AS PUBLIC DEBATE TURNS, no doubt prematurely, to when any release on our lock-down might begin I am reminded of an old Shetland tale. A drunk in a bar hears that one third of car accidents on the islands are caused by drunk drivers. “Whit?” he says, “Yon means that two thirds of accidents are caused by drivers that are sober. It’s time they took them ‘a aff the roads and let us drunks get oan wi’ it”.
As Nicola Sturgeon wallows in her new role as “mother of the nation” steering us through the Covid-19 pandemic we need to consider how well equipped the Scottish Government is to manage that release. The relish of Scottish politicians for the publicity that the present crisis offers them sees them drunk on administrative power; but it is just that – administering bureaucratic processes, a good fit with their public service interests, a lousy fit with any return to normal business where Scotland’s wealth creators earn the taxes that pay their wages.
The Shetland tale also comes to mind when I hear that only a tiny number of loans have been released to smaller businesses under the UK Chancellors support scheme. Taking out a loan to find a way through the present downturn is clearly not be the route of choice for small businesses that constantly do battle with their cash flow. Who thought it would? It’s clear that the political and bureaucratic establishment really has no clue what is meant by “business” or the impact their activities have on it. Their world is one of big organisations, PAYE employment, and the guaranteed income of a staff contract and employment rights.
How different from the real world of the self-employed, the thousands of small service support business, and those who pay themselves largely through annual dividends. The support measures on offer have failed them badly – yet they are part of the backbone of the Scottish economy, especially in rural areas.
The central state considers any “small to medium enterprise” to be a company with more than 50 employees. Any trader smaller than that is put into a generic “small-business” (above 10 employees) or “micro-business” (less than 10 employees) trading proletariat. What we are often not told is that 99% of businesses are of this smaller size. They provide around half of total employment.
Crucially, these businesses operate in a variety of ways; with a particular core purpose being to create and preserve cash flow; the central throttle of any business trying to grow and succeed.
The first of these ways is those businesses that do not actually try to grow. They get to grips with the gap between paying suppliers and being paid by customers by holding a reasonable cash float and trading stably; often as a lifestyle choice in a specialist field.
A second cohort trades by curtailing costs; they use freelance business cost reliefs, avoid taking on more than temporary staff, or use family members. It often comes to a shock to those in large corporates and the public sector when they are told that around a third of small business owners earn less than £10,000 a year. Around another 20% earn below the average wage of £28,500 per year.
That’s because the owner tends to get paid last; any cash goes to support the human and physical capital of the trading entity. Many of these businesses are seeking a “big win”; you can call this an eternal triumph of hope over experience if you wish, but that rejects a crucial insight. Quite a few businesses have owners with special insights along with an appetite, and the guts, to take risks. Scotland has few of these, but we do get the Tom Hunter’s, Jim McColl’s and Barr Families; we also have many – although not nearly enough – local entrepreneurs who quietly build companies and as a group employ many Scots.
A third group trade by financial engineering. Freelancers working from home, building up a portfolio of work with varied clients over the years, taking only the income they need or can at any one time. Specialists working on contract, either on commissioned fees or through service companies; some of which provide equipment and tools, some of which may or may not do depending on HMRC’s interpretation of software or firmware libraries, “tools” and past experience under the iniquitous (and highly destructive) IR35 rules. Many like to pay themselves through dividends, an approach that is not just to reduce tax but also a “clean reward” stance; for some it seems morally right to earn money first and then choose to make it your own; it’s a reward for generating cash margins. These people do not think in terms of a balance sheet being highly geared or manipulated through write-offs, future revenue streams, licensing deals or brand value. Many of them simply do not relish managing staff and overheads; their life-balance has other motivators.
What’s important to understand from a public policy perspective is that these groups are largely unfindable. There are no statistics to tell us who they are, or what they do, or what they earn in their sub-groups, or how they do that on a day to day basis. HMRC has the data, Revenue Scotland certainly does not, but it is buried in hundreds of thousands tax returns and short form audits, all of which hide a plethora of manoeuvrings by small accountants, and self-filing professionals. Creating sensible understanding relies almost entirely on surveys rather than well-grounded statistics. Such is the nature of a free economy. Whatever Nicola Sturgeon or Kate Forbes may claim “running an economy” in the face of this variability and multiplicity is madness. The inability of the Scottish state to support distress here is inevitable; the bureaucracy does not know who they are and, more importantly, cannot know.
And here lies the rub; the taxman is the driver for the economic actions of the above groups. If someone in business does decide to grow, what has been called the “growth corridor” is defined by the prevailing tax regime. What this means in practice is:
- All expanded premises face a council rates burden – 50% of rent.
- Every new employee raises an NIC burden – 12.8 % of salary.
- Every sale raises an additional VAT burden – 20% of margins.
- All additional activity adds managerial administrative burdens – taxed as above.
- All additional production introduces regulatory burdens – reducing cash flow.
- All tax burdens across all taxed business slow cash churn – reducing cash flow.
And if after all of this, it is imputed by HMRC that you have made a profit they tax you on that imputed profit. Note, not necessarily an actual real profit, a profit calculated by your accountant on the basis of a 2000 plus page Corporation Tax Guide that almost no-one understands, least of all HMRC who make deals with more complex businesses to agree their “profits”.
Is it any surprise that in Scotland in particular, where a large mass of customers is rare, a business with a near average gross margin on its sales and expanding beyond four employees has a negative cash flow up to the level of around twenty five employees; put simply, the rate of overhead growth exceeds that of margin growth.
The stolid lad or lass Kilmarnock, or Alloa or Oban who might build a business that grows slowly over the years, gradually employing more people, training them, adding in new modern capital equipment, selling well and maintaining prices at profitable levels while being part of a community, is crucified by the state’s tax imposition.
In reality in Scotland, it is uglier than this; the climate fostered by the SNP to favour its more socialist supporters proposes that you might be doing something wrong to earn more than others, and that you are party to some sort of exploitation regime that supports public sector cuts and a sackcloth austerity for those in need; only the decent caring munificence of a powerful central state drunk on power can combat widespread “business” selfishness. What total tripe!
If Scotland is to recover rapidly from our enforced downturn, there is a pressing need to drive a coach and horses through our existing tax system; discarding many of the strictures that have imposed on how we gather and report taxes. Supposedly a “fair” regime prevails. For “fair” read managed and controlled; with the enforcement of equalisation a priority and no heed paid to the crushing penalties on cash flow that allow wealth, revenues and tax collections to grow. We’ve put the drunks in charge of the apple cart.
Corporates are important, but they do not easily create the newness that Scotland desperately needs; they are trading on yesterday’s success, operating as tax revenue machines creating PAYE revenues and VAT from yesterday’s successes, but as we know from the retail world, those can evaporate very fast.
The basis of our wealth for tomorrow comes from the new, and post-Brexit we have the freedom to generate it worldwide, if the cash in business is left where it should be, available for investment in growth and capital deepening. Corporate taxes destroy this prospect.
When the left declare that there is tax avoidance on an industrial scale and suggest that not dutifully handing cash to the state is somehow immoral they are being unbearably selfish; promoting their own public service goals at the expense of others who are self-reliant. That’s insulting to many thousands of small cash flow creators. Such extractions are the creator of dismal socialism that makes poor people even poorer; we need to release creative capitalism to make poorer people richer.