You already know this: accountants and lawyers, who fail to advise properly, leave themselves open to a claim for professional negligence. In the “old days”, negligence claims against accountants or lawyers were rare. Not any more – nowadays, clients and banks or others who claim to have suffered a financial loss, have become much more willing to find someone to blame for their loss.
This article looks at something you may not have thought about before…
Social enterprises and not-for-profit organisations are diverse. You’ve probably got several of these organisations on your client list. And if you think about it for a moment, you would put them well down the pecking order of risks to your firm. You don’t conduct an audit, so where’s the risk?
But you could be wrong.
A couple of questions:
First, do you have an engagement letter in place?
Next, when the people running the organisation approached you, what did you advise them about their exposure to liability? Did you tell them it was an unlimited exposure?
Chances are you didn’t.
Most firms don’t. But that no excuse.
It’s a dangerous thing to do. If someone asks for your advice, you should explain everything or you could be blamed if things go wrong.
What could go wrong?
Something that is generally not realised is that Management Committees of unincorporated organisations (e.g. associations) and also members, are completely at risk of personal liability compared to an incorporated organisations. If the Management Committee enters into any contractual or other arrangements on behalf of the organisation (either alone or collectively) they are “jointly and severally responsible” for the affairs of the organisation.
To protect trustees from liabilities, some charities have registered as a limited company or a company limited by guarantee.
Did your engagement letter explain why you advised the clients to form an unincorporated organisation? Did it explain their possible exposure to unlimited financial claims that could bankrupt them?
If the answer to the last two questions is NO, then you could be in trouble.
In particular, did you explain that Charitable Incorporated Organisations (CIOs) are a new legal form for charities that stops a charity’s trustees being responsible for its debts? CIOs became available to charities in England and Wales on 4 March 2013.
Some committees might argue that the risk of exposure is small. However, as we live in a litigious society, anything can happen: for example a claim for injury by a member of the public when the risk hasn’t been insured under a liability policy. Another example could be a celebratory function organised by the committee (such as a Ladies Night or Centenary Dinner) that is a financial disaster through overbooking or costs not taken into account in the budget. In the front line for claims are the Treasurer and Secretary of unincorporated organisations.
If they have acted honestly and reasonably, claims can usually be met out of funds that the organisation has but if the claims exceed available funds, then personal insolvency for the members can ensue.
It might be possible for the committee to obtain Directors & Officers Insurance for risks such as those mentioned above. Professional advice should be taken.
If you were asked for advice and didn’t raise these issues with the client, you could have a problem.
It’s not worth taking the risk.
Oh, and by the way, Bizezia has just published a booklet about CIOs. I wrote it and it is available now as part of the Online Business Library.
Bizezia’s Contract Engine system has a specific engagement letter schedule that deals with this matter: (62- Engagement for Accountancy Services to an Unregistered or Unincorporated Club or Society (Non-Audit Assignment))
Please contact me at firstname.lastname@example.org if you are interested in these products.
It seems, from conversations I’ve had recently, that many professionals – accountants and lawyers included – are not up to speed with the changes last year that affect unincorporated organisations.
Here’s a brief introduction which I hope you’ll find useful. As ever, there’s a caveat: This guide is for general interest – it is always essential to take advice on specific issues.
Social enterprises and not-for-profit organisation are diverse. They include local community enterprises, social firms, mutual organisations such as co-operatives, and large-scale organisations operating nationally or internationally. There is no single legal model for a social enterprise. Options include companies limited by guarantee, industrial and provident societies and companies limited by shares: some organisations are unincorporated and others are registered charities.
Most charities currently exist as either trusts or unincorporated associations, but these structures give their volunteer trustees a legal responsibility for any debts the charity creates. To protect trustees from this responsibility, charities previously had to register as a company – a process that can be too expensive or complicated for some small and medium-sized charities.
The new form of incorporated organisation
Charitable Incorporated Organisations (CIOs) are a new legal form for charities that stops a charity’s trustees being responsible for its debts. The final legislation was passed at the end of 2012.
CIOs are registered through and regulated by the Charity Commission for England and Wales.
The regulations that complete the legal framework for CIOs enable organisations to:
- apply to register a completely new organisation as a CIO;
- set up a CIO to replace an existing unincorporated association or trust.
The legal framework for the CIO is set out in the Charities Act 2011 and in two sets of regulations and an Order. These are:
- the Charitable Incorporated Organisations (General) Regulations 2012 (General Regulations);
- the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 (Dissolution Regulations);
- The Charity Tribunal (Amendment) Order 2012.
Benefits of a CIO
The main benefits of a CIO are that it:
- has its own legal personality;
- can conduct business in its own name;
- provides the protection of limited liability so that its members and trustees will not have to contribute in the event of financial loss.
The above benefits are already available to limited companies. However, while charities can be formed as companies, they must then be registered with both Companies House and the Charity Commission. In contrast, the CIO provides limited liability protection but only needs to register with the Charity Commission. This is expected to reduce bureaucracy for the charity.
The CIO status became available to charities in England and Wales on 4 March 2013. In Scotland, the Office of the Scottish Charity Regulator began registering Scottish Charitable Incorporated Organisations (SCIOs) in April 2011.
Liability of Members in an Unincorporated Organisation
Something that is generally not realised is that Management Committees of unincorporated organisations (e.g. associations) are completely at risk of personal liability compared to an incorporated organisations.
Unincorporated organisations do not have an independent legal identity/personality. If the Management Committee enters into any contractual or other arrangements on behalf of the organisation (either alone or collectively) they are “jointly and severally responsible” for the affairs of the organisation.
It is thus possible for members of a committee (or the organisation’s membership as a whole) to be personally liable, without limit or indemnity, to settle any debts or other liabilities that may occur (e.g. fees for professional services, rent under a lease, or damages for breach of contract).
Some committees might argue that the risk of exposure is small. However, as we live in a litigious society, anything can happen: for example a claim for injury by a member or the public for injury when the risk hasn’t been insured under a liability policy. Another example could be a celebratory function organised by the committer (such as a Ladies Night or Centenary Dinner) that is a financial disaster through overbooking or costs not taken into account in the budget. In the front line for claims are the Treasurer and Secretary of unincorporated organisations.
If they have acted honestly and reasonably, claims can usually be met out of funds that the organisation has but if the claims exceed available funds, then personal insolvency for the members can ensue.
It might be possible for the committee to obtain Directors & Officers Insurance for risks such as those mentioned above. Professional advice should be taken.
CIOs are designed to be a more efficient way to run a charitable venture than standard charitable companies because their regulation is not as complicated or onerous as that for companies (for example, a CIO will only have to submit one annual return and one set of accounts per year.
A CIO is different to a community interest company (CIC). A CIC is a new type of company introduced in 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004, designed for social enterprises that want to use their profits and assets for the public good. CICs are intended to be easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community.
This publication is concerned only with CIOs. For information on Community Interest Companies please refer to the publication Community Interest Companies.
Further information including details of the relevant legislation, forms to download and sample articles of association can be found in the Community Interest Companies website, here.
Frequently Asked Questions
The Charity Commissioner has published a list of frequently asked questions about the CIO structure and its benefits. You can access them, here.
Today, I’d like to talk a little about ISAs. You may already know about them – but I don’t mean Individual Savings Accounts.
The ISA I’m writing about in this short article is an Income Share Agreement. It’s a financial vehicle or product or arrangement in which an individual or organisation gives a fixed amount of money to a recipient who, in exchange, agrees to pay back a percentage of his/her or their organisation’s income for a fixed number of years. These ISAs are a controversial new financing phenomenon that has recently emerged.
Beth Akers wrote about this in Brookings in relation to education costs. She said that in response to growing concerns over the issue of higher education finance, policy makers, advocates, and entrepreneurs have developed and proposed an array of solutions to address the shortcomings of our current system. Income Share Agreements are one such proposal that deserves more attention. ISAs allow students to raise funds to pay for their degrees by selling “shares” in their future earnings.
She added: “This solution is sometimes dismissed as a gimmick, akin to indentured servitude, despite the fact that it has the potential to offer improvements over traditional loans in terms of shielding students from risk and providing information about quality, two widely held objectives among advocates and policy makers.”
Della Bradshaw in the FT wrote, here, that some see it as a 21st-century version of indentured servitude, a system dating from the 1600s in which employers in the US paid the cost of the sea crossing for would-be immigrants in return for a fixed number of years of labour. These contracts, which, according to an article at TaxProf are offered by entities such as Fantex, Upstart, Pave, and Lumni, raise important questions for the legal system.
Back in April of this year, Senator Marco Rubio (R-Florida) and Congressman Tom Petri (R-Wisconsin) introduced companion bills in the US Senate and House that would provide legal clarity around private-market Income Share Agreements. The bills require certain consumer disclosures to be clearly communicated to the individual receiving the ISA. Read about it here.
ISAs are not a new invention, with contracts of this nature first proposed in the 1950s by Milton Friedman – the great American economist, statistician and writer – as a solution to the problem of students being unable to borrow against their future earnings to pay for college.
Whichever way you look at these arrangements, they seem to be part of the crowdsource or crowdfunding family. This funding is the new way to finance start–ups in a networked world. They are popular with entrepreneurs, small business owners, investors, artisans, or those who merely have a good idea for a business venture have a new and attainable means of securing capital to grow their dreams. In short, they are a long way from conventional financing.
I came across a useful book on this subject: The Crowd Funding Services Handbook: Raising the Money You Need to Fund Your Business, Project, or Invention (Wiley Finance) by Jason R. Rich which has only just been published. Publicity for the book suggests that it offers a step–by–step overview of the various crowdsource funding services available on the Web, as well as the necessary documentation required to launch a successful crowdfunding campaign. It contains details on how to evaluate and select the best online platform for crowdfunding efforts and provides details on creating a business plan to the specifications require to raise capital via crowdfunding. Available from Amazon: ISBN-10: 1118853008, ISBN-13: 978-1118853009.
Do you have any thoughts on this form of financing whether it be for educational purposes or a more general commercial application?
If so, I’d love to hear from you: email@example.com
You’ve been to the bank with your grand idea and your friendly bank manager has said “where’s your marketing and business plan?” and as it’s something you’ve ducked for a long time, you have to admit you don’t have one.
Your accountant says, “If you fail to plan, then it means you are planning to fail”. That sounds smart but it’s also true.
You sheepishly admit that you don’t know where to start. And you certainly don’t want to fail. So you ask your accountant to prepare your business plan.
“I can’t do that”, she says. Your smart accountant adds something like “it’s got to be your business plan and only you can put it together.” Again that makes sense because, after all, your accountant is smart.
“But where do I start?” you ask.
You tell her about an entrepreneur from China who has recently raised $25 billion or so on the New York Stock Exchange when his company, Alibaba, went public. You explain that you only want to borrow about £75,000 from your bank and you are even prepared to put up your house as security… “It’s just a drop in the ocean”, you say.
Your accountant makes a few suggestions – including that you read some of the brilliant Bizezia publications on the subject. The web address is: onesmartplace.com/products/online-business-library.
Your smart accountant sees that you are eager for more information so she suggests you view the index of the Bizezia publications.
She also suggests that there’s an organisation called MPlans who provide a number of free resources. In particular, she mentions The Essential Contents of a Marketing Plan (available here) written by Tim Berry of Palo Alto Software plus lots of other free resources at www.mplans.com.
Lastly, your accountant says that MPlans have a library of more than 100 free sample marketing plans, covering several industries
to help you to get inspired to create your own – available here.
How to Write a Business Plan
You go away and start writing your masterpiece… after about a week, you realise that your marketing plan is only a part of your business plan. It isn’t the whole business plan itself.
You call your accountant for some pointers and she suggests that you go back to the MPlans website and visit a page that provides insight and practical advice on how to write a business plan – it has dozens of articles on business plan writing as well as hundreds of free sample business plans and business plan templates to see real-life examples. The web address is: articles.bplans.co.uk/category/writing-a-business-plan.
Lessons from this story:
- Don’t go empty-handed to your bank if you want to borrow money
- Every business needs a business and marketing plan whether it is borrowing money or not
- Start planning early
- Speak to your accountant at the outset
Selling a business is a bit like selling a house – to get the best value and get a quick sale, you have to make it look nice on both the inside and outside to maximise your chances of success, says Rachel Bridge in the Telegraph, here. Among the list of things to do, she suggests that you plan carefully and don’t spend the money before you have a done deal. The value of your business is directly affected by early preparation. Whatever value you place on your firm, it’s only worth what someone else is prepared to pay for it and it may take a time to find the right purchaser who has the money and vision to make a success of the acquisition.
So, if you’re thinking of selling your accountancy or law practice it helps to know what a purchaser may be looking for. Here are my thoughts on the matter. They are not listed in a particular order – some issues will be more important on some transactions than others. The most important point to remember is to get good professional advice from the outset.
And, by the way, each of the numbered points, or at least most of them, probably deserve a separate article over the coming weeks.
These aren’t necessarily all the points to address when selling a firm. Any that I’ve forgotten, will be included in future articles.
1. Are your clients the sort of clients that a purchaser wants to deal with?
Are the clients you have generally good ones or, at the other extreme, are they all a load of trouble and bad payers? You may need to cull some of your clients. Get rid of the rubbish and focus on building up clients in a niche area.
2. Are the clients that you have, long-standing clients or are they fairly new to the firm?
A purchaser will feel a bit nervous if there’s a big churn of clients and the ones that you currently have are quite different to the ones that you had a year ago. A savvy purchaser will want to know where the clients came from. Best of all, in my view, are clients who were recommended to consult with you by an existing, satisfied client of the firm.
3. Do your clients pay you promptly or are you always in dispute with them?
What you’ll need to look at are areas such as the engagement letter process you have in place (what’s that I hear you say, you don’t have engagement letters?). Also, the frequency the clients pay you – for example, once every two years is not good enough. Do you tell your clients what your fees are going to be before you do the work and do you bill them when you say you’re going to bill them, not ages afterwards?
4. What are your staff and partners like?
Are they the sort of people that if they do the job well, the outcome is pretty ordinary? Do you have a big turnover of staff? Are they well trained? Do you spend money on training?
5. What are your fee charges like?
Are the fees you charge sufficient for you to earn a reasonable profit? A purchaser will want to know how you have arrived at your charges – whether it’s on an hourly basis, every 6 minutes or whatever.
6. What sort of branding does your firm have?
Is the image your firm portrays of a tired old fashioned dreary type of firm? Just what sort of reputation does your firm have?
7. What sort of connections does your firm have?
Do you have relationships with your local solicitors and banks? Who refers business to you?
8. How do you get new clients?
What do you do in the way of marketing? Do you spend money on marketing and advertising? What is the ROI of your marketing?
9. How many times have you been sued?
A purchaser will want to look at your professional indemnity insurance record and the claims made against the firm.
10. Why should anybody come to your firm when there are plenty of other firms on the high street?
Do you have any specialisations? Are there any niche positions you own in the market place?
11. What’s the status of your office premises?
Do you have a lease or do you own the building? Is the rent affordable? Is there room to expand? Will the purchaser transfer the firm’s activities to their own premises? And if so, what’s going to happen to your existing offices? If you own the freehold of the premises, are you going to sell it to the purchaser?
12. What’s the status of your technology?
Are your computers up to date? Is your software compatible with that of a purchaser? If not, it might be a problem. Do you have a strong online presence?
13. What about archiving
Do you have separate premises and are they secure?
14. Do you have any debts?
Have you had a history of debt with banks, loan providers, suppliers etc? How will debts be dealt with on a sale?
15. Goodwill, Debtors and Work in Progress
Now, these are key items and they will feature high up on the list of assets you are selling to a purchaser.
Let’s start with goodwill. This is an emotive subject. The firm who are selling have spent many years building the reputation of the firm and gathering new clients along the way – that must be valuable they say. The purchaser is more concerned with how long the clients are going to stay with the firm – there’s no such thing as a “long term contract” with clients and they can leave the firm at the drop of a hat, or a bill from the new owners that’s more than they paid in the past.
For accountants, because of the recurring nature of much of the work, it used to be the case that goodwill could be sold for 150% of the annual recurring fees of clients but not anymore. For lawyers it’s different. Most law firms work on a transactional basis and so goodwill is an even more difficult asset to value. And, whatever is agreed, it’s likely to be paid out over a number of years so no lump sum to take to your desert island retirement villa.
Debtors aren’t usually a problem. If the list you hand to the purchaser has only debtors that are not disputed and proper provision has been made for irrecoverable items, there won’t be an issue over value. However, in my experience, most purchasers won’t pay for debtors – it’s more likely that they will agree to collect the money for the old firm and hand it over when collected.
Work in progress is always an issue. If there’s unbilled time or value on the client ledger, the question arises as to why it hasn’t already been billed. Has the unbilled time relate to work that has been agreed with the client (what does the engagement letter say)? At best, a vendor can expect to get paid only when the client pays the firm. There may have to be a discount that is conceded to a purchaser.
If you’re hoping that the purchaser will pay a big cheque at completion and you can walk away to your retirement villa in the sun, you may be disappointed. Most purchasers will want to spread the risk and pay by installments.
Most firms have external funding (from banks etc) in addition to financing from partners or LLP members. More on this is a later article.
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Where can you get help?
Here are five firms that I know well and which can really help on these matters. In future articles, I’ll be speaking to them about some of the numbered points I’ve listed to hear what they have to say.
DMH Stallard LLP
DMH Stallard LLP solicitors have a significant corporate team operating out of London and the South East. They are recognised as one of the leading law firms in the region across all the key practice areas and are described as standing out from other law firms for “high quality advice and a strong reputation.” Having been involved in a number of mergers themselves as they have grown the firm over the years, they are well equipped to provide practical and commercial advice to professional firms on a range of M&A transactions. The main contact partners are Jonathan Grant and Abigail Owen.
Address: Gainsborough House, Pegler Way, Crawley, RH11 7FZ, England (And at: London, Guildford, Farnham, Crawley, Brighton) Tel: 01293 605000 Web: www.dmhstallard.com Email: firstname.lastname@example.org
Andrew Jenner FCA and Phil Shohet FCA of KATO Consultancy are respected and experienced specialists in practice management and M&A. They know all about the issues involved in buying and selling a professional firm. They will not act for any firm where they feel that they cannot add value to the business. They always confront issues in the most appropriately sensitive way, and their reputation is founded on finding the right solutions to practice issues and implementing them in a way that plays to partners’ strengths and improves the value of the business.
Address: Bank Chambers, 203 Goring Road, Worthing. BN12 4PA Tel: 07768 684724
Goldsmiths Practice Services
Another respected and experienced specialist is Ron Goldsmith who runs Goldsmiths Practice Services LLP – one of the UK’s leaders in accountancy practice sales and support including the merger and acquisition of accountancy practices both for sole practitioners and multi partner firms. Apart from this work, they also provide further assistance to help purchasers with acquisition financing on an unsecured basis. The financing schemes are also available for clients to help them with their commercial finance requirements. They also have a joint venture with Accountancy Age on www.accountancyage.com/practicebroker where you will find the latest opportunities for buyers and sellers.
Address: Siena Court, Broadway, Maidenhead, Berkshire SL6 1NJ Tel: 01628 627637 Email: email@example.com
Mark Lee FCA CTA (Fellow) works with professionals to help them to STAND OUT in a positive way. This is equally important whether you are to remain in practice or you want to secure a better price when you sell up. In this case you need to ensure that your practice STANDS OUT effectively. An accountant by profession, Mark chose to move away from the provision of professional advice in 2006. He has built a portfolio career that includes acting as a professional speaker, mentor, facilitator, author, blogger and debunker. The better prepared you are and the higher the profile and reputation of your practice with clients and with staff alike the more a purchaser is likely to be more attracted to your practice when it is offered for sale.
Tel: 0845 003 8780 Email: firstname.lastname@example.org Web: www.bookmarklee.co.uk
Stanley Davis Practice Support Services
Specialising in the accountancy and legal practice fields, the company will arrange: mergers, acquisitions, disposals, succession, exit strategies whether retirement or otherwise, partner or partner designate executive searches, practice development and organisation, restructuring and general business advice. The first consultation is always free of charge and without obligation. Eric Golding FCA is managing director of this company within the Stanley Davis Group and works with firms of Solicitors and Accountants, drawing on his experience as a Chartered Accountant in practice for more than 20 years.
Address: 41 Chalton Street, London, NW1 1JD Tel: 020 7554 2222 Email: email@example.com Web: www.stanleydavis.co.uk/practicesupportdirectors.asp
No Housing Bubble then. Well, that’s what we are asked to believe from the experts at the Bank of England. We’re told that even a rise in the price of houses in London of as much as 20% a year is not a serious problem. The announcement last week of some constraint, albeit modest, in the amount that can be lent to borrowers, really won’t have any impact on either prices or the lengthening queue of people who can never expect to buy a London home.
Who do you believe?
BBC’s Economics editor, Robert Peston commented (see here) on the plan to limit the proportion of new mortgages that are 4.5 times income or greater to no more than 15% of any bank’s total mortgages. Sounds good, but bankers are a wily bunch of people so surely they’ll find a way around any proposal to limit their bonuses.
It’s quite amusing, or so it seemed to the Governor of the Bank of England as he reacted with apparent amusement to a suggestion by Robert Peston that the Chancellor was “irrational and hysterical” in putting a cap on the multiples of borrowers’ income allowed under the government’s help to buy scheme.
The reality is that maybe there aren’t any properties available for Brits anyway as we’re told that London is a hot spot for wealthy Chinese and Indian buyers. Apparently, there are 63 million Chinese who have enough capital and income to buy a property in London and to educate their children in our best schools. That’ll be good for our economy but as these foreign buyers won’t want or need a mortgage, the Chancellor’s plan to cool the property market just won’t work. They’ll be introducing Exchange Control next!
Is the strategy of the banking policy makers: Test the gullibility of the subjects and then make a decision based on their response? In other words, tell us how bad it could get and then when things worsen we won’t be too upset.
So, what messages are we getting from Threadneedle Street? The bank rate was going to go up when unemployment reached 7%, said the Governor. Oh, sorry, no it isn’t, the UK economy is doing too well, too soon, we’re told. But the normal borrowing costs could go to pre-recession levels in the next 5 to 10 years says outgoing Bank of England deputy Sir Charlie Bean, as he bandied a figure of 5% last week. He leaves the Bank after Monday.
No, not 5%, says the Bank’s Governor who insists that the important aspect for homeowners and businesses is that rates are likely to stabilise at about 2.5% in three years’ time, rather than the historically “normal” level of 5%.
There’s even talk in the “sage” rhetoric that we can ease off the medicine we’ve been taking as the financial illness we faced no longer needs invasive surgery.
According to David Miles, one of the nine members of the Bank’s Monetary Policy Committee, writing in the Telegraph: “Having Bank Rate at 0.5pc is obviously not a normal or sustainable setting for monetary policy. We have had such low rates because the economy took a huge hit in the aftermath of the financial crisis of 2008. Until fairly recently we have not had any sort of sustained recovery from that. Now we have one. This is more a case of scaling back the emergency medicine as the patient begins their recovery, rather than invasive surgery to deal with a sudden, life-threatening illness.”
Fund managers, who of course have a view on these things, are now forecasting an interest rate hike before the election: Michael Bird, in City A.M. today reports that a survey of hundreds of UK fund managers suggests the Bank of England will hike interest rates ahead of the next general election in May 2015. According to a survey released today by Capital Spreads, nearly two thirds now believe the increase will come later this year, or the early part of next year.
If you think the issue of interest rates is clear, then perhaps the following may confuse you. The Bank for International Settlements (BIS) is warning that ultra-low interest rates have lulled governments and markets “into a false sense of security”. BIS, the Basel-based organisation, often called the “central banks’ central bank”, has urged policy makers to begin to normalise rates. “The risk of normalising too late and too gradually should not be underestimated,” it says.
The Yes and No game to confuse us all
Yes, says Samuel Tombs writing in City A.M. today, when he refers to Mark Carney’s forecasting record as patchy at best, but suspects “he is right to assert that the “new normal” for interest rates will be much lower than in the past. The household debt-to-income ratio is still very high, meaning that interest rate rises will have bigger effects on spending than in the past. In addition, spreads on new loans over Bank Rate – for good reason – are likely to remain wider than they were before the recession.”
But Patrick Minford says No: He says: “Mark Carney has said interest rates will settle at around 2.5 per cent a few years hence. But there are two main uncertainties. The first is whether inflation will remain under control in spite of all the money printing the Bank has undertaken. The second is how tight the margin of spare capacity will be. Growth is now powering ahead. And because some industries, like North Sea oil and banking, are unlikely to recover to their past levels, we know that the economy already has only a limited margin of spare capacity.”
So, it’s simple really. Nothing to worry about at all. It’s time to come off the medicine and face up to the simple fact that most of London could be owned by foreigners and that interest rates, even if we could get a mortgage, will be much more expensive in future than they have been recently. For those who can’t afford to pay the higher mortgage cost, that will actually help since more properties will become available in the South East as people scramble on the slow train to independent Scotland to buy a crofter’s cottage for a wee fraction of the cost of their existing property. And mortgage rates in Scotland will be much lower than in England and Wales, won’t they?
But enough of crofter’s cottages in Scotland and silly rate-setters and possibly irrational and hysterical politicians too. Why not bring some sunshine into your life. If you’re lucky enough to own a valuable three-bedroom flat in London, worth say £5.75m, you might be better off selling it and buying a 12-acre, 29-cottage Island in the Caribbean. It’s a real possibility. If you’re interested, Billy Ehrenberg explained how in an article at City A.M. last Friday.
In last week’s Budget, the Chancellor increased the annual investment allowance. He doubled it from £250,000 to £500,000 for an extended temporary period.
This measure is designed to stimulate business investment in the economy by providing an extended time-limited incentive for businesses to invest in plant and machinery. The time extension is to 31 December 2015 for Corporation Tax and Income Tax and further increase to £500,000 of the temporary Annual Investment Allowance limit. It applies from 1 April 2014 for corporation tax (CT) and from 6 April 2014 for income tax (IT) and runs until 31 December 2015, after which it will return to £25,000.
“Plant and machinery” includes tools and equipment used for maintenance or manufacturing, computers and other office equipment, plant and machinery etc. See detailed guidance on the meaning of ‘plant and machinery’. There is no statutory definition.
Background to the measure
The maximum amount of the AIA was temporarily increased to £250,000 from £25,000 for the period from 1 January 2013 to 31 December 2014. This measure extends the period of the temporary increase to 31 December 2015 and further increases the amount of the AIA to £500,000 from April 2014.
AIA is available for most businesses, including partnerships. It is not available for trustees or mixed partnerships (partnerships which are not made up entirely of individuals):
- Since 1 April 2008 (CT) and 6 April 2008 (IT) most businesses, regardless of size, have been able to claim the AIA on their expenditure on plant or machinery, up to a specified annual amount each year (subject to certain conditions mentioned below).
- With effect from 1 April 2012 (CT) or 6 April 2012 (IT) the maximum amount of the AIA became £25,000 for qualifying expenditure incurred on or after those dates. This was temporarily increased to £250,000 for the period 1 January 2013 to 31 December 2014 in Finance Act 2013.
- Businesses are able to claim the AIA in respect of their expenditure on both general and ‘special rate’ plant and machinery. There are however certain exceptions – set out in section 38B of the Capital Allowances Act 2001 (CAA), the main exception being expenditure on cars.
- The AIA is a 100 per cent upfront tax allowance that applies to qualifying expenditure up to a specified annual limit or cap.
- Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the 18 per cent or 8 per cent rate respectively.
Legislation will be introduced in Finance Bill 2014, to further increase the AIA limit to £500,000 from 1 April 2014 for companies and 6 April 2014 for other businesses. It will end on 31 December 2015.
There’s more information available from HMRC here.
What you can and cannot claim for
Any new expenditure on plant and machinery assets bought after 1 April 2008 for Corporation Tax, or 6 April 2008 for Income Tax qualifies for AIA, apart from these exceptions:
- Motor cars
- Plant and machinery previously used for another purpose, for example, a computer used at home and introduced into your business
- Plant and machinery gifted to your business
- Expenditure incurred in the accounting period in which your business ceases
[Update 27 March 2014]
HM Treasury (HMT) has waived a rule that makes individuals buy an annuity within six months of taking out their tax-free cash lump sum. HMT says: ‘The government will also confirm today that people who have recently taken a tax-free lump sum from their defined contribution pension, will be given more time to decide what they wish to do with the rest of their retirement savings and will not be put at a disadvantage should they wish to wait to access their pension savings more flexibly. The government is also changing the current rules that require people who take up to 25% of their pension pot as a lump sum to ‘secure an income’ within six months, which is usually an annuity.’
Last week’s Budget contained two proposals of particular interest to most people: Their pensions and their savings.
This article covers my understanding of the pension changes which herald a new era for the way people fund their retirement and what happens to their pot of gold when they reach retirement age. I’ve written a separate article on the changes to savings.
From next year, millions of people reaching retirement age can spend their pension savings fund in any way they want – including (as has been widely reported) buying a Lamborghini. From April 2015 pensioners will still be able to take up to 25% of their pension pot (tax-free) from age 55 onwards. But, there will be no restriction on the amount of income they can take, and if they wish, the whole fund can be taken as a lump sum; this is a massive change, possibly the biggest in a generation.
HMRC explain that there are four types of pension arrangements, see below. You can be in any number of arrangements in the same scheme. An arrangement can only pay you one type of benefit, so if you’re getting more than one type of benefit you must have more than one arrangement in the scheme.
The four different types of pension arrangements are:
- money purchase (or defined contribution arrangement)
- defined benefits
- cash balance
The two main schemes
Most schemes are money purchase arrangements – the pension you get depends on how much what you have paid in has grown to by the time you retire. This means the value of your pension will depend on how much pension your pension pot can ‘buy’.
Defined benefits arrangements are the second most common type of scheme – you’re promised a certain amount of pension at retirement. The amount of your pension is usually based on your pay and length of service.
The announcement in the Budget, will remove the requirement on many people with defined contribution pensions to buy an annuity (usually from an insurance company) with a guarantee of either a fixed or escalating pension for the rest of your life.
In future, retirees will have more flexibility to do what they want with their pension savings. The hope is that people can be trusted to manage their own finances. Some people take a lump sum to celebrate retirement with a holiday of a lifetime or, as the pensions minister admitted, even a Lamborghini sports car. The time-bomb that exists for many people with an interest only mortgage, without any definite idea of how it will be repaid at the end of the term, could be defused by people extracting monies from their pension fund over say a 5 – 7 year period (to keep their tax rate low) and paying down their mortgage in full. The popularity of interest-only mortgages has waned in the last 30 years, as the reality of final value of endowment policies taken out to pay them off, has come home to roost. But now with access to pension monies to pay off home loans, maybe we will see interest-only mortgages becoming popular again. And of course, the actual monthly outgoing for an interest only borrower is quite a lot less than on a repayment mortgage – so houses will be easier to buy, the frenzy to buy will be increased and everything will be hunky dory as long as house prices don’t go down.
Many retirees may choose to use the money to invest in buy-to-let property instead so that they receive a useful annual income. But the money available may not be enough to buy a property outright – currently, retirees will find in nearly impossible to borrow money on a rental property beyond age 70. On the other hand, maybe in future there will be a new mortgage market for the blue-rinse brigade – who knows?
In Australia, where people are already able to withdraw lump sums easily, recent evidence suggests that most retirees invest the money or use it to clear debts, but a few choose to buy holidays or cars. Similar changes were successfully introduced in Ireland in 1999 and the pensions system coped just fine. The Irish still save and there has been no crisis.
The new flat-rate state pension will provide just over £7,000 a year of income to fall back on but much lower than the vast majority of people are used to during their working life.
The schemes affected by the changes
The schemes affected by the changes are:
- Personal Pensions (including Group Personal Pensions)
- Stakeholder Pensions
- Self-Administered Schemes – both Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSAS)
- Defined Contribution Occupational Pensions (but not Defined Benefit or Final Salary schemes, such as those in which NHS employees or teachers are members)
Advantages or disadvantages of the changes
- There is greater flexibility in the amount of income which can be taken from the pension savings.
- You can take ad hoc lump sums in whatever amount and whenever it suits you and use the money to repay debts or mortgages outstanding or buy a holiday home or buy-to-let property to generate additional income (although that will be taxable).
- There is no automatic requirement for people with small pension pots to buy a Compulsory Annuity all the income from which is taxable. Some people may choose to buy a Purchased Annuity which guarantees income for life but because each instalment is deemed to include an element of return of capital, the taxable element is smaller.
- People may retire earlier, by taking higher incomes from their pension fund, until the State Pension kicks in and then reducing the income from their pension pot.
- People who take lump sums either all at once or by instalments, could pay more tax on lump sums and earlier than it would have been on a pension drawn from their pension pot on an annual or monthly basis.
- Anyone who takes large lump sums, or indeed their entire pension pot as a one off payment, could be left with insufficient income to meet their living costs on a continuing basis for their later years.
- The income arising from investments made with lump sums taken from the pension pot will be taxable whereas if the money had been left in the pension pot, the income would have been tax-free.
- Depending on how lump sums are invested, any ongoing income is not guaranteed unlike an Annuity, where the income is guaranteed for life.
- Anyone who rushes out to buy an Annuity before the new rules kick in on 6 April 2015 won’t be able to take advantage of the changes.
Don’t forget the tax impact
Taking all their saving out from their pension plans will mean that the taxman will want some of it. The money will be treated as income subject to income tax. There will also be inheritance tax consequences as, on death, estates may be larger than before.
At present, retirees don’t have much flexibility if they want access to their defined contribution pension funds during their retirement – they have to pay 55% tax if they withdraw the whole pot (excluding the tax-free element, usually 25% of the total fund) and annual pension withdrawals are taxed as income. From April 2015, people aged 55 and over will only pay their marginal rate of income tax on anything they withdraw from their defined contribution pension – either 0%, 20%, 40% or 45%.
Tom McPhail, head of pensions’ research at Hargreaves Lansdown, says (see here) that people already retired and in drawdown (that is, not having bought an annuity but taking a pension out of their pension fund) may want to contact their drawdown provider to find out whether they are going to be able to adapt their systems to accommodate the new 150% income limit (up from 120%). This is a revalorisation of the maximum pension entitlement calculated from official annuity tables. Although you can request a review of your income limits on your policy anniversary, it is dependent on the drawdown provider being able to meet your request.
It seems that there is another beneficiary of the changes – HMRC itself:
- Currently, the taxman get tax on the annual pension drawdown or annuity as it is taken. So it takes until the pot is exhausted for the HMRC to get its pound of flesh. And all the time there is money in the pension pot, the income is usually tax-free.
- In future, if retirees take all of their fund, HMRC will get an immediate income tax receipt at the marginal tax rate of from 205 to 455 rather than have to wait for it in annual instalments over the life of the pensioner. It gets better for HMRC too – any lump sums invested in assets such as buy-to-let property or stocks and shares or even left on deposit account at the bank, will produce taxable income.
Don’t forget the care you may need later on
Paying for care in retirement will be another factor if funds are used to buy rental property or other investments – these may have to be sold if retirees need residential or nursing care in their final years. It could also have an impact on Local Authorities who would face extra bills to pay for social care if newly retired people have spent their money on holidays (or fast cars) etc rather than putting some aside for care costs in later life.
The new system is planned to be start fully in April 2015, but only for the 300,000 or more people who retire each year with a defined contribution pension fund. People who have invested in an annuity won’t be able to access any funds as the capital will no longer be available. James Lloyd, of the Strategic Society Centre policy think-tank, says that people who opt to cash in their pension pots rather than purchase compulsory annuities are likely to have a lower income if and when they ask their councils for help with social care costs. It will also be easier to divest money from flexible pension pots before they require care putting them beyond the scope of means-testing.
How the current system works
Pension pot options
Currently, you can take up to 25% of your pension pot tax-free at retirement and you can spend it as you wish.
- If you withdraw all your money then you are charged tax of 55%.
- If you are aged 60 and your overall pension savings are less than £18,000 you can take it all in one lump sum – this is called “trivial commutation”.
- Regardless of your total pension wealth, if you are aged 60 or over, you can take any pot worth less than £2,000 as a lump sum, as this classifies as a ‘small pot’.
- A ‘capped drawdown’ pension allows you to take income from your pension, but there is a maximum amount you can withdraw each year (120% of an equivalent annuity).
- With ‘flexible drawdown’ there’s no limit on the amount you can draw from your pot each year, but you must have a guaranteed income of more than £20,000 per year in retirement.
75% of people currently buy an annuity with their pension savings.
The new system
From 27 March 2014:
- The amount of overall pension wealth you can take as a lump sum is increased from £18,000 to £30,000.
- The maximum amount you can take out each year from a capped drawdown arrangement is increased from 120% to 150% of an equivalent annuity.
- The amount of guaranteed income needed in retirement to access flexible drawdown is reduced from £20,000 per year to £12,000 per year.
- The size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, is increased from £2,000 to £10,000.
- The number of personal pension pots you can take as a lump sum under the small pot rules, is increased from two to three.
From April 2015:
- From age 55, whatever the size of your defined contribution pension pot, you will be able to take it how you want, subject to paying your marginal rate of income tax in that year.
- There will be more flexibility. People who continue to want the security of an annuity will be able to purchase one and people who want greater control over their finances can draw down their pension as they see fit.
- To help people make the decision that best suits their needs, everyone with a defined contribution pension will be offered free and impartial face-to-face guidance on the range of options available to them at retirement (although the money set aside for this appears to be woefully inadequate at £20m, perhaps providing £30 for each retiree consultation – hardly likely to be of any value to anyone).
The government has published a consultation on these changes alongside the Budget, so there may be final tweaks and amendments.
There is more information from the government available here.
If you would like to learn more about the government’s 2014 Budget proposals, click here to download the Bizezia publication.
Last week’s Budget contained an extension in a number of business tax reliefs to provide support for businesses and reduce the cost of manufacturing. Among these changes were two which are covered in this article: extension of the existing SEIS scheme and the new Theatre tax relief.
Making the Seed Enterprise Investment Scheme (SEIS) and the CGT reinvestment relief permanent
UK start-ups seeking funding are set to be helped by masking permanent the funding scheme which incentivises investors to back risky early-stage businesses.
Legislation will be introduced in Finance Bill 2014 to remove the time limit from SEIS and make it permanent with any time limits removed. The legislation will also make permanent the CGT relief for reinvesting gains in SEIS shares. These changes will come into force from Royal Assent to Finance Bill 2014 and, for CGT reinvestment relief, have effect for 2014 to 2015 and subsequent years.
The Chancellor claims that SEIS has been a success, despite complaints from companies applying for the scheme, which is seen as highly complicated by tax advisers and business. Since it was introduced in April 2012, around 1,600 companies have raised over £135m from SEIS.
The government will also review whether the SEIS tax reliefs could apply where individuals make investments in the form of convertible loans. In order to reduce abuse of the scheme by high risk investors, it will change the eligibility criteria of venture capital schemes to avoid subsidising low-risk activities that already benefit from certain government programmes.
The measure will support the government’s growth agenda by continuing to help small, riskier, early stage UK companies, which may face barriers in raising external finance, to attract investment, making it easier for these companies to become established and to grow.
Also, making SEIS and SEIS CGT reinvestment relief permanent provides more certainty for early stage companies raising equity, and individuals investing in such companies.
Detail on SEIS
- SEIS came into effect from 6 April 2012 for shares issued after that date and before 6 April 2017.
- It is designed to help small, early-stage companies raise equity finance by offering a range of tax reliefs to individual investors who subscribe for shares and have a stake of no more than 30 per cent in these companies.
- It complements the Enterprise Investment Scheme (EIS), which also offers tax reliefs to investors in higher-risk small companies. SEIS recognises the particular difficulties that very early-stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by EIS.
- To help kick-start the scheme and encourage investment in SEIS, CGT relief was given to chargeable gains accruing to an investor in 2012-13 where the gain is re-invested in shares that qualify for SEIS income tax relief. The amount re-invested was exempt from CGT. This was subject to a £100,000 investment limit (which matches a similar cap on SEIS-related income tax relief). In 2013 the CGT relief was extended to chargeable gains accruing in 2013-14. The extended relief was given to half the qualifying re-invested amount.
For its investors to be able to claim and keep the SEIS tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. Some of these apply only at the time the relevant shares are issued. Others must be met continuously, either for the whole of the period from date of incorporation to the third anniversary of the date of issue of the shares, or in some cases, from date of issue of the shares to the third anniversary of their issue. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.
Finally, there are requirements as to how the company must use the monies it has raised via the issue of relevant shares. The removal of the sunset clause will take effect from the date that Finance Bill 2014 receives Royal Assent. The permanent extension of the CGT re-investment relief will have effect in relation to re-invested gains accruing to individuals in 2014-15 and subsequent years.
Legislation will also be introduced in Finance Bill 2014 to extend Condition A (see below) and the 50 per cent relevant percentage to gains accruing to the investor in 2014-15 and subsequent years.
Section 150G of and Schedule 5BB to the Taxation of Chargeable Gains Act 1992 provides the CGT relief for re-investment in SEIS shares. Condition A is at paragraph 1(2)(a) to Schedule 5BB – it currently provides that the relief is limited to gains accruing to the SEIS investor in 2012/13 or 2013/14.
For further information, visit the HMRC page on this subject.
Click here to read Bizezia’s publication on the Seed Enterprise Investment Scheme (albeit not yet updated for the above changes).
Theatre tax relief
Legislation will be introduced during the passage of Finance Bill 2014 for a new Corporation Tax relief for theatrical productions and touring theatrical product ions. This relief is to apply to both commercial and subsidised productions and will include theatre, ballet, dance and opera, musicals and other live performance.
There are to be two rates of relief; 25% for touring productions and 20% for all other productions.
The government will consult shortly after Budget 2014 on the design of the relief, with legislation taking effect from September 2014.
The Arts Council commented favourably on these proposals and provided the following information on how the proposed scheme will work like this:
- Under this new relief, a production company will be able to claim tax relief on costs on a per-production basis.
- This relief will be at two different rates: 25% for touring productions and 20% for others from September 2014.
- The calculation of this is as a percentage of eligible capitalised expenditure (broadly one takes the capitalisation of the project, and the eligible portion comprises most categories excluding marketing and advertising, running costs, contingencies and any finance costs).
- The tax relief will then be applied to 80% of this eligible expenditure. The mechanism for claiming the relief will be covered in the forthcoming consultation.
- Both publicly funded and commercial productions will benefit, either by offsetting the relief against corporation tax or through a cash credit for the equivalent amount.
- This relief is separate from other forms of funding currently awarded to the arts sector.
Last week’s Budget contained two proposals of particular interest to most people: Their pensions and their savings.
This article covers my understanding of the changes to savings which seek to go some way to repair the damage done by the recession to the returns people get on the money they have put aside for a later or rainy day. I’ve written a separate article on the pension changes.
Cutting the 10% tax rate on savings income
The government announced at Budget 2014 that from April 2015, it is abolishing the 10% ‘starting-rate’ of tax for savings income and replacing it with a new 0% rate, to provide further support for the lowest earners. It is also increasing the amount of savings income that the new 0% rate applies to, from £2,880 to £5,000.
What this means is that anyone with a total income of less than £15,500 will not pay any tax on their savings. From April 2015, if total income (things like wages, pension, benefits and savings income) is less than the personal allowance, plus £5,000, a taxpayer will be eligible to register for tax-free savings, with their bank or building society.
New Individual Savings Accounts (NISA), Junior ISA and Child Trust Fund (CTF): increasing flexibility for savers and investors
With effect from 1 July 2014, the annual subscription limit for cash and stocks and shares ISA will be equalised at £15,000, and restrictions on the transfer of funds between stocks and shares and cash ISAs will be removed altogether. Consequential changes will be made to the rules concerning the securities and other investments that can be held in an ISA, and Core Capital Deferred Shares issued by a Building Society will also be eligible for investment in an ISA and CTF.
With effect from 1 July 2014 the annual subscription limit for Junior ISA and CTF will be increased from £3,840 to £4,000.
The Chancellor announced the introduction of new pensioner bonds to help retired people who have suffered from low interest rates. Two fixed-rate “market leading” savings bonds will be launched to help people aged 65 and over who have seen their incomes cut by low interest rates over the last 5 years or so.
The new pensioner bonds, launched by the government’s funding arm – National Savings and Investment (NS&I) – will be available from 1 January 2015 and be available to everyone aged over 65.
The exact rates will be set in autumn 2014 to ensure the best possible offer, but our assumption is 2.8% for a one-year bond and 4% on a three-year bond. “That’s much better than anything equivalent available in the market today,” the Chancellor said.
The maximum deposit limit per person will be £10,000.
NS&I will allow Premium Bond purchases up to £40,000 – up by £10,000 on the current limit of £30,000 from 1 June 2014. The number of £1 million prizes will be increased to two from August 2014. “Increasing savers’ chances of winning the largest prize will allow people who want to save more through Premium Bonds to do so” said the government. But it isn’t that people want to save more but rather win more.
The 2014 Budget Summary
If you would like to learn more about the government’s 2014 Budget proposals, click here to download the Bizezia publication.
When the Government publishes the Budget, the Chancellor gives a speech to Parliament in which he sets out the key decisions on tax, borrowing and spending, and his reasons for taking those decisions. This speech is known as the Budget Statement. And that’s what Chancellor George Osborne did yesterday. “This is a Budget for building a resilient economy,” he said.
The official forecast on which the Chancellor bases the Government’s Budget is provided by the Office for Budget Responsibility (OBR). Their duty is to examine and report on the sustainability of the public finances and it is required to do so objectively, transparently and impartially.
The Finance Bill 2014 will be published on 27 March 2014.
Brief history of the Budget
The Chancellor of the Exchequer is the most senior minister at HM Treasury and acts as the nation’s primary finance minister. A bit like a finance director.
The Treasury itself dates back to the time of the Norman Conquest. Even before 1066, the Anglo-Saxon Treasury collected taxes (including the Danegeld, first levied as a tribute to the Vikings to persuade them – sometimes unsuccessfully – to stay away) and controlled expenditure.
The first “Treasurer” was probably “Henry the Treasurer”, who owned land around Winchester; the site of most royal treasure of both the Anglo-Saxons and the Normans. Henry is referred to in the Domesday Book and is believed to have served William the Conqueror as his Treasurer.
Read further information
The Chancellor predicts growth of the UK economy in 2014 of 2.7%, and 2.3% next year, higher than previously forecast by the Office for Budget Responsibility and the biggest upward revision to growth between Budgets for at least 30 years.
- Taken together, the UK economy will be £16bn larger than was forecast just four months ago in the autumn statement. The annual Budget deficit will disappear by 2018-19, on current trends.
- The UK now has a higher employment rate than the USA – for the first time in 35 years.
- The IMF is impressed and believes the UK is “achieving the largest reduction in both the headline and the structural deficits of any major advanced economy in the world”.
- But faster growth alone will not balance the books, and more hard decisions are needed, as well as more cuts and pay restraint in the public sector, the Chancellor said.
- Tax avoiders had better pay attention (as well as their taxes) – the Chancellor said he is increasing HMRC’s budget to stop non-compliance and give HMRC modern powers (which most other Western countries have) to collect debts from bank accounts of people who can afford to pay but have repeatedly not done so.
- Buying a home at £500,000 and above through a company will be more expensive from now on as there will be 15% stamp duty to pay. Interest rates to exporters will be cut by a third and the amount of government credit available to support overseas sales has also been doubled, to £3bn. The government wants UK exports to reach £1 trillion by 2020, and for 100,000 more UK companies to be exporting by 2020.
- The annual limit on business investment tax relief currently stands at £250,000, but was due to fall back to £25,000 from the beginning of 2015.
- House-buyers will have a new “right-to-build-your-own home” and the equity loan element of the current Help to Buy scheme will now last until 2020.
- The government is to extend the grant for small businesses to support 100,000 more apprenticeships.
- Business rates discounts and enhanced capital allowances will be extended in enterprise zones for another three years, the Chancellor said.
- The Annual Investment Allowance (capital allowances on purchase of assets) will be doubled to £500,000, until the end of 2015.
- Bingo! The number of bingo halls has “plummeted” by three quarters over the last 30 years and so bingo duty will be halved to 10%. But is Bingo past its expiry date?
- Lots of small changes in personal allowances including abandoning of the 10% tax rate on savings income and small changes too in tax thresholds. Small changes too in the VAT threshold limits.
- Exciting news for some savers: There’s to be a new pensioner bond (maximum investment per taxpayer of £10,000) available from 1 January nest year to anyone aged over 65 but we won’t know the exact rates until the autumn. Indications are 2.8% for a one year bond and 4% on a three year bond. Be quick though: Only £10bn of these bonds will be issued.
- The regime for ISAs – tax-free individual savings accounts – is to be shaken up from 1 July 2014. Cash and stocks and shares ISAs will be merged into one New ISA (NISA) and the annual limit for saving in an ISA will be raised to £15,000.
- A shake-up too for pensions: If people choose to take their pension savings early, it will be taxed at a normal marginal tax rate (typically 20%), rather than 55%. The income requirement for flexible pensions’ drawdown will fall from £20,000 to £12,000; the capped drawdown limit will fall from 120% to 150%; the size of the lump sum small pot will rise five-fold to £10,000; and the total pension savings you can take as a lump sum will almost double to £30,000.
- All remaining tax restrictions on how pensioners have access to their pension pots will be removed. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. With no caps or drawdown limits and nobody will have to buy an annuity.
Extra detail on some points
Income Tax, personal allowances, rates of tax and thresholds for 2015 to 2016: For 2015 to 2016 the personal allowance for those born after 5 April 1948 will increase to £10,500 and the basic rate limit will be £31,785 for 2015 to 2016. For 2015 to 2016 the starting rate for savings income will reduce from 10% to 0%, (see below) and the maximum amount of an individual’s savings income that can qualify for this starting rate will increase to £5,000. Savers who are not liable to pay Income Tax on their savings income can register to receive interest payments from their bank or building society without tax being deducted.
Cutting the 10% tax rate on savings income: The government announced at Budget 2014 that from April 2015, it is abolishing the 10% ‘starting-rate’ of tax for savings income and replacing it with a new 0% rate, to provide further support for the lowest earners. It is also increasing the amount of savings income that the new 0% rate applies to, from £2,880 to £5,000. This means that anyone with a total income of less than £15,500 will not pay any tax on their savings. From April 2015, if total income (things like wages, pension, benefits and savings income) is less than the personal allowance, plus £5,000, a taxpayer will be eligible to register for tax-free savings, with their bank or building society.
Personal allowances for non-residents: To ensure the UK personal allowance remains well targeted, the government intends to consult on whether and how the allowance could be restricted to UK residents and those living overseas who have strong economic connections in the UK, as is the case in many other countries, including most of the EU.
Capital Gains Tax (CGT): non-residents and UK residential property: As announced in Autumn Statement 2013, legislation will be introduced to charge CGT on future gains made by non-residents disposing of UK residential property. A consultation on how best to produce the charge will be published shortly after the Budget. These changes will have effect from April 2015. Legislation will be in Finance Bill 2015.
National Insurance contributions: simplification for the self-employed: The government will introduce legislation when parliamentary time allows to simplify the administrative process for the self-employed by using Self-Assessment to collect Class 2 National Insurance contributions alongside Income Tax and Class 4 National Insurance contributions. These changes will have effect from April 2016, however customers will start to see the benefits after April 2015.
Increasing Small and Medium Enterprises (SMEs) payable Research and Development (R&D) tax credit: Legislation will be introduced in Finance Bill 2014 to increase the rate of R&D payable credit for loss-making SMEs to 14.5% from 11% for qualifying expenditure incurred on or after 1 April 2014. This will increase the rate of the cash credit payable to SMEs that conduct R&D, but do not have corporation tax liabilities.
Enterprise Zones (EZ): Enhanced Capital Allowances (ECAs): Legislation will be introduced in Finance Bill 2014 to extend the period in which 100% ECAs are available in EZs by 3 years until 31 March 2020, and to include a power to make future extensions to the duration of ECA schemes by Treasury Order. A pilot EZ will also be established in Northern Ireland. ECAs are available to companies investing in qualifying plant and machinery on designated sites within EZs. These changes will have effect from Royal Assent to Finance Bill 2014.
Enhanced Capital Allowances (ECA) for zero emission goods vehicles: The government will extend the ECA for zero emission goods vehicles to March/April 2018. However, to comply with EU State aid rules the availability of the ECA will be limited to businesses that do not claim the government’s Plug-in Van Grant. Legislation will be in Finance Bill 2015.
Extending the Seed Enterprise Investment Scheme (SEIS): Legislation will be introduced in Finance Bill 2014 to remove the time limit from SEIS and make it permanent. The legislation will also make permanent the CGT relief for reinvesting gains in SEIS shares. These changes will come into force from Royal Assent to Finance Bill 2014 and, for CGT reinvestment relief, have effect for 2014 to 2015 and subsequent years.
Theatre tax relief: Legislation will be introduced during the passage of Finance Bill 2014 for a new Corporation Tax relief for theatrical productions and touring theatrical productions. The government will consult shortly after Budget 2014 on the design of the relief.
Annual Tax on Enveloped Dwellings (ATED): Finance Act 2013 introduced the ATED on certain non-natural persons owning UK residential property valued at more than £2 million. Legislation will be introduced in Finance Bill 2014 to reduce this threshold to £500,000. From 1 April 2015 a new band will come into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. From 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500. There will be a transitional rule for the £1 million to £2 million band requiring returns to be filed on 1 October 2015 and payment by 31 October 2015.
Anti-avoidance, fairness and planning
Venture Capital Trusts (VCT) share premium accounts: Legislation will be introduced in Finance Bill 2014 to prevent VCTs returning capital subscribed by investors within 3 years of the end of the accounting period in which the shares were issued. These changes will have effect from 6 April 2014.
Accelerated payment in tax avoidance cases: This is a very contentious area: As announced in Autumn Statement 2013, legislation will be introduced in Finance Bill 2014 to change tax administration to require taxpayers who have used avoidance schemes which are defeated in another party’s litigation, and who do not settle the dispute, to pay the disputed amount to HMRC on demand. Following consultation, further legislation will be introduced in Finance Bill 2014 to extend accelerated payment of tax to users of schemes disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, and to taxpayers involved in schemes subject to counteraction under the General Anti-Abuse Rule (GAAR), so that the amount in dispute is held by HMRC while the dispute is resolved. These changes will take effect from Royal Assent to Finance Bill 2014.
Avoidance schemes involving the transfer of corporate profits: Legislation will be introduced in Finance Bill 2014 to prevent companies from obtaining a Corporation Tax advantage by transferring profits between companies within a group. The legislation will provide that where as part of tax avoidance arrangements a company transfers all or a significant part of its profits to another group member, then the company’s profits will be taxed as though the transfer had not occurred. These changes will have effect for any transfer of profits made on or after 19 March 2014.
Disclosure of Tax Avoidance Schemes (DOTAS): The government will consult on extensions to the DOTAS ‘hallmarks’ (the descriptions of schemes required to be disclosed) to be introduced by secondary legislation later in 2014, and proposals to strengthen HMRC’s powers to tackle non-compliance with the rules, with a view to legislating in a future finance bill.
VAT Avoidance Disclosure Regulations (VADR): The government will consult on proposals to improve the VAT Avoidance Disclosure Regulations (VADR) regime, including placing the obligation to disclose primarily on the scheme promoter. Legislation will be in a future finance bill.
Direct recovery of debts: Another contentious area: Legislation will be introduced to allow HMRC to recover tax and tax credit debts of £1,000 or more directly from taxpayer accounts, subject to rigorous safeguards. The government will also consult on the draft primary and secondary legislation and on the implementation of the measure, including safeguards to prevent hardship. Legislation will be in Finance Bill 2015.
Want more information?
Further information on various measures announced by the Chancellor can be found at:
The Bizezia Online Business Library now includes the 2014 Budget Summary as a PDF. You can view it online here.
There has been a 500% increase in Chinese inward property investment to the UK in the past three years alone. Many Chinese property investors have been coming to London because they see it as the centre of Europe. Others already hold US properties and want to diversify their investment portfolio. In UK prime locations, the land in itself is so valuable that it is a safe investment in turbulent times. Coupling that with the pound sterling staying low, has made London properties fantastic value for foreign currency buyers.
In fact, the UK is the number one destination for Chinese investment in Europe, attracting nearly £2 billion in the last year alone and more than 600 Chinese businesses who now have a presence in the UK. 85% of China’s wealthy want to educate their children overseas and what’s better than a top UK university for them?
According to the Chinese language property portal juwai.com, 63 million Chinese people have sufficient wealth and income to purchase international property. And 90 million Chinese search for property online every month. Along with other Chinese language property portals such as soufun.com, juwai.com is saturated with prime property listings in first tier UK cities and in other Eurozone locations. But there’s just one small problem: Less than 1% of mainland Chinese can read English.
Let me give you the number again: there are 63 million people in China who are financially able to buy property here in the UK, and there’s a good chance many of them will do so. It’s interesting to note that 70% of them pay in cash.
63 million Chinese (with their proverbial suitcases full of investment money) is about equal to the UK’s current population.
Does your firm’s strategy include addressing this growing
new market of Chinese investors in the UK?
It’s Utopia… Just think of all the tax returns required for those Chinese investors who let their UK property whilst they continue on their investment travels around the world. It sounds like a lot of business for accountants. Lawyers had better pay attention too – lots of large property legal work required, plus some IHT planning too.
Britain is in debt to a new generation of foreign entrepreneurs
This week, there was a report in the press that Britain is in debt to a new generation of foreign entrepreneurs, see here. Contrary to what many people think, immigrants are good for jobs. The truth is that foreign entrepreneurs are actually responsible for a great number of British jobs. Without these migrants, there would actually be fewer opportunities for locals and far fewer start-ups – that is the remarkable conclusion from a report today from the Centre for Entrepreneurs and DueDil.
Entitled ‘Migrant entrepreneurs: Building our businesses, creating our jobs’, the Centre for Entrepreneurs think tank and financial technology company, DueDil, have sought to explore a neglected aspect of the immigration debate: the contribution of migrant entrepreneurs to the UK economy.
The figures in the report – sourced from Companies House – are striking:
- 456,073 foreign entrepreneurs now live in the UK, defined as founders or co-founders – first directors – of active UK companies, excluding company secretaries and sole traders.
- There are 464,527 active UK firms with foreign nationals as founders or co-founders.
- Around 2.64m foreign nationals currently work in the UK; this suggests that 17.2 per cent of them have launched their own business, compared to 10.4 per cent of UK nationals in employment.
- It gets better: with a total of 3,194,981 active UK companies, migrant entrepreneurs are therefore behind 14.5 per cent of the total, or 1 in 7 of all UK companies.
- Entrepreneurial activity amongst the migrant community was found to be nearly double that of UK-born individuals, with 17.2 per cent having launched their own businesses, compared to 10.4 per cent of those born here. They are also, on average, eight years younger than indigenous entrepreneurs at 44.3 years-old compared to 52.1.
These astonishing numbers confirm that migrants create vast numbers of jobs for themselves and for other UK residents. It is especially pronounced for companies with a turnover that ranges between £1m and £200m per year: among this vital SME segment, migrant-founded companies are responsible for creating 14 per cent of all jobs, employing 1.16m people. And all this is despite the extra challenges they face including access to finance and cultural and language barriers.
London benefits mostly from all this, with 220,637 businesses run by foreign nationals, more than 21 times that in Birmingham, the second most popular location with 19,000. Once again, migrants are a strength, not a weakness; they help to explain why London is doing so well in terms of productivity, GDP growth, wages and employment growth.
No fewer than 155 nationalities are represented among migrant entrepreneurs in the UK; the most numerous are Irish citizens, followed by Indians, Germans, Americans, Chinese, Polish, French, Italians, Pakistanis and Nigerians. In the case of the French, where many of the entrepreneurs who have moved here are tax exiles or individuals who are sick and tired of the political climate in their home country, these are often businesses that would otherwise have been set up abroad.
- Migrant entrepreneurs are behind the creation of one in seven UK companies.
- They are twice as entrepreneurial as British-born working age population.
- On average, they are younger than British entrepreneurs: the average age of a foreign entrepreneur is 44.3, against 52.1 for British entrepreneurs.
- Irish, Indian, German, American and Chinese are the top performing nationalities
The Centre for Entrepreneurs also commissioned the Centre for Research on Ethnic Minority Entrepreneurship (CREME) at the University of Birmingham to investigate the social contribution made by migrant entrepreneurs. Their research found new migrant businesses provide buffers against unemployment and economic exclusion. They also act as vehicles for social integration, and for enabling ambitious workers to develop entrepreneurial skills and experience.
Malcolm Gladwell whose terrific book Outliers I have just read, would be interested in much of this. He made the point about how the sons of Eastern-European immigrants to the USA succeeded as lawyers not in spite of their parents difficulties but because of those difficulties: exactly the same as the immigrants coming to the UK, as CREME found in their study.
So, my message to accountants and lawyers is this: don’t sit there, do something about your strategy, now!
Action Plan: What should you do to take advantage of the Chinese opportunity?
Here are my top tips on your action plan to take advantage of these opportunities. There are many more, I’m sure but these will help you to get started:
1) The first thing you may care to consider is to learn the rudiments of the Mandarin Chinese language. There are plenty of language schools about. The time you spend will probably qualify for CPE / CPD and there are probably many online resources such as the BBC, Rosettastone and Michel Thomas. As only about 1% of the Chinese with access to the internet in China can actually speak English, it’s a good idea to get part of your website written in Mandarin Chinese. Maybe your engagement letters should be written in Mandarin Chinese too.
2) The sociological concept of losing or gaining face is a fundamental characteristic of Chinese society and culture (read a blog post on the Bizezia Blog by specialist employment lawyer Sofie Persson of Engleharts here to learn more). It’s a word-of-mouth thing, if you can get a foothold anywhere, work on it and the word will get round like wildfire that your firm can be trusted and that you know how to deal with Chinese business owners and investors.
3) The Chinese regard themselves as experts in negotiations and often they have an advantage in their business dealings outside of China. Some organisations can provide Chinese negotiation skills training, for example Prospect Chinese Services. Prospect also provide courses in Mandarin language and training in Chinese cultural awareness. Details are here. There are some further useful tips on etiquette here and here
4) Understand the requirements for monies to be transferred from China to the UK and for bank accounts to be opened in the UK. HSBC have some useful information here.
5) Many Chinese entrepreneurs apply a light footprint approach to management, which involves subordinating strategy to vision and to tactics. You need to understand this and to be able to deliver advice on it. There’s information available here and here.
6) You need to understand how the Chinese think and act in business: Though many people might emphasise the collectivist nature of Chinese society, visitors to China often remark how individualist they find behaviour to be. This is because Chinese society is collectivist in that individuals identify with an “in-group” consisting of family, clan, and friends. Within this, cooperation is the norm. Outside of it, zero-sum competition (a competition where one side wins by taking customers away from the other side) is common. Read more on this here.
7) Neil Edwards, the MD at leading marketing company The Marketing Eye has some excellent marketing advice for accountants and lawyers:
(a) Get your marketing messages in the right order. Quality, experience and reliability are the most important while local presence is the least important. Prepare case studies and client lists, naturally referencing other business dealings in China where possible
(b) Conferences & Exhibitions are highly regarded in China as a way of making initial contact with potential suppliers. Attendance at exhibitions, conferences and similar events can be essential for any practice looking to achieve substantial or sustained success in dealing with the Chinese. Dedicate time to researching the events that you should attend.
(c) Adapt some of your brochures into Mandarin – as with websites, successful communication can depend on appearing both ‘Western’ (usually synonymous with good quality) and ‘Chinese’ (knowledgeable about China, and willing to adapt to Chinese requirements).
(d) A note on Social media – 92% of Chinese citizens use some form of social media. The problem is, most of the platforms used in the West are blocked by the Chinese Government, which makes social media in China difficult and expensive for Western businesses to exploit. LinkedIn is said to have a large take up of English speaking Chinese so that could be worth exploring.
Accounting Bites report that accountants should get busier over the next 35 years: the UK will need to experience a surge in the recruitment of accountants if future demand is to be met, new research from Randstad Financial & Professional has revealed. The research shows that the UK accountancy sector is actually declining in number – recording only 76,000 accountants in 2013 compared to the 94,000 in 2008. But Ranstad say that 156,000 qualified accountants will be needed by 2050. Their report says that if the demand in finance skills is not met, the sector will find it difficult to flourish in the future economy.
Managing Partners across the UK should be tabling this at the next Partners’ meeting asking: what should our firm be doing about this?
Publications to help Chinese Entrepreneurs
There are over 650 publications on the Bizezia e-Library. We’re looking to having some translated into Mandarin Chinese for our subscribers. If you’re interested, contact me (see my contact details below).
And finally, I’m giving away copies of a publication I wrote some time ago. If you’re interested in how business is done in China, you’ll want this publication: Doing Business In China. To get it, simply email me at firstname.lastname@example.org or call me on 01444 884221. It’s free to the first 150 respondents, £125 + VAT afterwards.
Reeling Eurozone economies and recovering giants are all banking on China’s next move. In the wake of George Osborne’s visit to Beijing last year, a Treasury press release noted that Chinese students make up the largest group of foreign nationals in UK schools and universities. The UK is also the number one destination for Chinese investment in Europe, attracting nearly £2 billion in the last year alone and more than 600 Chinese businesses who now have a presence in the UK.
According to the Chinese language property portal juwai.com, 63 million Chinese people have sufficient wealth and income to purchase international property. Along with other Chinese language property portals such as soufun.com, juwai.com is saturated with prime property listings in first tier UK cities and in other Eurozone locations. According to the international property portal, Propertywire.com , improved trade relations between the UK and China along with an increasing number of Chinese children being educated in top schools here are among the key factors driving Chinese investment in prime central London property.
The company behind Soufun.com organises overseas purchasing tours for Chinese seeking to buy properties and a chance to live in the EU. Juwai.com also hosts extensive information on whether buying a house will lead to permanent residence in the respective jurisdictions. Conversely, the English language version of the same site is cleverly marketed to overseas property agents eager to break into the Chinese market. Is this a win: win situation for everyone?
Martin Chavez is a real estate professional who has lived and worked in Beijing for over 8 years. We were colleagues in Beijing and I called him up as I was very keen to hear his thoughts on this matter.
To my surprise, Martin’s first thought was: “Sofie, this topic isn’t very fresh.”
Unbeknown to many people in the UK, outbound property investment has already been talked about in China for two or three years.
Martin said: “I first came to China in 2005 and have since noted that things change at a faster pace, especially economical change which, unavoidably in first instance, affects the lighter areas of society, such as fashion, pop art and overseas travel. Every 3 years, there seems to be a change in the population’s taste and buying patterns.”
The growth in outbound property investment
According to Martin, this change has been gradual and largely driven by foreign travel becoming more and more widespread. Most urban Chinese with decent salaries have now had holidays abroad in for instance Europe, the United States, South East Asia and even in exotic destinations such as the Maldives, United Arab Emirates and South America. Despite controls, travel to Japan and Taiwan is also on the rise. As Chinese people become well-travelled they also become increasingly influenced by global trends (this was definitely not the case when I left China in 2008). Similarly, Chinese private investment tastes have changed in recent years.
“The bubble has already burst on the numerous touzi gong si (or investment companies) that popped up all over town. They would rent a top floor in the best buildings in Beijing or Shanghai. Within a year they would already be gone. People are now are now looking for more stable investments overseas and I have made quite few outbound investment referrals to the US and Europe. Chinese investors could easily get higher yields in Chinese second and even third tier cities, such as Ningbo or Wuhan, than they could ever dream of in the US or in Europe. So the outbound property investments are not driven by rate of return alone.” Martin said.
Without state-backed pensions, health care or education, the Chinese save almost half their income as a hedge against personal misfortune. Risk averse investing is then the preferred method of capital growth. They also feel that security overseas is higher and is not turning a blind eye to lingering corruption, political and financial instability in mainland China. If anything would happen in the mainland, money could diminish or even evaporate and many wealthy Chinese worry about how to get their money out of China if China ever returns to times of political turmoil.
Economic crimes, such as bribery and embezzlement, and crimes against national symbols and treasures, i.e. theft of cultural relics, are all capital offences in China. Investing overseas is a good way to not lose your head. Corrupt government officials and other crooks aside, changing lifestyle choices, emigration and education are commonly cited as the main driving forces behind the increase in Chinese investment in foreign property. Perhaps they are planning to send their sons or daughters to be educated abroad. 85% of China’s wealthy now want to educate their children abroad and over 60% of China’s wealthy are engaged in overseas investment or immigration.
“Not to mention gaining mianzi (or face), the mere fact that you can boast to your friends about owning prime real estate in London or the US something that is highly sought after” says Martin.
The sociological concept of losing or gaining face is a fundamental characteristic of Chinese society and culture. It is an abstract concept which can best be described as a combination of social standing, reputation, influence, dignity and honour. In Chinese culture, you can liu mianzi (or grant face) which means that you give someone a chance to regain lost honour. You can also shi mian zi (or lose face) or zheng mianzi (or fight for face) which is similar to the western concept of “keeping up with the Joneses”. You can also gei mianzi (or give face) that is, show respect for someone’s feelings. Causing someone to “lose face” means that they have been lowered in the eyes of their surroundings. Conversely, “gaining face” raises their self-worth. When I first arrived in China I was oblivious to these subtle (and sometimes not so subtle) codes of conduct. Over time I began to understand and appreciate how the concept of face dictates social interactions. It naturally follows that this concept would also greatly influence the Chinese’s investment patterns.
London is seen as the Centre of Europe
Top that off with top to toe brand wear, a kid in a private high school overseas and a golden visa to boot and you are at the very least keeping up with the Wang’s. It is clearly not the UK’s financial (or meteorological) climate that has led to a 500% increase in Chinese inward property investors to the UK in the past three years. Many Chinese property investors have been coming to London because they see it as the centre of Europe. Others already hold US properties and want to diversify their investment portfolio. In UK prime locations, the land in itself is so valuable that it is a safe investment in turbulent times. Coupling that with the pound staying low which in turn has made London properties fantastic value for foreign currency buyers. Overseas property investments not only ensure a (relatively) good nights’ sleep but also adds a great deal of mianzi (or face).
Fast Track Permits
Greece and Cyprus currently offer fast-track permit processes for purchases of at last 250,000 euros and 300,000 euros respectively. Portugal’s programme has a minimum of 500,000 euros. This is significantly less than the UK, which requires an investment of at least £1 million for Tier 1 (Investor) visas.
Governments in Cyprus, Greece, Portugal and Spain are courting wealthy Chinese homebuyers. Depressed housing prices and a chance to obtain a golden visa is being sold to Chinese investors. In Portugal, half a million euros will give a Chinese investor a good return on their investment as well as enjoying EU benefits they don’t have in China. For instance, the visa will allow for their children being educated in Europe.
Some visas also allow buyers to live and travel freely within Europe’s borderless Schengen Area. As with the UK, the Euro has steadily decreased since 2010, making it more affordable for foreign buyers.
Cashing in on EU Passports
Malta has recently been at loggerheads with Brussels as they offer a full EU passport to investors. Malta has decided to sell passports (and European Citizenship) for 650,000 euros to non-EU residents. This is without any prerequisite whatsoever, not even residence in Malta. Unsurprisingly this has angered MEPs who debated the issue on Wednesday on 15th January 2014.
Regardless of what their motivations or ulterior motives are, Chinese property investors will continue to flock to Europe. So far it appears to be focused on London and other first tier cities. Chinese buyers have tended to focus on the prime residential areas, such as Kensington and Chelsea and along the River Thames, in upper price bands and in new build high-rise flats, rather more than on the resale markets. However, this is likely to change over time as the first tier markets become more saturated and Chinese investors become more familiar with second tier cities. I have lived in Brighton for two years and it is incredible how often I overhear conversations in Mandarin when I am out and about.
We should definitely watch this space.
It’s a simple enough question: what are retail bonds and mini-bonds? But, the answer is complicated.
The London Stock Exchange was kind enough to provide the text for the explanation. But before I go into those details, here are some important statistics and facts:
- Launched in February 2010, £4 billion has been raised on ORB (Orderbook for Retail Bonds) through 41 dedicated retail bonds (further details available via the LSE website, here. Take a look at the list of companies that have raised money and you’ll recognise many of them, water companies, BT, Barclays, HSBC and
- even the London Stock Exchange itself.
- It’s a popular route for companies seeking alternative sources of funding.
- ORB offers retail investors easy and transparent access to an attractive asset class
- Currently, there are 170 bonds available for trading on ORB from an increasingly diversified range of companies (full list available via the LSE website, here.
- The majority of bonds are available in denominations of around £1,000, although many are tradable in denominations of £100 and some in denominations as low as £1.
- All these bonds are exempt from stamp duty.
Listed retail bonds are quoted on London Stock Exchange’s Order book for Retail Bonds (ORB) market. They require a full prospectus and issuers are required to publish detailed financial statements using IFRS standards; this means that investors are protected by the highest standards of transparency and regulatory disclosure.
These bonds are tradable in the secondary market, meaning that investors are not locked in to their investment and have the possibility of realising capital gains if the value of the bond increases prior to maturity.
Investors can buy and sell listed retail bonds at any time throughout the life of the bonds.
As London Stock Exchange offers transparent, continuous two-way pricing throughout the trading day with committed market makers quoting prices for ORB bonds, it means that investors can therefore easily monitor the value of their listed retail bond holdings.
Listed retail bonds that at the time of buying have at least 5 years of outstanding maturity, are eligible to be held in ISAs and SIPPs and can therefore be tax efficient.
These are often (and confusingly) referred to as retail bonds, but are most commonly known as mini-bonds or loyalty bonds. They are financial promotions offered by companies directly to investors. They are not part of the wider corporate bond market and therefore mini-bond coupon rates do not benefit from the pricing competition offered by listed bonds issued through the public markets.
Issuing this type of bond does not require a prospectus and issuing companies are not required to publish financial statements. Instead, mini-bonds are offered with a brief summary marketing brochure only and are not subject to any continuing financial disclosure obligations such as those required for listed retail bonds.
Mini-bonds are non-tradable which means investors are locked in until maturity and cannot benefit from any trading opportunities or liquidate their holdings in the secondary market
Unlike listed retail bonds, mini-bonds are not eligible for inclusion in ISAs or SIPPs
The Telegraph, here, provided perhaps a simpler explanation about these bonds saying that investors wanting a steady income plus a good chance of avoiding capital losses have had a new option in recent years: the “retail bond”. Most of the £4bn raised in the last four years has come from individual savers, thanks in the main to the interest rates the bonds pay – this is much higher than is paid by a bank or building society. Some bonds pay as much as 7% a year.
The Telegraph article adds: “The success of retail bonds has spawned another, similar investment, the “mini-bond”, which in some cases can pay even higher rates of interest, before promising to return your original investment in full.”
The small print
The article represents my views and understanding of the asset class described and does not constitute investment or financial advice. The contents of this article is intended for general information purposes only. I do not give investment or financial advice. Please note it is important that investors choose investments based on their own investment objectives and attitude to risk and at all times, they should seek advice from a suitably qualified adviser.
I acknowledge the assistance provided by Lucie Holloway, Senior Press Officer, London Stock Exchange Group, Telephone +44 (0)20 7797 1222
Mobile +44 (0)7837 225 859, Email: email@example.com, Address: 10 Paternoster Square, London, EC4M 7LS, Web: www.lseg.com
Wherever I look, there’s a news story about the latest rises in house prices, the mortgage offers that are about and the caution that some people say should be exercised to avoid another crash. Today’s review is no different.
One in three landlords looking to buy more property
On Monday, in Mortgage Finance Gazette, here: A third of landlords are looking to expand their rental portfolios in the next 12 months, according to the latest BM Solutions/ BDRC Continental Landlord Panel. Go back 2 years and at the end of 2011, 52 per cent of landlords were reporting an increase in tenant demand, but that had gone down to 35 per cent in Q4 2013. The intent by landlords to add to the number of properties they let comes despite tenant demand being at the lowest level for three years. However, a much greater proportion are reporting ‘no change’ in demand, with stability further reinforced in the market’s profitability profile. Four out of five (80 per cent) landlords continue to make a profitable full time living from letting, with 76 per cent of amateur landlords able to supplement their ‘day job earnings’ with the portfolios providing a return beyond the breaking even.
London boroughs are home to families that never fly the nest
Last Friday, in CITY A.M., here: As the supply of housing fails to keep up with demand, an increasing number of London families are finding themselves sharing homes, often with an older generation of relatives. According to figures from the 2011 census released by the Office for National Statistics (ONS) last week, the number of such “concealed families” has risen by 70 per cent in the 10 years from 2001’s national survey. Concealed families are typically arrangements like single parents living with their children in their own mother or father’s parental home. However, the number of couples with children living in the home of the child’s grandparents are increasingly common. In 2001, there were 170,000 family groups in such circumstances across the UK, but there are now 289,000.
London is hit particularly hard by the effect: six of the seven local authorities in which over five per cent of families are concealed are in the capital, with the highest incidences in the poorer boroughs of east and west London. Newham tops the list, with 7.5 per cent of families in these shared homes.
Property boom pushes house prices far ahead of incomes
Last Friday, in CITY A.M., here: UK incomes are failing to keep up with rising prices in the housing market, pushing properties to their most expensive level against earnings since 2008. According to Halifax’s house price index, the price to earnings ratio climbed to 4.74 in January, rising from 4.44 in the same month last year. The ratio is currently at its widest level since the market collapse in 2008.
Halifax say that prices were 7.3 per cent higher in the three months to January than they were in the same period last year, rising 1.9 per cent from the previous quarter alone. The bank noted a “lack of supply coming on to the market” as one of the major factors keeping prices rising.
MPs want exit strategy for Help to Buy 2
On Monday, in Mortgage Finance Gazette, here: Eight out of 10 MPs across the political spectrum want the government to set out an exit strategy for the Help to Buy mortgage guarantee scheme. This is according to a survey commissioned by Genworth, the mortgage insurance provider, and conducted by YouGov. The survey found that over half of MPs (51 per cent, rising to two-thirds of all Conservative MPs) support the involvement of private sector insurance to facilitate an orderly exit as an alternative to the government and taxpayer continuing to take on the risk. The Help to Buy scheme is due to end in 2017 but 52 per cent of MPs thought there was a risk that the scheme would become permanent.
Wages left far behind as house prices rocket
Yesterday, in CITY A.M., here: The average salary in England would have grown by £29,000 in the past decade and a half if wages had kept up with house price inflation, according to shocking new figures. Research by housing charity Shelter shows that average earnings would have been over £55,000, rather than just below £26,000, if pay had risen at the same rate as house price growth between 1997 and 2012. In some parts of the country pay would have needed to more than triple to keep up with rampant house price inflation: in Westminster, typical earnings would have risen to £146,569, rather than £41,194. Earnings would need to have grown by more than £50,000 in the period in 17 local areas, 16 of which are in London.
As you would expect, the gap is narrowest where demand for housing is low – in Burnley, pay would have had to rise by only £10,000 to keep up with much more modest increases in house prices.
Watch out for fake landlords
On Monday, in This is Money, here: Fake landlords are rapidly becoming the new scourge of the property market, with con artists fleecing hopeful tenants out of huge sums in a range of scams. In some cases, victims hand over deposit money or pay rent up front then find their ‘landlord’ didn’t own the property and has disappeared. In other ploys, tenants fall prey to identity theft after handing over passports and other personal and financial details as part of a ‘reference check’.
The article says that using an established lettings agency – ideally a member of a trade body such as the Association of Residential Lettings Agents, the National Approved Letting Scheme or the Property Ombudsman – is a good first step. But it will still pay to take other steps to avoid falling into one of the new tenancy traps.
Labour Party publishes petition on ‘Tory Housing Crisis’
On Monday, on propertytalklive.co.uk, here: The Labour Party has launched a petition on the ‘Tory Housing Crisis’ in London, forming part of a wider campaign on affordable housing in the capital ahead of the local elections in May. The petition states that the Conservatives a “housing crisis in London” and that Mayor Boris Johnson has failed to meet his own targets for building new affordable homes.
Launching the petition, Shadow London Minister Sadiq Khan MP said that Labour would work to tackle housing issues in the capital in both Westminster and local councils, by building more homes and tackling rogue landlords.
A colleague once said that the problem with insurance is that you are fully covered until you make a claim. He was, I am sure, being sarcastic. It couldn’t be true, could it?
This week, I have been thinking about insurance and the floods. This is not at all surprising as the inexorable onset of water fills the airwaves and TV screens almost all the time. Prince Charles’ visit to Somerset last week seems to have taken public interest in the floodwater affair to a new level. And rightly so. So this week, things are being done. The military are filling and placing the sandbags.
Was King Canute right after all, about commanding the water to retreat? Sadly, not so apparently – see the Canute story here.
Flood Insurance Statement of Principles
People with properties at risk of flooding have been able to buy affordable home insurance since 2000, thanks to an agreement called the Flood Insurance Statement of Principles. This is an agreement between insurers and the government that states insurance companies will continue to offer cover to homes and businesses at significant risk of flooding, on the condition that the government invests in flood protection measures that reduce the risk to those homes. Although that sounds a bit too wooly for my liking, I suppose we must take it at face value.
The new kid on the block: Flood Re scheme
The above agreement expired on 31 July 2013. The Association of British Insurers (ABI) has pioneered a new scheme to safeguard the availability and affordability of flood insurance for those at high risk, called Flood Re. This not-for-profit scheme has been built to ensure flood insurance remains widely affordable and available. Flood Re is designed to fully deal with at least 99.5% of years. Even in the worst 0.5% of years, it will cover losses up to those expected in a one in 200 year – a year that is six times worse than 2007 – with Government taking primary responsibility – working with the industry and Flood Re – for distributing any available resources to Flood Re policyholders should claims exceed that level.
You can read more about this here.
The Government-backed scheme to provide insurance for flood-risk properties will exclude the most expensive homes, reported the Telegraph yesterday, which says that even though the people that are excluded will have to pay a levy for it. Under the proposals, which are due to come into force in 2015, properties in council tax Band H won’t be eligible for the cheaper cover because they are deemed able to pay for insurance themselves. Properties built since 2009 will also be ineligible to discourage the development of properties on flood plains.
Insurers said thousands of homes in the Thames Valley and Somerset Levels, the areas worst hit by current flooding, could be affected by the loophole.
What I don’t understand yet is this: if the old scheme expired last year and the new scheme doesn’t start until next year, what happens to claims in the intervening period?
How much is it all going to cost?
The Guardian said this week that UK flood clean-up costs could hit £1bn, according to an insurance expert (I think it was Deloitte). The paper says that as rain continues to fall, more flooding is inevitable, and insurers may consider putting up premiums to cover the rise in payouts.
Look at the heading to this story again… It is one thing getting insurance and paying the annual premium but it’s another thing asking the insurance company to pay up when you make a claim. Even the Prime Minister and the leader of the Opposition have spotted this weakness in the promises being made at present. Ed Miliband has urged the Government to put pressure on insurance companies so that victims of the floods do not have to wait for payouts. The Labour leader reminded us all that Ministers had to act to ensure there was no repeat of the “foot-dragging” that firms engaged in after the riots in 2011, albeit dealing with fire and other physical damage rather than by flooding.
The Independent reported yesterday on what the Prime Minister is doing in response to the flood disaster. The paper reported that people whose houses have been flooded but do not have insurance should be given money from council “hardship funds”, the Prime Minister has said. He also warned insurance companies that they needed to “pay up the money fast” and urged people to contact their MPs if the cash was not received promptly. He spoke as the insurance industry said the cost of the recent floods could top £1.5bn (rather more than the £1bn estimated in the Guardian) and end up adding around £15 to average annual household cover. Mr Cameron said that “every local authority affected needs to have a hardship fund”. “If there is a need to top up those hardship funds then they can come to us and we can have a look at that,” he said. “Generally speaking, hardship funds have worked well for uninsured houses.”
The Water Bill
Bizarrely, the Water Bill is on the Table at the House of Lords at this very moment as I write this story. The Water Bill proposes to introduce greater competition in the water sector by allowing non-household customers to switch their water and sewerage supplier (retail competition) and by allowing new entrants to the water market to provide new sources of water or sewerage treatment services (upstream competition). If you’re keen on knowing what the Lords are up to, visit the Parliament website, here, for an (almost) running (water) commentary.
For more information and to find out what this means for you, click here.
Yesterday, vowing that ‘money is no object’ in the flood relief effort, the Prime Minister has promised new help to homeowners, businesses and farmers ‘to piece their lives back together again’. The Mail reported that Royal Bank of Scotland became the first lender to offer a three-month mortgage ‘holiday’ to homeowners facing huge repair bills after being flooded, see here.
There’s a good article in The Independent today, here. It concludes saying:
- Flood Re only deals with an existing problem – how to ensure that those at risk of flooding now can get affordable cover. The future presents another problem. There is a crying economic and demographic need for new homes to be built. Attempts have already been made to relax planning rules that prevent this. What happens if they get built on flood plains in the future? Or places that might become at risk of floods (remember it’s not just climate scientists warning that this problem is getting worse).
- Flood Re, now advertising for a CEO, isn’t supposed to cover new builds.
- Prospective new-build owners had better check flood maps (assuming they can find them) because they’re on their own.
Updated 17 February 2014: Reported here, The Government has announced a £10m funding package for small businesses affected by the floods. ,. A new hardship fund will be available to businesses in flooded areas that have been damaged by water or suffered loss of trade. Funded by the Department for Business Innovation & Skills, ministers expect to pay around £2,500 per business: Enough to help 4,000 businesses.
Alongside additional funding there will be extra time to file company accounts with Companies House, as well as a hotline for business support and offers of free office space for those who are unable to work in their own premises.
I was interested to see two articles that referred to privatisation plans of the Coalition government.
Plans to extend Land Registry’s remit in the run-up to possible privatisation could face a court challenge from an organisation representing private search agents. The Association of Independent Personal Search Agents (IPSA) said last week that it had begun judicial review proceedings to challenge proposals that the Registry take over local land charges services from local authorities.
In the consultation Ed Lester, chief land registrar, says the move ‘would mean that Land Registry would be better placed to serve the changing needs of our customers’. The consultation coincided with a government proposal that the bulk of Land Registry be turned into a ‘service delivery company’.
Steve Davies, chief executive of IPSA, said that the land charges consultation had set a deadline of eight weeks rather than the government’s guideline minimum of 12. He said that the rush suggested an intention to ‘fatten up’ the registry before a sale. The Law Society has set up a group to study both consultations. ‘We are taking informal soundings from members of the profession to formulate our response,’ said Jonathan Smithers, chair of the Society’s conveyancing and land law committee.
Read the Law Society Gazette article here.
Our pensions could be privatised
Over the weekend, a story emerged saying that the government is considering saving money by privatising the delivery of the state pension (that is according to Whitehall documents seen by the Guardian newspaper). The paper said that, in an effort to make up billions more in austerity savings, the Department for Work and Pensions (DWP) has initiated a review of how it issues 4.5m pension statements each year and the administration of £100bn in public money to millions of pensioners in the UK and worldwide.
The review, entitled DWP Efficiency Review, runs to more than 80 pages and is marked “restricted”. It also considers how to make cost savings in the way the department handles 750,000 phone calls and the distribution of £98bn in benefits and tax credits. Whitehall’s biggest department is facing an “unprecedented reform challenge”, says the document, which was distributed to senior civil servants in January.
By 2016, work and pensions secretary Iain Duncan Smith will have his operational budget slashed by 34% to £6.3bn from £9bn in 2009-10. Almost £2bn savings will need to be made in the next two financial years.
The Guardian story is here.
It doesn’t sound like privatisation me… more like outsourcing.
A waste of money – £4,560 per family
The Taxpayer’s Alliance (TPA) has accused the government of squandering £120.4bn in one year as the pressure group mounts a “war on waste”. In its new Bumper Book of Government Waste, the TPA says £1 in every £6 of government spending was wasted in the 2012-13 year – the equivalent of £4,560 per family. The TPA, which campaigns to reform taxes and cut spending, has itemised wastage ranging from £22.5bn overpayments on public sector pay and pensions compared to the private sector and £20.6bn for public sector fraud to £33,333 spent on pot plants by the Welsh government and £2,340 for six pictures of herbs for Heart of England NHS Trust.
It also singled out £8.9m for “the impact of Britain’s broken planning system on increasing the Housing Benefit bill” and £2.7bn for “the cost of contributory benefits for those who don’t need them, excluding the state pension”.
Is there a privatisation solution here? There must be, surely.
Read the story here.
If anything needs to be privatised, maybe it should be English cricket, and whilst we’re at it, perhaps the idea of outsourcing Government itself to the private sector could save a few billion, or could it?
I blogged previously about the Icelandic banking crash. You will recall that many local authorities across Britain were lured into placing huge sums of money (more than £1 billion in total) on deposit and were stunned when the crash happened. Originally, they thought all their money had been lost but some good news at last: Most councils that invested in the failed Icelandic bank Landsbanki have now recouped the majority of the money they are due after selling their claims, the Local Government Association (LGA) has said.
The article from Public Finance says that authorities’ claims to deposits were sold at an auction as part of the winding-up proceedings for the Icelandic bank Landsbanki, now known as LBI. As a result, town halls will, on average, recover more than 95% of the money they originally deposited, the LGA said. Councils had £414m deposited with LBI at the time of the crash. Prior to the auction, around £225m had been recovered, while the auction will realise more than £140m.
The Public Finance article explains the reasons why councils sold their entitlements at an auction. But what I can’t understand is why anyone would pay good money for something that is uncertain. The reasons for selling the claims are given as removing councils from:
(a) the process of the administration of the insolvent estate of Landsbanki, which was likely to continue for a number of years.
(b) the risk of future currency fluctuations involved in claims, which is measured in Icelandic Krona.
As well as Landsbanki, Glitnir, Heritable and Kaupthing Singer & Friedlander banks collapsed.
The full story is here.
Oh dear, another transgression by bankers: allegations of foreign exchange rate-fixing at major banks are “every bit as bad” as the Libor scandal, the boss of the UK’s financial regulator has said. Martin Wheatley, the head of the Financial Conduct Authority (FCA), told the Treasury Select Committee that 10 banks were now helping with its investigation. Traders are alleged to have colluded in setting certain key exchange rates in the £3bn-a-day forex market.
The Libor interest rate scandal led to banks paying $6bn in fines. Traders were found to have used online chat rooms to collude in setting the Libor rate – used to set the cost of borrowing between banks.
Other regulators around the world are also investigating possible manipulation of foreign exchange rates, but London’s position at the centre of the market makes the FCA’s investigation particularly significant.
Several banks, including RBS and Barclays in the UK, have launched their own internal investigations and already suspended foreign exchange traders.
Mr Wheatley said “the surprise for all of us” was that the allegations about fixing forex trades and the suggestion of collusion among traders have become so strong.
However, he told the committee that it was unlikely that the FCA’s investigation would reach any conclusions this year. “I hope that we will next year… We are still in the investigation phase.”
You can read about this in almost every paper. I read it here.
No end for PPI claims as cut-off date is ruled out
CITY A.M. report that cutting short the PPI scandal by imposing a deadline on compensation claims would hurt victims of the crisis, Martin Wheatley said yesterday. Banks are still unveiling higher and higher estimates of the final cost of the redress payments as the flow of claims from customers shows no sign of ending.
But the chief of the Financial Conduct Authority does not want to forcibly end those claims with a cut-off date. The regulator also clashed with MPs over sales incentives for junior staff.
MPs want all staff who could damage a bank’s reputation to be covered by a new certification regime controlling their pay and incentives – including junior, front office sales staff. Wheatley argued that such staff – for instance those at Lloyds, a bank which was fined for creating incentives to mis-sell from 2010 to 2012 – are following incentives laid out by their managers and do not always know they are doing wrong.
But MP Mark Garnier said this amounts to an “only obeying orders” excuse, calling it a “post-modern Nuremberg defence.”
Yesterday, I wrote about how Iceland has coped, even prospered, after the crash of their banking system (here).
I blogged that when the financial crisis hit America, instead of a wholesale dismissal of those who most directly caused it, the banks simply allowed their trouble-making workers to play a game of musical chairs. When the music stopped, the same people who had led to the mess were still sitting. But in Iceland, blame for the crisis fell almost entirely on the country’s financiers and almost all the top executives were fired and many are now facing criminal prosecution. In Iceland, they treat financial crimes like crimes. After it was shown that the biggest bank in Iceland was lending people money to “invest” in the bank (therefore boosting consumer confidence in the bank, also known as fraud), Iceland threw the book at the executives who committed the crime:
- Hreidar Mar Sigurdsson, the former chief executive, received five and a half years, while Sigurdur Einarsson, former chairman of the board, was sentenced to five years in jail. These are the heaviest sentences for financial fraud in Iceland’s history.
- The court gave Olafur Olafsson, one of the majority owners, three years and Magnus Gudmundsson the former chief executive of the Luxembourg branch, three and a half years.
Three Anglo Irish executives blamed for Irish banking crisis go on trial
Yesterday, we learned that the trial of senior executives at the bank that almost bankrupted Ireland has begun with tight security around the Dublin courthouse where the men being blamed for the Irish banking crisis are to be tried. The Guardian reports that “it will be one of the most complex and controversial trials in the history of European financial crime, with hundreds of witnesses, millions of documents and a trio regarded as national hate figures in Ireland”.
Three leading figures in the now defunct and disgraced Anglo Irish Bank – Sean FitzPatrick, Pat Whelan and William McAteer – will each face 16 charges of unlawfully providing financial assistance to individuals for the purpose of buying shares in Anglo Irish Bank in 2008. All of the charges relate to a specific person who allegedly received financial assistance between 10 July and 17 July 2008. The trio of former top bankers deny all the charges against them.
Among the star witnesses expected to give evidence will be Ireland’s one-time richest man, Sean Quinn, who borrowed billions from the bank to fund a global property portfolio during the Celtic Tiger boom years. When property prices collapsed across the world, Quinn owed billions and had to file for bankruptcy.
Around €30bn of taxpayers’ money had to be pumped into the bank in 2008 to rescue it and the entire Irish banking system from total collapse. The bank has since been nationalised and renamed as the Irish Banking Resolution Corporation.
Read the Guardian story, here.
Libor offenders – penalties and civil action to ensue
Against the above background I was interested to see the FCA has publishes Libor warnings to two bankers. The notices refer to the rigging of the Libor interbank lending rate and although handed out in November are the first made public by the regulator since the FCA gained the authority in October. In addition, the FCA is pursuing alleged Libor offenders through civil action. The case will now go to the FCA’s regulatory decisions committee (RDC). This is an independent body that will hear evidence from the two bankers and decide if the FCA is right to charge the bankers with a penalty. The move marks a change in the FCA’s publicity for such cases. Previously it could not reveal a decision notice had been issued until the RDC decided the case.
Read about it on the Guardian website, here.
SEC on accounting and financial fraud
In the US, the Securities and Exchange Commission (SEC) intends to pursue financial reporting and accounting fraud. Picking this up, yesterday, Michael Cohn writing in accountingTODAY (here) said the SEC has increased its enforcement efforts against lapses in accounting and financial reporting, while cracking down ever more on financial fraud, according to a new report.
The report comes from Morrison & Foerster, a large law firm with over 1,000 lawyers in 17 offices. They studied SEC enforcement patterns in 2013 and noted changes designed to highlight the SEC’s “robust” enforcement program that is “aggressive and creative,” and that “continue[s] to focus on financial statement and accounting fraud.”
In the aftermath of the financial crisis, the SEC focused more on cases related to the mortgage meltdown, accompanied by an intense wave of insider trading cases. But the balance began to tip towards accounting and financial reporting enforcement 2013, with a task force to focus on accounting fraud and leveraging analytical software to ferret out unusual financial reporting behaviour (see accountingTODAY stories: SEC Refocuses on Accounting Fraud and SEC Creates Task Force to Combat Accounting Fraud).
Revenue recognition remains a top item for the SEC (see my Blog today on news for accountants and finance directors about Alchemy and HP), according to SEC officials, but other performance benchmarks used by companies will probably also be carefully examined.
The impressive Andrew Tyrie
The Treasury Select Committee, under the chairmanship of the impressive Andrew Tyrie, has called on the FCA to act over banks’ sales incentives. He wants the FCA to crack down on banks’ sales-based incentive practices and has written to Martin Wheatley, chief executive of the FCA, pushing the regulator for a ‘deep cultural change’ on how the banks pay branch staff.
Tyrie’s letter was prompted by the £28 million fine handed out to Lloyds Banking Group in December 2013 for failings in its sales practices. Tyrie said that the FCA had to date shown ‘little’ enthusiasm for taking action for such change.
The news story was in City A.M. here.
Corruption across the EU is ‘breathtaking’, the European Commission says
Yesterday, BBC News reported on news (here) from the EC about a report on corruption. The extent of corruption in Europe is “breathtaking” and it costs the EU economy at least 120bn euros (£99bn) annually, the European Commission says. EU Home Affairs Commissioner Cecilia Malmstroem has presented a full report on the problem. She said the true cost of corruption was “probably much higher” than €120bn. Three-quarters of Europeans surveyed for the Commission study said that corruption was widespread, and more than half said the level had increased. The cost to the EU economy is equivalent to the bloc’s annual budget. For the report the Commission studied corruption in all 28 EU member states. The Commission says it is the first time it has done such a survey.
In the UK only five people out of 1,115 – less than 1% – said they had been expected to pay a bribe. It was “the best result in all Europe”, the report said. But 64% of British respondents said they believed corruption to be widespread in the UK, while the EU average was 74% on that question.
In some countries there was a relatively high number reporting personal experience of bribery. In Croatia, the Czech Republic, Lithuania, Bulgaria, Romania and Greece, between 6% and 29% of respondents said they had been asked for a bribe, or had been expected to pay one, in the past 12 months. There were also high levels of bribery in Poland (15%), Slovakia (14%) and Hungary (13%), where the most prevalent instances were in healthcare.
The EC published a press release yesterday and explained why it has adopted the first EU Anti-Corruption Report. The Report gives a frank assessment of how each Member State tackles corruption, how existing laws and policies work in practice, and it suggests how each Member State can step up the work against corruption. The Report calls for improvements in a number of different areas. In some Member States, vulnerability to corruption in public procurement processes is the main problem. In others, political party financing is not transparent enough. Widespread corruption at the level of local authorities is another example, or that many healthcare patients have to pay under the table to receive proper medical care.
The Europa press release is here.