Editorials

Colin Rodrigues
Corporate
T: 01384 216840
M: 07808 159138
E: crodrigues@hawkinshatton.co.uk
I head up the corporate team. I am a client-facing approachable corporate lawyer, who takes a collaborative approach to transactions. I am involved in the running, marketing and developing of the department and corporate clients. The work consists mainly of private equity work for management teams, management buy-outs, sales, mergers, acquisitions as well as disposals for SME shareholders and a broad range of day to day corporate work including restructuring of mid-sized companies and related tax issues. Recent experience includes dealing with multi-million pound businesses in the fields of hotel and leisure, aerospace and manufacturing.
Client base includes regional, national, European and Anglo-American Companies. My aim is to ensure my clients have the best possible team working for them at every stage of a transaction and I work closely with our professional partners to give effect to this. I also deal with drafting of disclosure letters, tax deeds, loan notes and other ancillary documents.
On a personal front most of my time is taken up with my young family. I have a passion for food and drink and am a talented cook. I also enjoy travel.
crodrigues@hawkinshatton.co.uk

Brexit Trumped

Donald Trump has always been the person who courts controversy regarding himself as a plain speaker and a disruptor of the status quo. His state visit to the UK this week will be like a large pebble being dropped in to a pond that is the current political turmoil surrounding Brexit with repercussions being felt long after his visit. Prior to his visit, Trump ordained Boris Johnson who is regarded as the darling of the conservative party and favourite to be May’s successor ignoring the other 12 candidates standing alongside him. Assuming that Boris becomes the next leader of the conservatives and so Prime Minister will he achieve change given the arithmetic that May faced in Parliament will not change. I understand that negotiations can be difficult and there is merit in tackling the difficult subjects first. However, there are two main elements for the UK leaving the EU and perhaps May should have insisted on discussing the divorce bill and the future relationship in tandem, rather than making one dependent on the other as demanded by the EU. Trump, even on his first visit to the UK said that the UK should not pay the EU £39 billion that was demanded but instead the UK should “walk away” if it does not get what it wants. Parliament is paralysed as it cannot agree on what it wants or does not want other than there is a desire that there must be a deal with the EU.  But is Trump right? Should the UK walk away as even last week Sir Peter Marshall (former Assistant Secretary-General of the Foreign and Commonwealth Office) ,said again “by the EU insisting on discussing the financial settlement first and phasing the discussions it has broken the rules within Article 50 which provide that the EU should negotiate and conclude any withdrawal agreement taking account of the future relationship with the Union.” Thus, there should not have been phasing of the discussions. Will the next Prime Minister accept the EU’s redline that the withdrawal deal cannot be reopened or will he/she take Trump’s advice and walk away if discussions are not reopened knowing that there is then only the WTO rules to fall back on. Ultimately, will the next Prime Minister be a disruptor or be someone who maintains the status quo

How Much is it Worth?

The value of a country’s currency is an indicator as to how that country’s economy is perceived by the rest of the world. Put simply it is the principle of supply and demand. The stronger the currency is the more that currency is in demand. Thus, if a currency is in demand it means that people require that currency for many reasons including facilitation of their investments within that country. But does this also mean the stronger the currency the stronger the country’s economy is? As with everything in economics, the answer is never clear cut as one question leads to another. Looking back at history there have been periods of economic growth in countries when their currency has been devalued. Does this then mean that the devaluation in sterling since the referendum will lead to another economic boom in the UK economy? To answer this question consideration needs to be given to the structure of the UK economy and how strong it is in services and how much weaker it is in manufacturing, borne out by the fact that there is a current account surplus in one and a deficit in the other. When looking at a current account deficit this is the difference between the exports and imports. Thus, in reality this is how much the UK owes to the rest of the world because it is not producing sufficient goods and services to trade in order to meet its own demand for goods from other countries. The lower value of sterling will make cheaper UK exports but you still have to take your goods to market in order to sell them and if nobody knows your goods are for sale it does not matter how cheap they are nobody is going to buy them. So even if you do get to market there will be a time lag between the intention of investing within a country and reaping the benefits of the same notwithstanding that there will be a lower cost of production and labour. Will this investment into the UK lead to better productivity something which the UK has suffered from? London has long been a world financial centre, does this mean that with Brexit the UK will no longer be the spearhead for foreign investors when looking to find a foothold within Europe, whether in respect of services and or manufacturing. Global banks have already started to move operations to Paris, Frankfurt, Amsterdam because there may be knock on costs to importing UK products and services through tariffs. But the know how surrounding financial services which has been built up in London is not easily going to be replicated abroad.   I have talked about the value of sterling, current account deficits and what you cannot forget is a country’s credit rating, as this effects the ability for a country to borrow in order to fund its current account deficit.  An obvious point is that whenever a currency falls it does make imports more expensive. A good thing some would say as it encourages consumers to buy home grown products. But over the last 20 years the UK economy has changed and evolved to include “just in time” delivery and, as such, now a large percentage of food and energy is sourced from abroad. This immediately means that unless wages go up the money in consumer’s pockets is worth less because disposable income will have gone down due to higher prices for food and energy. Will this mean that if people are feeling poorer then the consumer stops spending which in turn causes a weakening in the UK economy as the UK economy is consumer led. Overall, the lower value of sterling will have advantages to exporters but only if they continue to invest to improve productivity through skills and training and capital investment, otherwise, the UK economy will find that this under investment will lead to a systematic slow-down in the UK’s ability to compete with other faster growing economies.

How Will Brexit affect Mergers and Acquisitions?

Businesses planning to expand or restructure through M & A in 2019 will do so against a background of changing political, trading and social conditions. The fear is that Brexit will lead to a recession in Quarter 4 of 2019 and bring an end to the recent boom of the mid-market M & A sector. Uncertainty is the challenger of business and still questions remain as to whether the UK will leave with a no deal? Will there be a second referendum? Will there be a change in UK government? What will the trading relationship with EU look like? What will be the impact on the pound/exchange rates? Whatever the responses to these questions, on 29 March 2019 businesses will need to adjust, adapt and embrace the changes and during this transitional period it is inevitable deal volumes will fall. Hence 2019 is predicted to see M & A at somewhat of a standstill. Major Banks have announced their exit from London to cities such as Paris, Amsterdam, Frankfurt and Dublin. This will lead to a loss of £700 billion of financial assets in Quarter1 2019 to insurers and other financial services companies in the UK. Add to this the fact manufacturers with significant capital investments in the UK (such as Nissan) are contemplating whether they remain committed to the UK or shift their operations elsewhere due to the uncertainty of Brexit. That said the Brexit situation is not the same as the situation UK businesses found themselves in during 2007/2008 as a consequence of the global financial collapse. There are certain UK sectors which will be unscathed by Brexit and it will be “business as usual”. These are markets which have little or no recourse to Europe in relation to imports/exports or workers. The expectation is also that the Private Equity market will not be impacted by Brexit as its primary consideration is the strength of a management team. The UK is an important contributor to the world stage and this will not change due to Brexit. The UK continues to lead in technology closely behind the US hence making such companies attractive to acquisition. The UK is also rich with companies in the SME sector where there is no natural succession exit hence the companies will need either a trade exit or management buy out. The outlook for M & A in the UK therefore remains promising despite the challenges faced.

The Shop That “Jack” Built

For those of you who are my age you may recall a shop called Kwiksave which is still around.  I regarded Kwiksave as one of Britain’s original discount stores.  Tesco is now taking the fight back to Aldi and Lidl by creating its own version of a no-frills supermarket under the brand name Jacks which Tesco has just recently unveiled. Some of you may be thinking why is the name Jacks whereas those of you who follow back stories may know that the founder of Tesco was Jack Cohen and he started the Tesco brand in the 1920s, so there is no more fitting way to give tribute to Mr Cohen than by naming Tesco’s new venture Jacks. Supermarkets have already had a foray into the convenience store sector, which has long been saturated by independent shopkeepers and cooperatives. Will Tesco win this new fight against the German discounters? Lower prices and scale will be the answer to this question and this will only become apparent when we know how many new stores are rolled out throughout the UK and become established.  In the short term it is expected that 10-15 stores will be opened in the next 6 months. The idea behind Jacks is very similar to the model of Kwiksave, Aldi and Lidl in that it will be smaller in size and will carry a more limited product range under its own label of Jacks.  The shopping habits of UK consumers have changed as a result of the arrival of Aldi and Lidl in that brand appeal within shops has been outweighed by value for money.  Indeed consumer habits have changed within the supermarket sector generally, as there is a cross-section of consumers who are attracted by constantly low prices across the range which the German discounters have promoted so well. In order to keep costs down the Jacks stores will not be aesthetically pleasing but more basic and functional. Is there place in the discount sector for another player to come in and take on the established German discounters?  Is this Tesco taking on Aldi and Lidl at their own game rather than trying to adopt the historic tactics of attracting customers by cheaper petrol, 3 for 2 offers and loyalty schemes? Sainsburys on the other hand has taken a different route by trying to add new dimensions through its takeover of Argos and potentially Asda in the New Year subject to getting regulatory approval.  That is not to say that Tesco has not tried to conquer the food sector in different ways as it was not so long ago that Tesco took over the “Booker’s” cash and carry. It will be very interesting to see next year what happens when figures are published about consumer spending in the supermarket sector how much of every £1 spent continues to go to Aldi and Lidl and how much is taken by Jacks.

Capital investment is the way forward post-Brexit

At a risk of repeating myself, this is a topic which I have commented on previously, but this is something that I am very passionate about.  This is with good reason because being a corporate lawyer, I deal with business clients daily. As such, I feel that I am in the front line when trying to understand what the stresses and strains are for SME businesses. Productivity has long been associated as one of the main things that is holding back the UK economy. Last week McKinsey produced a report which was not given the coverage it deserved within the business community, which I can only attribute this to the fact that there has been a lot of background chatter around Brexit. The McKinsey report was on “Advanced Manifesting Technologies”. Technology is evolving faster than ever, through mediums such as artificial intelligence and 3D printing. Therefore, there needs to be innovation and investment within the manufacturing sector if it is to keep up with its ever-changing competitors. An economist’s understanding of what “productivity” means would be associated with the output that is generated by an employee for each hour that they work. This may seem very obvious, but as with everything, productivity is the most important factor that will translate to the bottom line, being the profit made by a company. If you get a chance to review the McKinsey report, it will come as no surprise that when it compares the UK to Germany, that there is a difference of approach which can be put down to more than cultural differences. Within the UK, it can be seen that we favour labour to create our productivity, whilst in Germany the focus for productivity relies on investment in new technology for equipment and software. One thing for sure, is that the UK focus on employees has led to full employment. A cynical view could be that this full employment also means that productivity cannot grow any more within the UK, as there are not the people available to fill the jobs required by the economy. This may not sit well with the outcome of Brexit, given that the current UK labour force is going to be constrained by its ability to increase its capability and quality of output. Whereas robots can be made to work faster or slower where needed, without incurring significantly higher costs, other than their initial cost of purchase and installation. My observation, is that this new Brexit era will allow manufacturers to have a chance to re-focus on capital investment in order to upskill the existing UK workforce to use newtechnology, and maintain full employment, given that the economy is at maximum capacity. What is clear is that there will be lack of additional workers coming into the UK economy to help increase productivity. The next issue is going to be where the money is going to come from for this new capital investment, as some of the foreign investment into the UK may already have been diverted away as a result of Brexit. Therefore, I would encourage all SMEs to look at capital investment in order to help them move their businesses forward in the short to medium term. Colin Rodrigues is head of the Corporate Team at Hawkins Hatton

A High Street Called Titanic

We are at a watershed moment in the economic development insofar as the UK high street is concerned. Britain built an empire on trade and were fondly known through-out the world “as a nation of shopkeepers”, but has this all changed with the dawn of an internet-savvy generation? In a recession everyone understands that retail will be under pressure as people want to keep their money in their pockets. However, by all measures, whilst the British economy has slowed down we are not in recession. In fact, the job market is tight and inflation is also falling. What then is causing the sea change in the high street? Is it the direct costs of having a footprint in the high street as compared with having a distribution centre? Or, is it a change in our shopping habits as the internet savvy generation are now older and have more disposable income. The old stalwarts of the high street have been consigned to the dustbin of change as we have moved into new waters.  We all remember Woolworths when that went into liquidation, but of late there seems to be a plethora in names such as BHS, Maplins, Toys R Us, Poundworld, House of Fraser and now Homebase.  Warnings of this collapse on the high street have been broadcast, even the British Retail Consortium as far back as two years ago warned that there would be 900,000 jobs lost in the retail sector. Everybody would like to blame the national minimum wage and business rates as these are the two largest costs retailers face. I agree that these costs contribute to the difficulties for retailers, as compared with internet retailers who may instead use distribution centres and less employees. The other catalyst for change is shopping habits. We are still in a cycle of consumption, it is just that consumption has moved from the high street to online. There are many reasons for this but the main one has to be accessibility. High street retailers need to innovate and create a stronger online connection if they are to survive.  They need more convenient ways to assist their customers over and above click and collect.  High street retailers will then need less staff and floor space.  You need less bricks and mortar in expensive high street locations if retailers change their business models. It should not be forgotten that this squeeze on the high street is not confined to retail shops but to financial services, as many banks have started to push their online offering in preference to having a branch operation, which inevitably leads to less bank branches through-out the country and staff. It is not a question of how to stop this decline in the high street, but instead to focus on how we can rejuvenate the high street with new and different offerings, for example leisure and pop-up restaurants within empty retail spaces as well as looking at housing. This will only work if there is a genuine desire to re-invent the high street and not just focus on business rates which generate £30bn or so, and form nearly 5% of the entire UK tax take.

Will the Bullring and Merry Hill ever meet up?

We all know the retail sector has been impacted by the growth of the online offering year on year. Take Amazon by example, which started off just selling books and DVDs, and now sells virtually everything you can think of. But it has not stopped there, Amazon is also looking to enter the grocery market as demonstrated by its purchase of Whole Foods in America. Maybe this is why Sainsburys is looking to buy Asda, after Sainsbury’s successful acquisition of Argos, in the same way Tesco bought Bookers to defend against the potential online threat. The above said, only a few weeks ago two of the UK’s largest property shopping centre owners in talks over a merger, since December 2017, suffered a set back. Hammerson, the owner of shopping centres like Bullring and Brent Cross were looking to take over Intu, the owner of shopping centres like Merry Hill, Trafford Centre, Metro Centre and Lakeside. Is this set back a further indication of the tough times on the high street? The run up to Christmas 2017 was not exactly full of festive cheer for retailers. In money terms if the deal between Intu and Hammerson completed, we would have seen a sum of £3.4 billion paid by Hammerson. From a corporate perspective, what is very unusual is that Hammerson made a formal takeover bid for Intu. Under the Stock Exchange Rules, Hammerson would need to complete on the bid given it had been accepted by Intu’s board. However, the board of Hammerson advised its shareholders that the deal is not such a good idea hence they should bring a stop to it going through by voting against it. If we drill down into the issues around what caused this change in sentiment, it could be down to the recent spate of high profile administrations such as Maplin’s, Toys R Us and of late the recent difficulties Carpetright is facing, to name but a few within the retail sector. But is this the real reason as administration of anchor tenants has always been a risk, (remember BHS). Thus, the retail space has been a difficult sector for its members for a number of years, not just since last December. One thing certain is that players like Intu and Hammerson will have the benefit of analytical data which will enable them to understand their tenants turnover within their shopping centres, given that rents are usually linked to turnover. If this information has always been available to Hammerson, then why is it now trying to move away from the Intu deal? Surely Hammerson’s original motivation for the deal, namely to concentrate upon having the best shopping centres within the UK, showcasing the best tenants, is still a powerful reason to do the deal? This would have surely better insulated Intu and Hammerson from the problems that are prevalent on the high street such as the administrations that I have already mentioned. Maybe, it is not just about size it is also about not having a concentration or a propensity for tenants who are constantly being squeezed, as surely an anchor tenant in the Bullring may also have leases within Merry Hill and the other locations. Therefore, this could be storing up trouble as currently administrations only represent a loss of income of around 1% for companies like Intu and Hammerson and the merger could see this figure rise. We all know that Debenhams and House of Fraser are currently also facing pressures. What is clear is that Hammerson will seek to dispose of some of its assets and re-invest the monies into other premium sites. Who knows, as when all of this started Klépierre, a French company, were looking to pay £5 billion for Hammerson but this was rejected by Hammerson as it felt it undervalued its business. This may come back albeit through another suiter.

To Budget or Not to Budget

Last week’s budget may have contained surprises for some, but not for others. With a few more million saved here and a few more million spent there, but no ‘rabbits out of the hat’. But when it comes to budgeting there is going to be a big bill for leaving the EU and people have speculated that it may be as high as 60 billion euros, or as little as zero. What is surprising is that such an important factor affecting Article 50 is only now coming to light, and has not been more fully debated. Baroness Faulkner, the chairman of the EU Financial Affairs Sub-Committee of the House of Lords, said recently that if there is no withdrawal agreement pursuant to Article 50 then there is no obligation on the UK to pay. This may have come as a surprise to many. The Sub-Committee did take expert advice but found that this was conflicting, and as such used its own lawyers to decide the principle of whether or not there is a payment due on exiting the EU. Based on the principles of the Vienna Convention on the Laws of Treaties there is no obligation to pay. This is because the obligation is contained only within treaties and not within Article 50 itself. Article 50 deals with exit, but is silent on the question of payment. There are no courts that can regulate or definitively decide on this matter. The only exception would be if an individual member state decides to take the UK to the International Court of Justice in The Hague, on the basis of losses suffered as a result of the UK’s exit. Despite the above, given that the EU is a political beast and the Prime Minister is committed to signing a withdrawal commitment, we all know that a payment will probably have to be made to secure an orderly exit, and one which ensures limited market access and participation in some EU programmes. Without such a payment from the UK there will be a 12% hole in the EU budget.

Jaw-Jaw Not War-War

When Winston Churchill coined this phrase, it was with a view to the fact that talking was always a good solution to fighting. You may be thinking why I have quoted him, but what will happen if there is a trade war post-Brexit? The difficulty for the UK is that we will no longer have the protection of the EU trading block post-Brexit. The USA are about to impose the biggest set of restrictions on trade for more than 40 years. Donald Trump last week actioned his campaign promise of “putting America first”. He is hoping to achieve this within the next few days when tariffs will be placed on aluminium at 10% and steel at 25% which is imported into the USA. You may think that these tariffs are designed to prevent the cheap influx of Chinese steel into the USA however, Chinese steel imports into the USA count for less than 3% which may come as a surprise to most people. This decision by Donald Trump may have unintended consequences. Donald Trump’s chief economic advisor Gary Cohn resigned as the director of the National Economic Council in protest of this decision. Mr Cohn’s departure is regarded as a significant loss as he was seen as a moderating influence on Donald Trump. When the announcement was first put forward by Donald Trump, there were no exceptions to the tariffs. He has since relented by exempting Canada and Mexico. This may be seen as a cynical ploy to help the USA’s negotiation of the NAFTA. Given that the EU is one of the biggest importers into the USA of steel and aluminium, they have already hit back by announcing they will report America to the WTO but given that Donald Trump has announced these tariffs under the guise of statutes which provide that tariffs can be imposed for national security reasons, the WTO may not be able to look behind the same. What is of more concern is that once tariffs come into play, what will happen to the steel and aluminium which is destined for America. This will have to go somewhere, otherwise steel prices within markets will fall considerably. No wonder the EU are considering imposing their own tariffs on imported American goods. This unfortunately is the thin end of the wedge as if you really want to protect the steel and aluminium market within your own country or trading block, you need to have safeguarding measures which will inevitably lead to the imposition of similar tariffs and this is how trade war will start. Let’s hope there is more jaw-jaw to prevent the trade war.

Equality

“Equality” is a very simple word which you think would resonate with most people. It is not unreasonable to expect to be treated equally or, at the very least, in the same way as you would treat others. Equality of pay you would think is also a very simple concept yet applying this to women has proved a challenge in our modern age.  According to the Office of National Statistics, the recent average pay for full-time female employees was 9.4% lower than for full-time male employees. The only good news is that this gap has continued to narrow from the heights of 17.4% in 1997. In my view, we are now at a watershed moment in history. This glacial change commenced after the Second World War when women started to join the workforce. At this point in time there was still no equality between the sexes in pay terms, and it was only in the late 60’s where government studies identified the immense inequality and things started to change. We are all familiar with the film and the stage play “Made in Dagenham”. The essence of this film captures the real-life events of the strike by women sewing machinists at the Ford Car Plant in Dagenham over equal pay. The upshot of the actual events in Dagenham lead to Government statutory intervention through the Equal Pay Act 1970 (“EPA”). You would think given the effluxion of time since the EPA that the barrier to women’s equality would have fallen. The gender pay gap has been laid bare and brought to public attention through the recent events surrounding Carrie Gracie and her treatment by the BBC. The Carrie Gracie event is going to continue to snowball, which can be demonstrated by the fact that Tesco have just come under the spotlight and could be facing an eye-watering claim that may go into billions of pounds. By early April this year organisations which employ 250 or more people will be required to declare their gender pay gap. That is when the true extent of the differences between the average earnings of male and female workers will be exposed.

New Year, New Money

Is 2018 going to be the rise of the crypto currency (virtual currencies) or just another New Year fad? The crypto currency is an up and coming entrant into the financial market place, spear-headed by “Bit-coin” which was worth in the region of 00 at the start of 2017 and near the end of 2017, it had a reported value of nearly ,000. Like most things which go up, they also come down and at the start of this year Bitcoin fell back by ,000 but then rose again by a further ,000 per coin as a result of the founder of PayPal, Peter Thiel increasing his investments in it. I know to some the idea of an unregulated virtual commodity may seem a little etheric. But in essence, that is exactly why some people prefer the idea of the crypto currency, as in a recent survey by Blockchain “30% of millennials if they were given £1,000 to invest said that they would rather invest in the crypto currency (such as ‘Litecoin’, ‘2Cash’ and ‘Ethereum’ to name but a few of the current 700 available crypto currencies) rather than in government stocks or bonds.” It begs the question of how the crypto currency works if there is no central bank to guarantee it. But like with anything, if someone is prepared to buy it then it has a value, hence crypto currencies rely on peer-to-peer trading to maintain value. That is probably why it is easier to think of crypto currency as an asset class or a commodity rather than as a currency. Even though there are so many crypto currencies available, they still only form a very small part of the financial market. But like any commodity, as the market place grows, and the commodity becomes more liquid, trading of the same also becomes more expansive. In my view, once this happens I am sure we will see a lot more millennials starting to trade in these crypto currencies. In fact, the New York Stock Exchange is looking to follow suit to some other exchanges and list a number of funds linked to Bitcoin, hence once crypto currencies enter the financial lexicon of the mainstream, everyone will be more familiar with terms like “ICOs” (Initial Coin Offerings). This however could be a double-edged sword as once crypto currency becomes mainstream, regulators such as the bank of England will want some kind of say over how these crypto currencies are traded, as they are in effect financial instruments. Currently, 100,000 plus users per day are purchasing crypto currencies.  Thus, the regulator will not want to leave these people exposed. The other problem with crypto currencies is scalability. Even now, some of the exchanges, such as Binance, closed to new registrations as recently as 4th January 2018 to allow for infrastructure upgrades. So, interesting times, let us see what the future holds.

Productivity

A word which is sometimes misunderstood. Here in the UK business leaders, economists and financial institutions always talk about productivity. But what is it, how is it measured and why is it important. Lots of questions and hopefully within this article you will find an insight into these questions. An economist may look to define productivity as profits and dividends and/or outputs made by businesses per hour, coupled together with wages, which figures are then compared with other businesses and/or countries. But being a lawyer, I look at things in a slightly different way to that of an economist. As such, it may be easier to define what productivity is not rather than what it is, as it does not measure how idle a country is compared to another. Within the UK we have low productivity as compared to a country like France, but when I look around at my clients they are far from being idle. In my view, the difference in productivity between the UK and France can be explained by the fact the French labour system is very rigid and is orientated by its unions. It is much like the UK prior to Thatcher coming into power. If you have a difficult labour market there is no choice but for businesses to invest in technology as an alternative to labour. You should also bear in mind that the structure of the UK economy is very different to that of the French economy. As a result of the last recession, the UK’s service based economy dipped in productivity terms and has never really recovered. The conundrum for the UK is that we have low employment. In fact, some economists think we have full employment given our employment rate is at 5% compared with 15% in France. Yet the workers in France are paid more than their UK counterparts. Again, this could be down to the strength of collective bargaining through the French unions. So, the real question for the UK may be, is more employment better? At the end of the day, one thing certain for economic growth is you do need sustained productivity. It is in this backdrop of Brexit that we have to hope that policy makers will make the post-Brexit world better for businesses by allowing them to continue to invest so that they can continue to grow and reduce their levels of debt. This is a simple goal which can be easily translated into the policy going forward. The only way the UK National Debt will reduce is either increased productivity by making more per hour, or spending less so we do not need to borrow as much.

Paradise Lost

I wonder what John Milton would be thinking if he were alive today and witnessed the revelations which were exposed through the “Paradise Papers”. It was only 2016 when the previous scandal of the “Panama Papers” arose. Is it just public curiosity as to how the rich and famous manage their money or is it something deeper as to how the rich protect their wealth. Just to keep things in context, it is legal to avoid tax in legitimate ways but it is illegal to evade tax. With Brexit yet to unfold and many more bumps in the road before the UK leaves the EU, the question is should we as a country be fixated about tax or should we instead focus on trade. The Paradise Papers may seem controversial, but tax is the life blood of any economy without which the heart that is GDP would not beat. Multi-national companies will always be looking around the world to see in which jurisdiction they can exploit prevailing tax legislation to enable them to pay minimal tax on their profits. A good example of this is when Apple went in search of a new safe haven to store its cash outside the US. Apple had a beauty parade of tax havens and chose Jersey in the Channel Islands as the place to house its profits when the European Commission forced the Irish Government to close its tax loophole. The EU’s concern about the UK is that it is keen to avoid the UK being Europe’s off-shore tax haven post Brexit. Whenever we talk about off-shore, people always talk about unfairness. This is something that can never be truly addressed. All I can say, as a corporate lawyer, is that the UK is known internationally for its legal and financial services and as far as corporate tax is concerned, this is on par with most countries around the world. What you have to bear in mind is that there will always be competition for tax revenues and to pretend this does not exist is delusional. In short the rich will always seek to protect their wealth however by attracting the rich to the UK the economy benefits significantly whereas if the UK tax laws become too restrictive the rich will house their wealth in other countries around the world and the UK stands to lose substantial tax revenue.

Can less ever be more?

Most people are aware of how strong the banking and financial sector is within the UK economy as it has a global reputation throughout the world. What is concerning to me as a corporate finance lawyer is the proposal currently being discussed in the US regarding a move away from international banking regulations and treaties which could have ripples wider than the US. One thing everybody has learnt since the financial crisis caused by Lehman Brothers is that there is a risk of financial contagion when large financial institutions get into trouble given their global reach.  Currently, there are issues with Italian banks which has resulted in Germany continuing to throw money at a legacy problem still not fixed. The requirement for banks to have stronger balance sheets to avoid such contagion and large scale catastrophes is something everybody is now familiar with.  As part of the new order banks have also started ring fencing riskier aspects of their banking business such as investment banking.  These aspects are kept away from their traditional banking so consumers are better protected in theory. I do see that there is an argument when people say that all this regulation has made it harder for consumers and businesses to borrow.  Surely, is not a bad thing as implementing stronger procedures / checks in respect of lending criteria can help avoid bad debts and reckless borrowing by weeding out irresponsible borrowers. As for businesses so many business clients I deal with borrow when they need to for investment purposes but even then they like to ensure they have a comfort blanket of sufficient cash reserves to avoid the unforeseen. It is important to learn from historical lessons and recognise that these international banking regulations have helped create a level playing field globally when it comes to international banking so in my view this is something we should not move away from lightly. I hope the UK does not go down the route of the light touch approach to encourage banks to stay in the UK.  There is talk even of making the UK, Europe’s new tax haven post Brexit.  When looking back even further in history one can see how in the 1980s Japanese banks did not carry sufficient capital to protect against their riskier investments which caused a crisis at that time and this is history we do not want repeated in UK banks. On most things I am a firm believer that less is more when it comes to regulation but what the last few years have taught me since the financial crisis is that when it comes to capital for any business owner the opposite is true therefore this principle should extend to our banking system.

Do Not Stress about Self Assess.

Her Majesty’s Revenue & Customs (HMRC) are now looking to phase out self-assessments in respect of tax returns. This may on the face of it seem like good news to the 11 million tax payers who have to fill out self-assessment returns each year. However, in reality, only a few people will be able to benefit from the new regime as the self-assessment system will remain in place for those people who pay tax other than through the PAYE. Thus, the usual suspects of self-employed individuals and private landlords will still be caught by self-assessment. The people who no longer have to fill out self-assessments will fall into two categories. Firstly, you will have those individuals who are subject to the PAYE system but for various reasons HMRC forms the view they have underpaid tax. In such circumstances without self-assessment there is no mechanism for HMRC to collect the under paid tax. Without self assessment a tax payer would need to volunteer the unrepaid tax to HMRC which in reality would never happen. The other group of people are pensioners, who’s state pension is more than their personal allowance. In respect of the two categories above, HMRC will determine what additional tax is payable without self assessment and it will be reliant on information and data which it holds and/or which is supplied by employers, pension providers and the Department for Work and Pensions. The new simpler system will benefit only a limited group of people. Thus, for those lucky few this sounds like good news, but those individuals will only have 60 days to decide if their tax bill is right or wrong. If the tax bill is wrong, there are still some options, which include a further 30 days to make a formal appeal. If those individuals are not able to do this, then they will need to demonstrate a good reason to show they qualify for an over-payment relief. In short, what could have been streamlined system for tax collection cutting through burdensome requirements for disclosure may be become oppressive but only time will tell.

Round Three – Brain Drain

In my role as a corporate lawyer I come across different kinds of businesses employing a vast array of people. But when looking at businesses from whichever sector you choose to name, I can honestly say that in the main a business’ life blood is not the products or services that they produce or sell, but their employees. This is why it makes worrying reading when last week a new report by EEF – The Manufacturers’ Organisation indicated that skilled workers across Europe are considering turning their back on the UK, surely this can only be as a result of Brexit. The EEF report stated that a quarter of UK manufacturers saw a decrease in applications from EU nationals whilst 16% of UK manufacturers have seen people leaving their business. At the same time, last week, KPMG predicted in their own report which made even more depressing reading that one million EU workers were considering leaving the UK. A statement like this has to be put in context when you realise that 7% of the UK workforce is made up of EU nationals. Yet looking around, it is all about the supply of labour as the jobs are there. In fact, a common view is that there is full employment. It is just the lack of workers to fill the positions which are causing the problems. I suspect that this is something that will get harder as from speaking to a client in recruitment, they said that the availability of candidates has been falling consistently since 2013. Maybe this could be due to more recruitment companies entering the market or the fact that jobs are more widely advertised and not just through recruitment consultants. It is not just manufacturing businesses that are suffering. It seems that this lack of elasticity in the jobs market crosses all sectors from high end jobs such as professional services, IT, financial services and engineering to more routine jobs such as construction, hospitality and care work. Again, you have to bear in mind that some of these sectors are crucial to the UK economy in that for example, one in three construction workers in London are from the EU. That is why in round three in the UK’s negotiations with the EU, the Government needs to give more reassurance around the immigration policy not just now but in the next five years as people are like businesses and they all like certainty. Maybe it is time to think outside of the box and develop new schemes to find and encourage EU workers to come into the UK even though this seems counter intuitive to the Brexit vote. It is important that the Government recognises that the UK has to retain access to jobs and skills from other EU countries to stem the brain drain. There is no doubt that Brexit and the post-Brexit years will be a roller coaster ride but I am confident that having a flexible and vibrant job market in the UK will help the workforce within the UK adapt to these more uncertain times. Especially given when talking to employers most of them are saying that they are at capacity whilst others are saying that they would like to hire more staff.

Not such a sterling effort

Britain is adrift and there are so many questions with so few answers. The UK’s credit rating has gone from AAA to AA for the first time in 38 years. All we know is that there is going to be a unit of top civil servants set up to deal with the process of exit from the EU and instead of October 2016 we might get a new prime minister by August 2016.  Using an adaptation of Oscar Wilde’s words “to lose one prime minister may be regarded as misfortune but to lose the leader of the opposition looks like carelessness”. “It’s the Economy, Stupid” the famous campaign strapline is an apt reflection of business views.  Banks mirror the economy, hence why banks are losing their value and in the institute of director’s survey earlier this week 25% of companies are putting recruitment on hold and 5% of companies are making redundancies. From the UK’s perspective there is a conversation that needs to take place with the EU, the UK started that conversation however the consensus view of the European leaders is effectively “Good bye and good luck UK!” as no further negotiations will take place until Article 50 is involved.  The clear direction of the EU has been further integration and now the UK is no longer a stumbling block.  There has never existed a “Special” relationship between the EU and the UK.  It is evident the EU will make the transition for the UK’s exit problematic to deter other countries from seeking a similar exit.  Notwithstanding the significant experts from the UK to EU, it is now time for the UK to focus it attentions on the rest of the world including the Far East and to leverage off its “Special” relationship with the USA. In the short term business can only sit tight and wait and see the outcome of the leadership challenge for the Tories and hope that the UK is able to negotiate a financial passport to protect the city of London. In the medium term my view is that given interest rates based on a recent prediction by Bloomberg have no prospect of increasing until 2018, businesses may be able to borrow to continue to invest in order to increase productivity and weather the looming storm.  I would encourage everyone to be engaged in the debate and not leave it to others to take a lead and decide the nation’s fate at this historical moment.

Don’t Get Hung Up

There has been a lot of uncertainty in the run up to the election, but now the votes have been counted and we are expectedly, or unexpectedly in the Prime minister’s hands, left with a hung parliament. Now businesses have to deal with the implications of the election result, and the government with the Brexit negotiation. To that end, the cabinet has been reshuffled in order to try and put the best foot forward. In light of the election result, the European Union considers it has captured the moral high ground at the start of the negotiation process. So what next? There is no indication of the softening of the hard Brexit which Theresa May is seeking, unless the Democratic Unionist Party is paid the price of a soft Brexit in return for its confidence and supply agreement. However, the problem with this is that the price may be too high for some of the Tory euro sceptic MPs. The only positive to come out of the situation is that the UK economy, notwithstanding the expected falls in the strength of sterling, has still proved robust and defied critics and the political uncertainty that has been Brexit. Maybe this is because, for some time now, businesses have had to plan for and manage uncertainty. In fact this has become the new normal and business leaders are now anticipating a marked slowdown in the UK economy. The thing I would urge businesses to do is to continue focusing on productivity, it is that old adage of getting more for less. More output for less cost, more quality for less cost and more efficiency for less cost. This will mean, by keeping the mantra going, businesses will avoid the road blocks of unpredictability and will continue along the highway of success, rather than stalling after being caught in the headlights of uncertainty.

Dulux to Domestos

Only a few weeks ago, Unilever, and just of late the Company which owns Dulux paints, have both decided to break themselves up and return money to their shareholders. So what? You may be thinking… But this should be considered in the backdrop of Cadbury’s takeover by Kraft some time back. Activist investors are fund managers with deep pockets who perceive value so buy into a business and shake things up. The activist investor is more familiar to our US conscious, but with the weakness in Sterling, opportunities in the UK and Europe are becoming more irresistible. These activist investors usually target publicly quoted companies and after becoming the significant or majority shareholder, the investors seek to de-list the companies in order to restructure. This is not something new, but maybe given now the size of the targets is so substantial, the activity is getting more noticed. The activist investor’s decision is predicated on having scrutinised the target, its valuation and opportunities that it can create. That is why, in respect of the Dutch company Akoz Nobel which owns Dulux, you get someone as rich and famous as Warren Buffet involved. Activist investors are able to achieve their goal of wealth creation by stripping away complex lays around what are fundamentally good businesses with a view to reduction of overheads and cost to create cash. Some see this as short term compared with a long term outlook. But, bear in mind, not all target businesses have grown organically; most have expanded through acquisitions. It is difficult to criticise or judge activist investors who clearly identify opportunities which the current owners of the target businesses do not. Further, activist investors place their own money on risk to generate those opportunities, and to create value beyond the target current market value in the short to medium term, whereas target businesses are complacent and content to maintain an existing level of dividends and market value.

Brexit 2 Years On

What most people want to know is what format the trading relationship with the EU will look like in two years’ time. This is the key unanswered question that businesses have both within the UK and the EU. Unfortunately only time will reveal the answer. Global trade has existed for most of the last century, and in the last 50 years we have seen globalisation open up markets, economies and political systems, whilst enhancing awareness and understanding of different cultures. However in recent times popular sentiment has moved away from globalisation which can be demonstrated by the attitude of the main proponents of free trade, namely the UK and US. Ultimately the UK’s deal with the EU will come down to ‘negotiation’ and the ability of the UK to negotiate through the new Department for International Trade, and its newly appointed experts. The UK will also have to negotiate with the Trump administration and turn the hand of friendship in to a tangible agreement and not just a special relationship. Trump has made it clear that he is not an advocate for globalisation, so it will not be plain sailing for the UK when it looks to strengthen it’s trading relationship with the US. It is obvious that the UK government will do its upmost to secure the best possible arrangements with the EU, and Teresa May has to date avoided political grand standing. In reality we will all be able to gauge the progress of negotiation through political comment from the UK and EU. In any event negotiations will always be difficult and testing, especially given the high stakes for the EU and the UK. Ultimately, the UK has a common interest and goal with the EU in order to achieve the desired outcome. If a deal can be negotiated by focusing on future relations and by avoiding recriminations, then both the UK and the EU are likely to be winners. The usual mantra that is rolled out is that the UK is still a major player in economic terms within Europe and the rest of the world. The UK also has a formidable presence on the world stage when it comes to foreign policy and defence, even if it is overshadowed by the US. With all of this in mind, why would the EU not want to maintain a good relationship with the UK? I have no doubt that there will be a price for leaving the EU, so the real question in my mind is how high will this price be? This is why we need careful negotiation to ensure the cost of our exit is minimised. As with any club it is difficult to insist on having the benefits of membership when you no longer pay the subscription fee or sign up to the rules. However allowing non-members to attend the club does have added advantages to both its social make-up and its coffers, whilst giving the non-members the opportunities to deal with members of the club.

2016: A year to remember

We have now started 2017, are there any certainties for this year? We know for certain that Article 50 will be triggered and that there will be elections in France and Germany, and that Donald Trump will become the American President. I remember at the beginning of 2016, both the UK and global economy was surrounded by gloom. However, at the end of 2016 the economic environment of the UK and rest of the world began to look brighter. No predictions can be made for 2017 in respect of the UK economy due to the uncertainty posed by triggering Article 50, one of the main areas of impact being the financial services sector. Inflation has caused the UK economy to suffer which means that the government is unlikely to change monetary or fiscal policy. Only time will tell if UK businesses and consumers can defy the negative predictions of some economists, by using the cushion of cheaper currency to give the UK a competitive advantage. As I say to my clients, now is the time to prepare and gear up to exploit the opportunities that will become available in 2017. When there are uncertainties, businesses which can be nimble and have available capital, are able to move into the spaces created by the less capitalised and slower moving businesses. I therefore predict that those businesses which are prepared, can be confident in 2017. When looking at these opportunities globally, it is important to look at America as Donald Trump is the enigma which turns convention on its head and he may do the same for the US economy, as evident in the latter part of 2016. We will therefore need to wait to see what his views are of fair trade as opposed to freetrade. As for the European markets, there is improved growth and inflation which has narrowly avoided a deflation road block. In respect of France, it has demonstrated an interest in business friendly candidates which is good news for the French economy provided France avoids the nationalism wave in its election. Regardless of the outcome of the uncertain times ahead, 2017 will prove to be an interesting year. For further information and/or advice please contact Colin Rodrigues on crodrigues@hawkinshatton.co.uk or 01384 216840.