Financial Review 16th January 2015

Low income families pay highest % of tax
The average household pays £274 more in taxes than it receives in benefits and services, according to an analysis by the Taxpayers’ Alliance, while the top 10% of households pay a huge £30,023 more in taxes than they receive through services.

The analysis, based on data from the Office of National Statistics, showed families on the lowest incomes pay a higher percentage of gross income in tax than any other group, driven by VAT and council tax, as well as taxes on cigarettes and alcohol. The top 10% of households had an average income 27 times higher than the bottom 10%. This group received an average of only £422 in non-contributory benefits, which include child benefit, while the bottom 10% received £3,682.

“Our tax system is neither progressive nor fair, and we need radical reform if the way we tax and spend is to become fit for purpose,” the tax pressure group concluded.

Big fines threatened in crackdown on dodgy claims firms
Claims firms that try to make money from accidents will now face fines that could hit millions of pounds. Those found to have broken the rules will be fined up to a fifth of their annual turnover. This move is part of a new government regime to crack down on claims management companies.

These businesses offer to help people to get compensation for situations such as injury or payment protection insurance (PPI). They then pass people’s details on to legal firms and charge customers to act as a middle man. Breaches of the new rules include sending out misleading marketing information and wasting time and money by making spurious or unsubstantiated claims.

The growth of claims management firms has coincided with a surge in bogus ‘cash for crash’ claims, which cost insurance firms more than £2 billion a year and add more than £90 to the average car insurance premium. A report by MPs found firms offer incentives such as free iPads and shopping vouchers to encourage those involved in road accidents to pursue compensation.

When HMRC is really sorry, expect flowers
HM Revenue & Customs has sent over 100 bouquets of
publicly funded flowers to people it has wronged since 2009. Revelations of the floral apologies came as HMRC launched a controversial pilot scheme, inviting people struggling to reach the organisation by phone to tweet their tax queries instead. HMRC says flowers may have formed part of a wider financial redress package to customers.

“When we let a customer down, we always apologise and put matters right. Occasionally, having considered the specific details of a complaint, we do send flowers, but only where we consider this is the most appropriate way of saying sorry,” said HMRC in an official comment on its horticultural generosity.

Business chiefs expect wages to rise nearly 3% this year
Business leaders expect to increase wages above the level of inflation during 2015, despite continued concerns about the global economy and the outlook for the UK. About 60% of leading chief financial officers said their firms faced “normal, high or very high levels of uncertainty”, according to a report from accountants Deloitte, compared with a low of 49% nine months ago.

But CFOs were upbeat that the long-term squeeze on real terms earnings and consumer spending would end, forecasting wages would rise 2.9% in 2015, well ahead of an expected Consumer Price Index (CPI) inflation rate of 1.3%. Pay rises have not been consistently ahead of inflation since 2008, though figures for the three months to October showed total pay increasing by 1.4%, nudging ahead of the CPI.

Finance directors were positive on the domestic economy, but had fears about UK politics, including a possible referendum on EU membership and economic weakness in the eurozone. There were also some concerns about poor productivity, the possibility of a UK housing bubble and further cuts in public spending.

Supermarkets’ land banks could prove to be costly liability
Supermarkets are building on just 6% of the land they control across the UK, underlining the problems they face with undeveloped sites as they reverse plans to open new stores. Even before the latest Tesco announcement, building work on stores had fallen by 20% compared with a year ago. This means almost 44 million square feet of land with retail planning permission is not being used or likely to be used, according to property agent CBRE.

If the retailers conclude they no longer want to build shops on these sites, they will be forced to take a hit of billions of pounds from writing down the value of assets on their balance sheets. Major supermarkets are fighting against the rise of the discounters, Aldi and Lidl, as well as consumers moving away from the weekly food shop to more frequent visits to local stores.

Move to free current accounts ‘a mistake’
The former head of the first bank in the UK to offer customers free current accounts has admitted the move was a mistake. Hervé de Carmoy, who was chief executive of the Midland Bank shortly after it abolished charges in 1984, said free banking was now a major problem in the UK.

The competition watchdog, which is investigating the personal current account market, is examining whether the ‘free if in credit’ model is undermining consumer choice. The Competition and Markets Authority (CMA) fears free banking may mean consumers are unable to understand how much they are truly paying. When Midland removed fees for statements, cheques and standing orders 30 years ago, it signed up 450,000 new customers within a year. Its competitors soon followed suit, and the vast majority of current accounts are now free if the consumer is in credit.

Banks made £8.1 billion in revenues from current accounts in 2013, an average of £125 per customer, according to the Office of Fair Trading. This is made up largely of credit interest and overdraft fees. But many are believed to provide current accounts at a loss to cross-sell mortgages and credit cards. The UK is unique in providing free banking.

Most parents don’t regret mortgage help
The average mortgage deposit from the Bank of Mum and Dad is now £18,505. One in seven parents have found themselves in debt after helping their children on to the property ladder, according to a new study. Some were forced to remortgage or even downsize their own home the research found. A third said their financial security had been affected. More than three quarters had dipped into their savings while one in six had cut back on expenditure. More than one in 10 said they had cashed in investments. One in 40 has even gone as far as to downsize and sell their own home to raise the capital and nearly one in 20 remortgaged their home.

The research also showed that, despite 16% of parents calling the money a loan, less than half expected to see the full sum returned. But despite all the negatives, just 6% said they regretted the decision to help their children.

Consumers feel less confident about the wider economy
Confidence in the economic recovery hit a peak last year and consumers are now starting to worry again about prospects in 2015, according to research from Which? Almost half (45%) described their finances at the end of the year as good, a slight rise on the 41% who said so a year ago. And those reporting financial problems fell from 36% to 28%.

But while feelings about their own finances were more positive than a year ago, almost 60% said they were worried about their savings or pensions. There was also a shift in mood about the prospects for the wider economy. Those expecting the economy to improve this year fell from 36% a year ago to 30%, and 30% expected it to get worse, a slight rise on last year.

Global spending on domestic animals reaches $100bn
People in the UK will spend more than £4.6 billion on their pets this year, with owners splashing out on special foods, exercise classes and designer outfits as well as normal pet care costs. Global spending on domestic animals will break through the $100 billion barrier for the first time, according to Euromonitor data.

Gina Westbrook, director of strategy briefings at Euromonitor, said the humanisation of pets is the force behind this trend. “Pet owners are treating their cats, dogs and even small mammals like members of their family,” she said, adding that this presented an opportunity to commercialise this trend into a vast range of goods and services. Examples she cited ranged from dog beer to cat counselling and from pet weddings to ‘socialpetworking’. “The opportunities are staggering for businesses that can position themselves to gain credibility among this growing demographic,” she concluded.

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