Tag Archives: Accountancy Age

Homeward bound: Why companies are ‘re-shoring’ back to the UK

23 Mar

This is a piece of mine just published in Financial Director, a monthly magazine for British finance directors and chief financial officers that I used to edit a few years before going freelance. A few of the big business consultancies are saying that the time is right for British businesses to stop sending their manufacturing work to China and use companies at home- but the evidence that British businesses agree is not compelling. There are, though, a few small-scale operations that are making it work. Read about them below.


The
British economy is beset by persistent structural problems. We haven’t been a manufacturing power for generations because we’re a ‘knowledge economy’.  It’s more profitable to sell land to a foreign investor than to stick a factory on it and make things. So why is ‘re-shoring’ – the practice by which British businesses stop outsourcing production of some or all of their goods and services to China and other historically low-cost, high-volume countries, and bring it home to employ, innovate and build at home – being pitched as a good thing to do?

With the inception of minimum wage law and the emergence of highly-skilled, better protected, educated workforces in some Asian countries, manufacturing in that region has become almost as expensive as it is at home. Yet the operational risks unique to doing so remain. At home, labour is cheap because it is unskilled. The tide has gone out on the labour cost advantage that Asia has offered.

So re-shoring is a pragmatic choice. “For us, it was quite simply a matter of cost,” Eben Upton, a founder and now chief executive of the Raspberry Pi Foundation, which makes and sells the ubiquitous low-cost computer. The Raspberry Pi Foundation transferred production to Sony’s South Wales factory in 2012 through its partner, Premier Farnell.

“While we were satisfied with the quality level of our original Chinese contract electronic manufacturer and their factory-gate cost, we were able to reduce the UK landed cost of our product through re-shoring. Subsequent cost optimisation – easier without a language barrier and physical distance – has delivered further savings,” Upton tellsFinancial Director. “We build in the UK because it’s cheaper than the alternatives.”

According to Big Four accounting firm EY, which published a study of re-shoring earlier this year, about half the manufacturing businesses in the UK have actively re-shored part of their operations or have been considering doing so. The government has established its own advisory, Reshore UK, to guide small to medium-sized businesses (SMEs) on the process of re-shoring.

The tide has gone out on the labour cost advantage that Asia has offered

However, Civitas, the think-tank, found in its 2014 study that only 64 British SMEs of some 49,000 observed had undertaken re-shoring. The study concludes that “only a tiny part of current production in China will be returned to the UK during the next five to ten years”.

Yet, Civitas lays out several frightening examples of problems British companies have had when giving manufacturing contracts to Chinese companies that would give any FD reason to re-shore. These range from manufacturers ignoring specific instructions on how to produce a product, delivering it months late and with faulty parts, using counterfeit materials in high-spec products, even factories running two production lines – one for the contracted manufactures and another for illicit copies, with nothing but a curtain separating them for the benefit of their visiting clients.

Meanwhile, the language barrier and distances involved in visiting factories add cost and complexity to their supply chains that slow down everything. Re-shoring requires careful planning if it is to bring the financial benefits you want. And it can go wrong. When Magmatic, maker of the famous Trunki children’s wheeled suitcase, moved all its production to a British manufacturer, Inject Plastics, in 2012, it was forced to buy the company six months later to keep the whole project afloat. Inject had cash-flow issues that resulted in the withdrawal of bank finance.

The move to buy Inject became pivotal to making re-shoring work: on closer inspection, it wasn’t equipped to do the job. “When we acquired Inject, we had a good look at what it needed and, yes, it did need further investment – in equipment and the organisational structure,” says Andy Jones, finance and operations director at Magmatic.

“Whether this turns out to be expensive will depend on the value we can continue to create. If we just saw a UK facility as cranking out a standard product at volume then it’s likely offshore operations could do it cheaper. We gave some thought as to how it could offer us a point of difference over our competitors.”

Raspberry Pi and Premier Farnell collaborated for some months on finding costs that could be removed from the manufacturing process, so that the re-shored operation had many more automated steps and needed fewer humans. Adding two holes to the circuit board greatly improved automation and allows faster response to spikes in demand.

Tim Lawrence, a manufacturing expert at PA Consulting, says FDs with whom he has spoken about re-shoring usually prioritise this ability in their considerations.

“Those FDs we have spoken to are interested in the ability to respond to customers’ demands more quickly and to hold less inventory,” he tells Financial Director.

At Trunki and Raspberry Pi, a vital benefit had to be the ability to bring research and innovation teams physically closer to production, to respond to the increasing thirst customers have for customisation and evolving design or capabilities of products. Manufacturing in Asia was simply too cumbersome. Re-shoring made it cheaper to chop and change designs, functionality and to release upgrades and new designs faster.

Magmatic’s Andy Jones says that buying Inject Plastics (now called Magma Moulding) gave the business a readily available, fully controllable and flexible resource that has created new business. “The inputs you need for successful innovation can vary greatly; it’s difficult to predict exactly what you’ll need and for how long. We’ve found that parts of our process lead us in directions we’d not fully considered at the outset,” says Jones.

“Having this access to our quality people has paid dividends in delivering brand new products – like our Trunki case with ‘in-mould’ labels, around which the case is actually moulded so you get no join lines. This has allowed our design team to be more creative with their artwork.”

Jones says there are no other case manufacturers that can in-mould labels onto a case surface which curves over numerous plains, making this a unique selling point it can offer its clients. “We can now make up to 1,000 Trunki cases a day, but we restrict it to about 600 to remain flexible and responsive if we get a sharp fluctuation in demand,” he adds. “Being able to develop new case decoration processes in the UK has helped differentiate us from the copycats. And the factory also acts as our warehouse, which saves us a lot of money on storage and gives us better control over our customer service.”

Those FDs we have spoken to are interested in the ability to respond to customers’ demands more quickly and to hold less inventory
Tim Lawrence, PA Consulting

But little has changed in Britain’s ability to provide skilled technicians and craftspeople, a linchpin element of the re-shoring proposition as painted by advisers such as EY. It posits a government policy of lowering employers’ national insurance contributions, especially for under-25s, to exploit the pool of young unskilled people for the purposes of promoting re-shoring.

However, re-shoring is more likely to be predicated on more automation, rather than more hands, as in the case of Raspberry Pi.

“The key issue in any migration project is retaining and transferring the necessary knowledge that can be difficult to capture and document. In the case of re-shoring, it applies especially when that knowledge, after a long period of offshore activity, has completely been lost in the country of origin,” says PA Consulting’s David Vasak.

With emerging technologies – such as 3D printing and global machine-to-machine connectivity on the internet of things – “a new industrial era is emerging. The way value is created in manufacturing will completely change,” he says.

“Productivity will be based on complex technology and a ‘knowledge workforce’ supporting flexible, highly automated value chains. These will project customer wishes through product development and production to a network of suppliers. Cheap labour won’t drive productivity anymore; here, we see great potential for the UK.”

It remains to be seen how many businesses are prepared to make those complex and fundamental changes to their model in order to benefit from the re-shoring idea.

Financial Director: Raising hope for Haiti

2 Oct

British medical charity Merlin won a charity prize last night and their tweeting about it reminded me that I had interviewed its director of finance, Vicky Ennis, in the aftermath of the Haiti disaster in 2010, about how charity finance people lead efforts to respond to major emergencies of that scale. Very much enjoyed researching and writing this article, and speaking with the finance directors from several charities who responded to the Haiti disaster – have a read.

One of Merlin's mobile clinics in Haiti. Photo from Flickr.com/merlinphotostream

One of Merlin’s mobile clinics in Haiti. Photo from Flickr.com/merlinphotostream

The utter devastation suffered by Haitian citizens after the 7.0 magnitude earthquake that struck on 12 January rendered the biggest humanitarian response ever recorded, reports claim. No ballpark figures yet exist, but several billions in individual donations combined with government gifts and a raft of large celebrity cheque signings amassed unprecedented sums, all within days of the event.

Getting it into the country in those first few days, though, proved impossible. Most of Haiti’s infrastructure and banking system are out of action; roads are decimated by mudslides or mountains of rubble from the estimated 280,000 collapsed or badly damaged homes and commercial buildings. And what use is a single dollar bill in a place where the markets, their suppliers and the ports allowing essential imported goods in are destroyed ­ while their proprietors may be among the estimated one million homeless, or the 530,000 dead or injured?

In fact, due to the level of disturbance, the response from UK charities to these challenges was quite literally to bundle up thousands of pounds and wire it to Haiti through neighbouring Dominican Republic. Vicky Annis, head of finance at medical charity Merlin, explains that her team of 12 finance staff had to do just that from its central London headquarters. “It has been quite literally a case of three or four members of my finance team taking £3,000 in cash down to our local Western Union several times a day,” she reveals. “It’s enormously time consuming.” Merlin was one of the first charities that had no previous business in Haiti to land there after the disaster.

David Membrey, acting chief executive at the Charity Finance Directors’ Group, confirms this has been practice elsewhere. “I know in the case of the 2004 tsunami that some charities, in the weeks after the event, were literally sending staff out with rucksacks full of dollars,” he says. “The destruction was so wide there that you could be on a project where there might not be a working bank for a 100 miles. It’s not a long-term solution but it’s a practical one.”

Faith-based charity Cafod’s head of finance James Steel has to employ his skills of persuasion and pull in help from around the business to cover sudden need from finance. Cafod has a financial accounts team, a financial management team and a humanitarian finance team, he explains, as well as donation processing people to call on if it needs extra hands.

Charity FDs say they were not hit with the response for Haiti until between 72 hours and the first week after the event, once trustees and directors (including the FDs) had decided on their level of response. Says Steel: “In early February, while Haiti was going on, we had external auditors going through what we’d done in Southern Sudan and Mozambique with a toothcomb. You’ve got to balance that over the life of a response to something like Haiti,” he says. “It brings a level of complexity into the organisation.”

In and out
While the process of getting money in the door is now automated thanks to online and text donations, FDs in even large charities found themselves struggling to upscale dramatically in the first days after Haiti to get it out again. It meant diverting finance staff from modest teams away from their usual duties, diverting funds to hire temporary staff or persuading other managers to get their non-finance volunteers mucking in.

“This office was full of volunteers processing credit cards on the weekend, because suddenly we had this massive surge and we had no time to plan around it,” says Joe Ghandhi, head of finance for Médicins Sans Frontières UK. “I was ringing our 0800 number first thing every morning to test the response time and some of our country websites had real bandwidth issues, so we had to switch things around.” MSF already had around 800 staff in the field on a long-term programme.

Cafod’s Steel concurs. “In the 2004 tsunami appeal we couldn’t change the message on our freephone donation number. It was Boxing Day and I was in the office trying to change it, but we couldn’t get hold of anyone,” he says.

Charity FDs are learning valuable lessons around how to plan for these problems that really hamper the increasingly common emergency responses they have to make.

In other, ongoing ‘silent’ crises such as the conflict and mass displacement of people in Jos, central Nigeria, or responding to the immediate needs and longer-term rebuilding efforts in Sumatra after last September’s earthquake, getting funds to disaster-struck communities on a regular basis proves difficult, too ­ and is part of the FD’s remit.

Cafod’s Steel reveals how far down in the detail FDs mobilising resources can be. “We’re making quite a big response in Jos and for that we had very immediate spending needs. We decided on the Friday that we needed money to respond and it got there on the Monday” ­ good going, given that getting money into rural Nigeria is difficult and we work with a lot of individual clinics there, says Steel. For Haiti, Cafod sent four people immediately, “but we were short on dollars, borrowing them right, left and centre, making sure they’d got credit cards: small things, but just making sure that they had what they needed.”

Informed response
MSF’s Ghandhi highlights the communication skills needed from FDs in crisis response. His finance function worked closely with its fundraising and press departments on the Haiti appeal to stay informed about what campaigns were running, as it has a direct impact on his mandate. “Because of that, finance knew early that we had a fantastic response from the public so we then had to shift quickly to asking donors to donate for our general programmes rather than specifically for Haiti,” he says. This fulfils its other longer-term projects and uses money wisely.

Keeping track of what is spent where, as well as building an overall plan to rebuild communities is something the charity FD needs to balance. Cafod’s Steel says that 72 hours after the Haiti earthquake his finance team were finalising areas of responsibility for spending mechanisms and for setting a framework for accountability.

“You need to establish mechanisms for receiving money, setting up o utsourcers which can be complex, then working out how all of it is going to get back into your database and how it is going to be accounted for,” he says. “You’re sending people to Darfur and you have to meet their pension and payroll needs.” Merlin’s Annis designated an additional finance person to manage everything to do with Haiti from the UK and assigned a specific code to all costs arising from the response, to make accounting for it simpler.

“Now it’s about bringing in all our financial procedures and controls so we can understand where we are for developing a full budget, having that reporting on cashflow and having an idea on a weekly basis what cash is going to be required in the field, and managing how we transfer the money on a much more regular basis.”

She adds: “We need to identify our Haiti spend against different donor projects and split them down into project level, start reporting against it and understanding where we are on our budgets.” Merlin will place a permanent country FD in Haiti for the next six months to oversee this reporting process.

MSF’s Ghandhi will need to finance the rebuilding of its three field hospitals, all of which were badly damaged in the earthquake. “I have to talk with our central team about how much we can spend over the next three years, say, to fix them ­ so our campaigns have to match that amount.”

Against the backdrop of what corporate FDs have had to manage recently, the work charity FDs have done to respond to Haiti and other disasters is impressive. “It can be difficult to scale up in a very dramatic way ­ something that no one in a sane world would do ­ but you just have to do it,” says Cafod’s Steel. “There is the supply chain management, procurement is very difficult and there is all the political stuff.

We had a briefing in early February from someone who just came back from Haiti and his message to us was, ‘why send tents when the rainy season is coming, can’t we get into semi-permanent construction’. The logistics of getting materials into the country with no infrastructure make that absolutely impossible.” At some point, though, they’ll just have to.

The charity FD and disaster response
In regular contact with charities across the UK, the Charity Finance Directors’ Group has the big picture view on how the sector responded to Haiti and some chronic issues charity FDs face in disaster response. Acting CEO David Membrey spoke with Financial Director about his observations and where he saw the troublespots for FDs.

• Logistics
“A good charity FD really understands the operational networks and logistics of the charity better than anybody else. They should know what is where and they should understand the systems that will tell them how many blankets they’ve got at their depot in Wigan, for example. If they don’t, they should know where to get it.”

• Sector-wide collaboration
“If you don’t have a programme in Haiti you don’t have to set one up overnight: you piggyback on somebody else. That happens a lot in the charity sector as they all know each other and often get together, so can share resources. They can do more if they share resources than they can if they work in isolation and there’s no point ordering the same thing for the same area.”

• Disaster planning
I know of some charities trying to set up a network of warehouses and facilities to house goods for emergency response across the world, rather than mobilising stuff from, say, Europe to be flown to the Caribbean or Asia at a moment’s notice. The next disaster of Haiti’s kind is not likely to be in London, so why keep all your stores there? FDs of charities need to think about this and I know they have done.”

• Donors should listen to the FD’s funding decisions
“Donors to the 2004 tsunami wanted to see immediate results and it was difficult for many charities to reconcile that with the need for long-term planning. The fact that a lot of that money wasn’t spent after two or three years was viewed negatively, but charities wanted to make a lasting difference, to rebuild homes so they won’t fall down the next time. That is a very real issue for FDs: they have to say, ‘no, at the moment the bank is the best place for it’.”

From my archive: Finance directors still need convincing on the value of social media

7 Aug Hey, it worked for Mark Zuckerberg...photo courtesy Flickr.com/Matt Debouge - http://www.flickr.com/photos/mattdebouge/6916612853/

While I’m waiting for my next two freelance articles to hit the news-stands, I found this from my archive to share. Looking back it’s amusing that I chose to write this, given that until that time (Christmas 2010), I was a Twitter hater and wrote about it on more than one occasion. But I’ve found as a freelancer that it has actually proven profitable for me – literally – to have my Twitter profile and to update it regularly. I have found work through it. But finance directors see it differently as the piece below found.

Have a read.

Donald Rumsfeld once said there are known knowns, known unknowns and unknown unknowns. But that was one year before the birth of LinkedIn, three years before Facebook went live and five years before Twitter emerged.

Now, the champions of social media networking would have you believe that by plugging in to these and other platforms, known knowns can be challenged – as the Wikileak cables have shown – while known unknowns can become knowns. And anyone who does not want to know who singer Lily Allen hates this week might say the average Tweet is an unknown unknown that would have been better kept as such.

Hey, it worked for Mark Zuckerberg...photo courtesy Flickr.com/Matt Debouge - http://www.flickr.com/photos/mattdebouge/6916612853/

Hey, it worked for Mark Zuckerberg…photo courtesy Flickr.com/Matt Debouge – http://www.flickr.com/photos/mattdebouge/6916612853/

Celebrity gossip aside, businesses in every sector and all over the world, along with governments and even regulators, have flocked to social media networking sites in the last couple of years. As marketing budgets have shrunk, it has emerged as a free or cheap platform on which to promote known knowns – products, services, opinions and expertise – and understand known unknowns: what their rivals are doing, what their clients want from them, what the next big thing is and what the market thinks of them.

But a list of Twitter accounts run by FTSE-100 companies published by Lance Concannon, a social media consultant, demonstrates how rudimentary many of those efforts still are. The list is littered with that have been updated a few times and then abandoned. But of those that are actively maintained, the value seems clear. BT’s @btcare Twitter is an extension of its customer services operation with 9,623 followers, who seem to use it when they are tired of being on hold with their call centres. Customers tweet them with complaints about billing and connectivity and appear to be answered by real people – and answered swiftly. It makes innovative service delivery into a public relations campaign.

Burberry chief executive Angela Ahrendts retweets when others mention Burberry products, throwing a bit of stardust in the direction of her followers by way of a mention while simultaneously demonstrating how vibrant and active the recently-revived brand is across the world.

Where’s the value?

For finance directors, though, using social platforms does not mean they understand the value of social media.

A survey by Financial Director, taking the views from 256 FDs and CFOs in December 2010, found that it remains largely an unknown unknown with FDs on the topic falling into two distinct camps: the avoiders of social media who are deeply cynical about it, and those who say they have had tangible return on investment (RoI) from it, but can’t necessarily quantify that return. Of the latter group, five percent report a “significant” RoI on social media and 16.4 percent say they have seen positive RoI.

Asking the question again but differently – to double check how much evidence there really is of a return – 12.5 percent said they had seen other tangible non-RoI evidence of social media having a clear business case.

But emotions run high when FDs who say they do not use any social media are asked why. About half of the FDs that took the survey use one or more social media networking platforms. Those that do not often see no reward for the time needed to update them and their immediate nature.

“Anyone who is constantly tweeting cannot actually be doing anything other than typing – so what have they to Twitter about?” asks one. Another thinks that “those who have time to use social networking sites don’t have serious jobs that absorb all available time. There is no return for the time taken updating them.”

Others see it trying to supercede face-to-face business and in the process is attracting the wrong type of interest.

“Personal relationships are everything. Any electronic correspondence is a poor substitute for shaking someone’s hand, looking them in the eye and talking to them,” says one FD. “I don’t think they add value; you get a lot of unsolicited contacts.”

Some see online networking as lacking the confidentiality that drives business deals, particularly for finance.

“Finance is about confidence and confidentiality, which is not a great mix with a broadcast system like Twitter or an intimate one like Facebook,” one FD thinks. “Real networking is something else entirely.” And in the case of Twitter and Facebook, their popularity among teenagers erodes their credibility as a business tool.

“My daughter has set up a Facebook account for our cat. It’s not exactly serious,” one CFO says. That is a fair point and one that means many businesses make blocking access to social media networking sites company policy, allowing only their communications teams to drive company accounts that are so dry in their delivery, they may as well not exist – because no one is listening.

All talk and no teeth? Photo courtesy Flickr.com/petesimon - http://www.flickr.com/photos/petesimon/3365095019/

All talk and no teeth? Photo courtesy Flickr.com/petesimon – http://www.flickr.com/photos/petesimon/3365095019/

“LinkedIn is great but Facebook and Twitter are not really much use,” one FD reports. “Very large companies can use them for public relations, but finance is confidential; ‘the company is having a fantastic quarter’ is not really appropriate for sharing.” In the eyes of many FDs, Twitter is just noise, blather or gossip.

LinkedIn rules

Contrast those comments with the statistics our survey conjures up. Of the half of respondents that use one or more social media networking platform, almost all are in possession of a LinkedIn profile and 63 percent have a Facebook page. Even more surprisingly against the comments we received about its value, 37 percent have a Twitter account. In terms of the time they spend on them, a sizeable 25 percent use these every single day while 33 percent access them twice a week.

And these are not individuals that have been forced to start tweeting by their companies. Asked what the motivation for setting up these accounts is, most FDs told us it was purely a personal decision: just five percent were compelled to do so by someone senior to them at work.

Those using these platforms in the finance world have found that it is helpful in terms of their career, building profile and connections, as well as for locating and checking the backgrounds of prospective team members. Users of Financial Director’s LinkedIn group start and drive vibrant discussions on a range of issues affecting them, seeking peer advice and experience to make ever more informed decisions.

Businesses that maintain a block on employees accessing social media may be making a mistake. Of the three most recent uses of social media we asked them to share, 17 percent of FDs said they were researching rival companies’ products and services, and 20.4 percent said they were checking out the background and contacts of prospective senior finance employees. That is of immense value to any business. The third use was responding to requests to connect with headhunters or other FDs they view as helpful contacts, either to expand their network generally or because those individuals may prove able to help them into their next role. Indeed, 20 percent had received what they saw as a genuine and credible job offer through relationships forged on social media networks, while one FD had found his current role through a LinkedIn contact.

“LinkedIn is routinely used in my organisation for recruiting. I was recruited through my LinkedIn profile – I could not provide a better endorsement of its power,” he tells us.

Among those comfortable with it, social media networks are providing another way to expand an FDs’ influence and contacts, either by linking up with people they have met in person or with a mutual connection, as a platform to meeting them in person.

Nearly 40 percent of those using social media networks use them to raise their profile as an FD and a further 26 percent use them to get advice from their peers – in the same way a traditional meeting would, but in some cases with people it may have been tough to get an audience with or with those they simply may not cross paths with otherwise.

Old boys’ club

But the problems with social media persist. Some worry that the mode of connecting it provides is a retrograde move, not progress.

“Using a social networking site for recruitment would be divisive and potentially discriminatory. It smacks of a different type of ‘old boys’ club’, ” says one finance director. Another calls networking on social media sites “the lowest form of personal braggadocio.”

And what if someone takes umbrage – or worse, calls their lawyers – over your perfectly innocent tweet? The Independent reported last November that trainee accountant Paul Chambers was convicted of sending a menacing electronic communication having tweeted, in jest, that he would blow up Doncaster’s Robin Hood airport if it did not re-open after heavy snow. He later said he had lost his job as a result.

In the US, Computerworld.com reported last July that an IT staffing company had sued a former employee for violating the terms of their non-compete agreement by connecting on LinkedIn with a number of the company’s staff. It said that she had done so on behalf of her new employer. “If Ms Hammernik could be sued for striking up a conversation at a bar with an employee from her former employer, then she can be sued for striking up a conversation with that same employee on LinkedIn,” a reader commented.

Essentially LinkedIn

As for demonstrating the value in social media, LinkedIn comes out the clear winner. Otherwise, the pictured is mixed. Nearly seven percent of FDs responding to our survey said that they view social media as essential to business, 43.5 percent said it was useful sometimes and 28.5 percent said it was not that useful. Twenty eight percent said it was useless to FDs.

One FD reports that his last three uses of social media platforms were to make contact with a former colleague who works for a company his business is targeting for sales – using the contact to get an audience with that target company – to get back in touch with a former client and invite them to lunch – as a way to get them back in his active network – and to search the contacts of his connections for any potential target clients and shortcuts to introductions with them.

That is nothing you would not hope to do offline; it is just that these platforms make it possible and fairly discreet if done well. But that requires a time investment and a willingness to go on the learning curve – and without the hard numbers to report the usefulness of social media, many more FDs than not may find that the concept remains in that unknown unknown category.

Accountancy Age: Budget 2012 coverage

23 Mar George Osborne: Giving with one hand, taking with the other? Flickr/Conservative Party

The morning after the day before I was called in to do some Budget post-mortem for Accountancy Age, a leading British online news service for all things accounting and business. Here’s a slightly longer mini-feature analysis piece I did.

George Osborne: Giving with one hand, taking with the other? Flickr/Conservative Party

George Osborne: Giving with one hand, taking with the other? Flickr/Conservative Party


Will changes to the personal allowance drive a change in work behaviour? Melanie Stern examines all the views

The Chancellor has proclaimed he will save two million low-earners the trouble of paying income tax at all through his changes to the personal allowance, and has concurrently been lambasted for attacking dear old grannies by cutting pensioner allowances.

Those groups know where they rank in George Osborne’s priorities. But in the centre of these groups is the working majority – the ‘squeezed middle’ – for whom the changes in personal allowances provide a conundrum.

The good news is that the personal allowance will increase by £1,100 to £9,205 from 6 April 2013; a quarter of the benefit will be passed on to higher rate taxpayers. That comes with the the decision to cut the top rate of income tax next year from 50% to 45%.

The less good news?

There will be a £2,125 cash decrease in the basic rate limit, taking it to £32,245, which is expected to bring 300,000 into the higher rate band.

And a few quiet voices are lamenting a missed anomaly: due to the phasing out of personal allowances for those earning between £100,000 and £116,000, that group will now effectively pay a rate on income tax of 62%.

“The increase in the personal allowance is good news, but the squeezed middle – income around the higher rate threshold – has little to cheer,” says Tony Spillett, tax partner at BDO.

“Equally, those earning £100,000 will be wondering how their marginal rate of tax is allowed to remain at 62%.”

Andrew Shaw, head of personal tax at Kingston Smith, points out this hidden anomaly will cost anyone with income over £100,000 £1 of their personal allowance for every additional £2 of income.

Indeed, the business and accounting communities are split on whether this will hinder or help the overall raison d’etre – to stimulate national economic growth, to get all hands to the pump. Though some think the hidden higher rate will de-motivate that income group, slowing their input into the economy, others say it will lead to small business owners becoming limited companies to take advantage of the cut in corporation tax.

“We’ve got the message, from talking to our members, that higher rates of income tax can be a deterrent to effort,” says Richard Baron, head of taxation at the Institute of Directors.

“When you see that if you earn an extra £100 and you only get to keep £58 of it, after paying national insurance as well, you’ll think ‘was it really worth all that effort’? People will think twice about applying for promotions because they’ll now take home less of a pay rise,” adds Baron.

“Or it could be a case of deciding not to put in the overtime because it isn’t worth it for the amount of cash you’d get out of it.”

Jan Lockley, head of tax at chartered accountants Berley, is less fatalistic. “I think the idea those individuals will work less hard or stop wanting promotion is absolutely absurd.

“If you’re doing a job you usually want to do it to the best of your abilities. If a promotion does involve an increase in salary, at the end of the day you will still have that increase – but equally it will lead on to bigger and better things,” she says.

“If you give yourself a ceiling and don’t progress beyond it because you perceive you get no value from it – well, that is very short-sighted.”

Lockley adds that in the aftermath of the Budget many of her clients, who are sole traders, have been in touch to ask about converting into limited companies, to take advantage of the cut in corporation tax. Surely that indicates that those individuals might shortly be making a greater contribution to the economy?

“That is still a numbers game – you still need to work out if it’s worth it for you with the extra professional charges that come with incorporating. But I think once all the figures are known and have been modelled, we’ll probably end up taking most of our clients that way,” she says.

Lockley adds that she thinks the changes are broadly good for individuals and believes that those earning between £60,000 to £70,000 will be marginally better off, to the tune of about £200-300 a year.

“I think they’ll be about 25% better off from the change in allowances after doing all the sums and modelling the effect, even considering that people are smoking cigarettes and drinking alcohol, which is becoming more expensive.”

If there is one thing we know about the squeezed middle, it’s that they’ll keep on finding the cash to pay for their ciggies and their Friday evening beers. They’ll need it, what with the net extra income tax they’ll pay.

Link – http://www.accountancyage.com/aa/feature/2163121/squeezing-tax