actually be profitable provided that the interest rate is higher than the UK borrowing rate and the repayments are maintained. But at the bottom of this, the UK is lending to Ireland who cannot otherwise raise the funds in a commercial transaction which is why we need full transparency.

Ireland

I am certainly not alone in trying to understand the full ramifications of the Irish debt crisis and what it means to all concerned. One thing does seem clear and that is that the French and the Germans in particular are pressing Ireland to raise the corporation tax rate from the current rate of 12.5%. According to the Irish Government this is non negotiable. That must be doubtful; if they need the funding that badly they are not in a position to make any demands.

There is an argument that in order to be in a position to return to solvency, the Irish will need to attract businesses which the low rate allows them to do, which is what the Irish government appear to be saying.

All sounds very sensible but the rate of tax in Ireland is something of a red herring. It would certainly affect Irish owned companies and on the face of it overseas investors such as the US pharmaceutical companies would also be hit, but as long as the rate increases to something which is still less than the European average, say to 20%, it’s hard to see any company incurring the costs of relocating simply for tax reasons.

In any event, the international tax breaks that Ireland allows means that overseas companies can avoid paying even the 12.5%. See how Google has managed to reduce the rate.

http://tinyurl.com/32jypx7

The reason Ireland allows this is that the companies have to employ people (approx 2,000 in Google’s case) who themselves pay income tax. So it should not matter what the headline rate is if it can be reduced to a nominal amount by effective tax planning.

Why then are the Irish resisting raising the rate? I can think of a number of reasons: i ) the politicians do not understand how the system works and assume that a raise will send overseas companies away, ii) it’s a stance to take on the question of sovereignty which might play well in an upcoming election, or iii) it is a negotiating point and they will raise the rate so as to get an overall favourable deal.

There are well reported cases of UK companies who have reorganised and set up a Jersey registered holding company which is resident in Ireland( eg WPP, UBM and Shire).  The reason given in the press is that the Irish corporation tax rate is only 12.5%. But this is of very little significance. Although they are resident in Ireland, these companies have no substantial presence in Ireland other than the head office function. What they can do is take advantage again of the Irish international tax rules which allow overseas income to be kept offshore in low tax jurisdictions. This is not the case in the UK for example which has the controlled foreign companies legislation.

Perhaps the EU should be pressing Ireland to change these rules rather than change the rate, and maybe they are; it just does not get reported as it might seem a somewhat arcane point. There is a threat that if the rules were changed, the companies would relocate away from Ireland, but where to? Switzerland possibly, but why make it easy for them?

EMI and private equity

I haven’t followed the details of this case and maybe there’s nothing more than has been reported.

http://tinyurl.com/29ubzd2

I can see that this might have been a last throw of the dice to try and get something out of a bad decision, by chucking good money after bad in the form of lawyers’ fees, but you still have to wonder about the nature of private equity.  

Firstly there had been major questions over the business of record companies over the last 10 years or so as downloading became more common.

Let’s assume that Terra Firma took that on board, and it would be crazy to assume otherwise, you must also assume that they thought it was worth £4.2bn, that was because they thought that the cash flows from EMI under the control of Terra Firma would give a required return on that investment. It would be irrelevant that someone else was involved.

It’s not like buying a house. If you see a place you like, good location, near schools etc, you might be prepared to enter a bidding war if someone else has the same idea. OK you might have got it cheaper but the only relevant point is whether you can fund the purchase for somewhere you want to live. With a business acquisition, there might be room for manouevre but ultimately there is no emotional attachment, it is solely dependent on your calculation of the return.

A decent business decision would have been to get out of it if the price was going up too high. I can only further assume that the way private equity worked pre credit crunch was to bid whatever you could get funding for to get hold of the assets then sell on a few years later at a higher price which would inevitably arise as the market was rising. Doesn’t require much business acumen to buy and sell in permanently rising market.

Vodaphone

There has been comment in the press about a supposed £6bn tax charge avoided by Vodaphone which has led to demonstrations outside the Vodaphone shop in Oxford St.

As ever there is a colossal amount of ignorance about this. It is nothing to do with Vodaphone avoiding tax on its UK income which will always be subject to UK tax.

To try and summarise this in general terms: a UK company might organise its affairs so that the profits from its overseas subsidiaries are paid in dividends to a sub holding company based outside the UK. The UK rules have changed recently so that such dividends are not likely to be taxed in the UK if there were no sub holding company, but even before the rule change, if the profits were taxed overseas the dividend would not be taxed again in the UK due to the operation of double tax relief.

So far so good, but the advantage of the subholding company is that the funds from the dividends can be reinvested, for simplicity let’s say in an offshore bank account.* If the subholding company is based in a low tax country the interest is subject to a low rate of tax and can be accumulated offshore. So far remember that none of the income has had anything to do with UK operations.

Then HMRC have said for years that if/when the interest income was distributed to the UK it would be subject to UK tax and they will get it as soon as it comes into the subholding company under the controlled foreign company rules.

Vodaphone were arguing that EU rules allowed them to establish a company wherever they wanted, in this case Luxembourg a low tax country. HMRC argued that the CFC rules would still apply and the Court of Appeal had agreed with HMRC. This is where things go strange. Vodaphone were due to appeal to the Supreme Court but before they got there HMRC gave way and agreed a settlement with Vodaphone for a reported £1.25bn.

The question is why did HMRC want to settle given that they had won in the Court of Appeal and a result in the Supreme Court would have settled the matter once and for all. It is thought that there are a number of other companies in a similar position and presumably there is still an uncertainty there.

There has been reportedly a dissatisfaction within HMRC at the way the settlement was achieved.

Although the figure of £6bn tax lost seems to be a calculation made by Private Eye, Vodaphone itself had provided £2.2bn in the 2009 accounts. This may have been the maximum they expected to pay but it was also more than a remote worst case, they must have thought that it was a possible amount due.

Why therefore did HMRC settle?

Football players

There is a report in today’s Independent about a supposed tax scheme used by Premiership players.
http://tinyurl.com/325elrt

I understood that the “image rights” loophole is under scrutiny in detail by HMRC as to whether a particular player actually had an image when signing which had some value, and whether the implementation had been watertight in the sense of separate contracts etc. In any event the loophole could only be effectively exploited by a player before becoming resident in the UK. We may yet see  litigation in the Courts though I suspect that any clubs who did not set things up correctly would just settle with HMRC.

The employer funded retirement benefit schemes EFRBS are just a form of salary sacrifice, the main advantage of which is to reduce the employers’ and employees NIC. I am aware that a number of organisations are in the process of implementing these, and the NIC saving is being shared with the employees in order to make it worth their while.

In the case of a footballer, however much he is paid,  he would be advised to put as much into the pension fund as possible, thereby saving at his highest rate of tax, but more importantly allowing him to build up a pension fund to draw on during the very long period of retirement, bearing in mind that this could well begin in their early 30′s.

The Government has proposed new legislation to restrict the tax relief on pension contributions. It would still be adviseable for a player to fund his retirement in some way, given that it might have to provide an income for 50 years or so and those wives don’t look at all cheap, but the NIC benefit might go and it could be funded out of taxed income.

Pensions

http://www.dwp.gov.uk/newsroom/press-releases/2010/oct-2010/dwp145-10-271010.shtml

I have only seen this on the TV news so far and heard the broad principles on the radio but in a way the details are unimportant. This just raises a number of questions.

What is the point of NIC? The rationale for the NI fund is to provide inter alia for pensions. Why then should employers have to provide for pensions through another compulsory scheme?

Take the example of an accountancy practice run from someone’s house. If they are successful and need assistance they could outsource/subcontract or take on an employee. Already the HR and tax hassles are conspiring against this and this new suggestion will only make it worse. It is even suggested that the practice should not try and grow beyond the point where help is required. Admittedly someone else will probably come in to fill the gap, but it is short sighted that legislation is against work creation