Friday, March 16, 2007

How to get the UK taxman to buy you a jet.

So here we go again. The formula one season is just about to start, personally I am beside myself with excitement. The field is so wide open this year, that it is hard to call... However Ferrari should win this year...Felipe Massa, if you please.

I shall be there at the Monaco Grand Prix, not sipping champagne in the VIP stand, sacrilege! No I shall be in my favourite stand K, sipping an extremely overpriced can of Coke and having my ears blasted off.

Some others will be sat on their yachts not too interested in what is going on. I have a client who actually told me that "he missed half the race" because he was talking to his accountant. This brings me onto my point. There is a lot of 'talking to accountants' going on in Monaco at the moment because of the UK government's sabre rattling over the 'Monaco Boys' flouting the UK tax laws.

This generation of super rich have taken to the Riviera like the proverbial duck to water and it hasn't interfered with their businesses one bit. This is due to the loopholes available under the UK tax system for those who travel in and out of the UK. Basically you are allowed 90 days in the UK without becoming resident for tax. The day you enter the country and the day you leave are not counted towards this 90 days*. So some of the wealthy expat UK businessmen are flying on a Monday and coming back on a Thursday. If you work this out, they can work most of the year in their office in the UK but pay only the tax in Monaco, where they are resident. The tax payable in Monaco? er.... Nil!

This commuting is essentially a tax paid situation. Imagine, if you will, that you are earning $50,000,000 per annum, your tax in the UK would be somewhere around half of that. You can buy a pretty reasonable jet for $25,000,000 to ferry you back and forth, all on the UK Tax Man.

Or you could keep your money and take the helicopter which will get you to Nice Airport and into your first class seat. In less than a couple of hours you will be at your desk in the office. Consider this, if you live in the Thames Valley area in the UK and drive to London to work, it will take you about the same time to get to your desk as our Monaco Boy has taken to get to his.

Problem is, this conspicuous, perfectly legal, activity has become the focus of not only governmental scrutiny, but also of private individuals outraged by the fact that the super rich can avoid tax while their employees are hit with the full range of taxation tools at the disposal of the UK government.

However, I believe it was a British Law Lord who said "It is every man's duty to arrange his affairs to pay the least possible tax he legally can." In other words the voices from Monaco are responding with "Don't hate the player, hate the game" Mind you, those same peers have also gone on record to say: "It is also the Government's duty to ensure that it collects the maximum tax it legally can."

My money is on the government to win this particular battle.

My personal view is that the Super Rich are, more often than not, the people who create wealth in the country. They have taken the risks, made the right moves and created jobs and income for the country. Is it right to take $25,000,000 from man earning $50,000,000? This could be argued all day, but in this particular period of the worlds history, we do not owe our prosperity to shrewd governmental machinations, but more to those who invent, create and build. If we choose to chase them from our shores with punative tax laws then with the global nature of business, those creators and inventors wil choose to do so elsewhere.

Taxation was initially developed in the UK as a 'Port Tax' because, generally that was where the money was. This was levied on those counties which had a part of the county as a shoreline. The government of the day then required more money, probably to wage another war, so decided that they would tax 'Inland' districts, hence 'The Inland Revenue'. Its looks as if this once seafaring inspired tax department is now focusing on the wealthiest port of them all, Monaco and its wealthy expats.
*As of the 6th April 2008 the days of arrival and travel will be included for tax residency purposes.......

Thursday, March 01, 2007

Cash and Carry Trade - Should we be worried?

My son is an inquisitive sort, and (according to his school reports) a maths guru for a twelve year old. So he has become very interested in the stock market troubles. After being peppered with questions I attempted to explain some of the potential problems we are facing. He was particularly interested in ‘carry trades’ that were being mentioned on CNN.

I explained that people with lots of money in investments, had been looking around for places where they could borrow money at a lower rate than the investments that they place this borrowed money into. Some time ago he negotiated a 1% per month interest rate from me on any money he saved, and promptly stopped spending anything, so he understand the concept. I said if he could borrow 1,000,000 Japanese Yen that would be worth about 10,400 Swiss Francs. The cost of borrowing the Yen would be about 1 odd percent, he could invest it with his pocket money savings and get 12% from me.

“So I would make about 1040 francs every year for doing nothing”. Was his enthusiastic reply. “Yes” was my reply”. “OK, let’s do that” was his inevitable response.

The problem with this is what if at the end of the year the money that you borrowed in Yen was due, you would have to pay it back in Yen. What if the 1,010,000 Yen you now owe cost you 13,000 Swiss when converted?

“I would have lost 1,352 Swiss Francs”. He says, not so enthusiastically, after a few minutes on the calculator.

I then explained why that could be. If all those rich people who had borrowed lots of yen to make investments, such as this, got worried and started to sell what they had bought with the money, then the price of the yen would start to rise. “If everyone was selling Playstation 2’s and buying Playstation 3’s on EBay you would get less for your Playstation 2 because there are more of them and pay more for the Playstation 3 because there are less of them” Was my feeble explanation of supply and demand in the money chain.

“So if you borrowed the money to buy Playstation 2’s you would not be too happy? You would be losing money on that as well as having to pay more back” he said.

“That's my boy!”

“So if people have bought shares in the stockmarket with borrowed money, they must be really worried” He said like a true market guru.

There you have it. A simplistic look at the carry trade, I agree, but if a twelve year old boy can see the potential problems why can’t everyone else. First of all, we are all not making complex carry trades and secondly a lot of the liquidity in the market is invested funds not necessarily required now. Long term plays like pension fund money and savings.

Also the economies of most countries around the world are still making progress so the markets should still be OK at least in the medium term..

The opportunities out there? Well yen investments look good. If you bought some Yen based Blue Chips and the Yen carry trades do unravel you would make money on the rising Yen, bonds will look to be more attractive and (you may be surprised to hear us say it) but selected smaller companies in your portfolio could be a good play, as they are less susceptible to macroeconomic forces, and lets face it, if people are selling blue chips they still will want to invest a portion in the market, its addictive. This influx of money may help the smaller companies tremendously.
Economies cannot continue to grow indefinitely in a straight line however, so we are due a correction at some stage and if this latest blip is not the start of it, then you can bet that it will be somewhere in our not so distant future. As the wider sentiment becomes edgy, anything can kick off a big correction. The Iranians having a punch up with the Americans, Central Banks controlling carry trades, rising interest rates, consumer spending reducing and the armegeddon scenario, a massively leveraged hedge fund going to the wall. We have seen these things before.

I am reminded of an old joke about a very bad actor who told his agent that he was getting rid of him because he had not found the actor any roles in years “Fine” said the agent, “But that is a bit like changing deckchairs on the Titanic”

When it comes, and it will, any investment could be a problem, at least for a while until the next bull run which, as sure as eggs is eggs, will follow whatever problems we face.