UK Credit Ratings Downgraded

The UK has seen a downgrade in its credit ratings in the wake of the Brexit vote. Ratings agencies took the decision to downgrade the UK’s ranking as a borrower following the public’s vote in favour of leaving the EU and the resultant economic turmoil.

One of the main credit rating agencies, S&P, previously gave the UK a AAA credit rating, the highest offered by the agency. It has now downgraded the credit rating assigned to the country to AA, two levels below the previous rating. Previously, S&P had been the only credit rating agency to maintain a top-level rating for the UK. The agency said that the UK public’s decision to exit the European Union was likely to “weaken the predictability, stability, and effectiveness of policymaking in the UK” and this was reflected by the downgrade in the country’s credit rating.

Another major credit agency, Fitch, reduced the UK’s former AA+ credit rating to a lower AA. As a key reason for the decision to downgrade, Fitch cited the expectation that the short term would see an “abrupt slowdown” in the UK’s growth.

The downgrading of credit ratings for the UK by S&P and Fitch follows a previous move by Moody’s, another ratings agency. On Friday, following the revelation that the UK had chosen to leave the EU, Moody’s downgraded the credit outlook of the UK from “stable” to “negative.” In explanation for this move, Moody’s talked of a “prolonged period of uncertainty” that was likely to follow the vote in favour of a Brexit, and said that the result of the referendum was likely to have “negative implications for the country’s medium-term growth outlook.” The negative impact on economic growth would, Moody’s predicted, outweigh any financial benefits gained from not paying into the EU.

These cuts to the country’s credit rating mean that the UK is now perceived as having a higher risk profile when borrowing. This can make it more costly for the government to borrow money. In international financial markets, as with credit for individuals and businesses, a poorer credit ratings tend to be reflected by higher interest rates.

Just shortly before S&P and Fitch announced the downgrades in the credit ratings issued to the UK, Chancellor George Osborne sought to issue reassurance about the future of the British economy. He insisted that though there would be a need to “adjust” to a new situation, the UK economy would approach its future “from a position of strength.”

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Facebook to Pay More Tax in the UK

Facebook-LogoFacebook is to see its UK tax bill increase by millions of pounds following a huge reform of its tax practices. The social networking giant implemented the reforms following heavy criticism of the practices it uses to minimise the amount of tax it pays on its UK advertising revenue.

Previously Facebook, like a number of other major companies, used complex business structures to divert its UK profits through overseas offices. As such, though the profits were generated in the UK, they were largely recorded as taking place overseas. Effective rates of tax paid to the UK government by multinational companies using these tactics can be extremely small, with tax on UK profits instead being paid in other jurisdictions that offer lower rates of corporation tax.

The announcement that Facebook will be paying more UK tax follows not long after another company that has used similar tactics, Google, attracted fresh controversy. The search specialist reached a deal with the UK government which saw it continue to pay very low effective rates of corporation tax, leading some to accuse the government of offering “mates’ rates.”

Facebook was diverting profits for advertising revenue generated from sales to many of its biggest advertisers through Ireland, a jurisdiction also favoured by many companies using similar tactics such as Google. This included revenue generated through advertising for large-scale businesses such as Sainsbury’s, Tesco, WPP – a major advertising specialist – and Unilever.

Advertising sales from smaller businesses will still be routed through the company’s international headquarters in Ireland when advertising is booked online without significant involvement from Facebook staff. However, the decision to cease this practice with regard to the bigger advertisers will see the full rate of UK corporation tax paid on the majority of the company’s UK profits. The resultant increase in the company’s tax bill for its UK operations is expected to reach into the millions.

Facebook is one of a number of multinational companies to attract criticism for avoiding UK tax on its earnings. Facebook is a multi-billion pound company, usually taking only around three months to generate in excess of £1 billion in profit. While it is not known exactly how much of this comes from UK revenue, it is known that the UK is one of the company’s biggest markets. In spite of this, it was revealed late last year that Facebook’s total corporation tax bill for 2014 came to just £4,327.

The changes to Facebook’s tax structure will take effect in April as the new tax year begins. As a result, the company’s first tax bill under the new arrangement will be payable next year.

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Inflation Stalls in February

Official figures have revealed that February saw UK inflation come to a complete standstill. Last month, the overall inflation rate dropped to 0%, marking the first time since records began that inflation in the UK stood completely still.

In January, inflation had progressed 0.3% compared to the same period in 2014. However, in February the year-on-year inflation rate had fallen to zero, leaving inflation at a net standstill compared to a year ago. The drop to zero was facilitated by price changes in a number of key sectors, including furniture and furnishings, food, and recreational products.

The Consumer Prices Index (CPI), which tracks inflation, has kept records since 1988. In the 27 years since the CPI began, this is the first time that the UK inflation rate has been shown to have dropped to zero and remained unchanged overall across a one year period.

The difference between January’s 0.3% figure and February’s 0% was also much more stark than most forecasters expected. The majority of experts predicted a drop in the region of just 0.1%. The actual fall in the inflation rate exceeded this estimate three times over.

An alternative measure of inflation, the Retail Prices Index (RPI), saw the UK inflation rate drop from 1.1% in January to just 1% in February. The RPI, which almost always gives a higher inflation figure than the CPI, works in essentially the same way as its counterpart but with some key differences. Both examine a set variety of goods, compare their prices at present to their cost one year ago, and use the difference to work out the rate of inflation. However, the CPI essentially looks at the cost of retail goods rather than household costs. The RPI includes things like council tax, rental rates, and mortgage repayments which are not used by the CPI, and this is why the figures are usually different.

According to the CBI, a prominent business lobby group, the effect of the inflation standstill is not likely to be a significant reduction in the cost of living. The group’s director of economics, Rain Newton-Smith, said “Despite inflation dropping to zero, it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades.”

However, Newton-Smith noted that there were some decided consequences to this development. In particular, he said, “With the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

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UK Sees Falling Unemployment and Rising Wages

The UK economy is benefitting from a continued trend of falling unemployment as well growth in wages. Unemployment has dropped to 1.86 million, while wage growth is ahead of inflation by the biggest margin in nearly five years.

In the three months to December 2014, the number of unemployed in the UK fell by 97,000. According to the Office for National Statistics, this places the unemployment rate at 5.7% of the country’s current working population.

Long-term unemployment – those who have been out of work for a year or more – fell by 210,000. The UK is now home to approximately 638,000 people who are classed  as long-term unemployed.

The total employment rate for those aged 16-64 in the three months to December reached 73.2% This is a record high, tied with the three month period from December 2004-February 2005 when employment rates reached exactly the same level. Together, these periods jointly represent the highest level of employment since records first began to be kept in 1971. Overall this means that, during the final three months of last year, the UK population included 30.9 million people in work. Compared to the same time a year earlier, this is an increase of 608,000.

Unemployment for the 16-24 age group, however, remained unchanged compared to the previous quarter. This figure remained at its existing level of 16.2%.

While overall employment has risen, self-employment has fallen over this three month period. Overall, the quarter saw the number of people working for themselves in the UK fall by 19,000. There are now around 4.4 million self-employed individuals.

The same three months saw average earnings up by 2.1% compared to the same period a year before when bonuses are included. If the figure is recalculated without taking bonuses into account, wages for the quarter were up by 1.7% year-on-year. In the month of December alone, wages were up 2.4% compared to the same time in 2013. This is the furthest ahead of inflation that average wages have been since March 2010.

Inflation, meanwhile, stood at 0.5% in December. The most recent data, released this week, shows that January saw inflation fall to a mere 0.3%. This is the lowest level of inflation seen since records began.

The pound has risen in value against other major currencies, and in particular has reached a seven-year high against the Euro. The strength of the labour market, with rising employment and wages, is believed to be a significant factor contributing to the strengthening of the pound.

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UK-UAE Economic Overview

Both the United Kingdom and the UAE are considered leading economic powers in the global scene. According to the most recent World Economic Forum’s annual Global Competitiveness Index report, the UAE’s economy has now become the best rated in the Arab World and is also the world’s 12th most competitive. The report also provides interesting insights into the current economic climate in the UAE, as it shows that the local economy now rubs shoulders with well-established European powers, such as Denmark and Norway. Moreover, the data suggests that should economic growth continue to rise at this pace, the UAE’s economy will be soon able to catch up with countries like Sweden or the United Kingdom. The Emirates have undergone a very rapid recovery following the period of decline experienced during the global financial crisis. Between 2007 and 2009, the UAE’s economy dropped to the 37th position in the Global Competitiveness Index, a fact that makes their recovery all the more significant.

Image by Jemasmith

Future opportunities for collaboration

The future looks bright and full of opportunities for strengthening the economic ties between both countries. For instance, the Abu Dhabi 2030 plan has set out to diversify the local economy beyond its current reliance on the profits derived from oil and gas exploitation, focussing instead on the research and development of new technologies. This is where the UK industry sector comes into play.

In September 2014 the president of the Khalifa University of Science, Technology and Research announced that this institution was planning a series of joint ventures with 26 British companies. This would serve to bring together the expertise of UK leading firms and the potential of the UAE’s brightest graduates, who are set to work in high-value industry areas in the UK, which include aerospace, defence, biomedical, and engineering.

Likewise, talks have already taken place to explore the possibility of joint collaboration in the security industry. In January 2014, members of the UK Trade and Investment Defence and Security Organisation met with UAE officials to discuss how the British security industry could help the UAE prepare for the Expo 2020 by providing security equipment and police training. It is expected that more than 100 British companies will have the opportunity to take part in this exchange.

What does all this mean to you? There are multiple opportunities for growth and development arising from the close economic ties between the UK and the UAE. A Master in Accounting and Finance can improve your future prospects and help you successfully navigate the current economic climate. Gaining a qualification in this area can improve your own marketability in an  increasingly competitive job market, where only the best qualified individuals have a chance to get ahead. There has never been a better time to invest in your future with a postgraduate qualification.

A brief overview of UK-UAE economic relations

Although both countries are economic powerhouses in their own right, it is useful to look at their common economic ties. The UK and the UAE have a solid history of prosperous bilateral relations, whose origins can be traced back to 1971. According to the UAE’s embassy in London, there are more than 100,000 UK citizens living and working in the UAE, and Emirati tourists and visitors contribute significantly to the British tourist sector. Every year, the UK exports goods to the UAE for the value of £3.2 billion, and conversely, the UAE exports over £1 billion worth of goods to the UK. In fact, the UAE is among the UK’s top 15 largest export markets.

The potential of bilateral economic relations was further enhanced by the 2009 UK-UAE Joint Economic Committee, in which both countries agreed to increase mutual trade links by 60 per cent in just six years. This target was surpassed in 2013, two years ahead of time. In addition, several Memorandums of Understanding have been signed since 2008 to guarantee collaboration in the strategic renewable energies sector.

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September saw Increase in Public Borrowing

According to the most recent figures released by the Office for National Statistics, September saw a significant rise in the UK’s levels of public borrowing. The government borrowed £11.8 billion, which is a year-on-year increase of £1.6 billion compared to September 2013.

The increase goes against expectations, as economic experts were predicting that public borrowing would remain flat. It also represents bad news for George Osborne (pictured right). In March, the Chancellor pledged that, over the course of a year, he would slice 10% off the budget deficit. This plan has since consistently struggled to get off the ground, with the latest figures forming a fresh blow.

Total borrowing for the financial year up to September came in at approximately £58 billion. Compared to the equivalent portion of the 2013/2014 financial year, this represents a year-on-year increase in borrowing of £5.4 billion or 10.3%.

According to economists, the government will certainly feel the effects of this situation of increased borrowing. As the general election approaches next year, they are likely to find themselves with only limited options. According to Capital Economics senior economist Samuel Tombs, “The continued run of poor UK public borrowing figures looks set to severely hamper the chancellor’s ability to announce giveaways to address his party’s deficit in the national opinion polls before next year’s general election.”

Furthermore, Tombs believes that in the Autumn statement, which is due for December, “the chancellor will be forced to acknowledge… that the fiscal consolidation is not going to plan.”

These sentiments were echoed by Chris Leslie, the shadow chief secretary to the treasury, who described the increase in borrowing as “a serious blow to George Osborne.” Leslie went on to say that the figures have left Osborne “set to break his promise to balance the books by next year.”

The need for greater volumes of borrowing comes in part from lacklustre income tax receipts. For the first half of the 2014/2015 financial year, the year-on-year increase in income tax receipts stood at a mere 0.1%.  This, according to IHS Global Insight chief economist Howard Archer, is down to a number of factors such as weak earnings growth and the fact that “much of the employment growth has been in low paid jobs or in self-employment.” The fact that the personal allowance has increased during the current government’s term has also had an impact on income tax.

A spokesperson for the Treasury acknowledged that the figures were less than ideal. The spokesperson admitted that “the impact of the great recession is still being felt in our economy and the public finances” and that “we have to recognise that the UK is not immune to the problems being experienced in Europe and other parts of the world economy.”

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UK’s economy predicted to rise by 1.2% in 2013

The CBI business group has predicted an increase of 1.2% in 2013 and 2.3% in 2014. This is due to a shift in the economic climate although it is “still early days” according to the CBI lobby group of 240,000 UK businesses which also feels that due to frequent imports from overseas in an attempt to improve growth more attention needs to be place to encourage exports. John Cridland, director-general of the CBI said that the government needs to “get behind talented UK businesses” and help them with encouraging business overseas.

On a positive note, John Cridland said: “The economy has started to gain momentum and confidence is picking up… We need to see a full-blown rebalancing of our economy, with stronger business investment and trade, before we can call a sustainable recovery… We hope that will begin to emerge next year, as the Eurozone starts growing again.”

The recent sunny weather has also helped to boost UK high street sales. A spokesman from Capgemini Consulting, Alex Smith-Bingham responded “The warm weather encouraged shoppers to leave their homes and shop on the High Street to enjoy the sunshine. As a result, bricks-and-mortar retailers saw sales rise.” There are also less empty shops in the UK, in comparison to previous years, due to the increased footfall shown in research conducted by the British Retail Consortium and Springboard, which has risen by 0.8% in July.

Online sales in the UK however have declined by 2% in June-July, which is reported to be the lowest since 2010. There is also some concern as to news that use of payday and Doorstep loans providers has more than tripled in the past 18 months, and many blame inflation and government policy for this.  The general secretary of Unite Union Len McCluskey stated “Low wages and insecure employment are destroying incomes, forcing people to turn to payday lenders… This is a personal debt pile-up that cannot be ignored and certainly ought to correct overblown claims of economic recovery. No recovery can be built on hardship and misery.”

Despite the mixed picture, the UK is officially rising from recession as figures reported by bloc’s GDP showed an increase of 0.3% towards the end of 2013. There is also positive movement in the services, construction, housing and manufacturing sectors. In spite of this, the UK’s economic improvement will still see an increase in imports rather than exports, countering any potential increase in trade contribution if strong enough support is not shown by parliament for UK businesses.

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Budget 2013: same challenges, same measures in a bid for long term growth

The Chancellor of the Exchequer’s budget last week has received mixed reactions; some business leaders and insiders consider the provisions a step forward, while others are stinging in their criticism of it.

At the dispatch box, George Osborne gave a brave performance. In presenting some optimistic figures, he still revealed that public borrowing is set to rise marginally over the next few year, accompanied by a fall in growth, from 1.2% to 0.6%. After promising in previous years that the deficit is being reduced, and will be gone by 2014/15, it will now be eliminated by 2016/7. This was just the prelude to more government cuts.

Amongst those cuts, a 1% public sector cap on pay will remain. Most government departments will see their budgets cut by 1% each year for two years; education, health and international development budgets will be ring- fenced however. A further financial burden to each department is that

£11.5bn in cuts has been announced for 2015-16.

For the public sector, it is not all doom and gloom. Transport and infrastructure, both public and private, will see an extra  £3bn in 2015-16, and will receive in £15bn in total by 2020. This comes after investment in aerospace and related industries was announced. Investment in shale gas exploitation will get tax allowances, and the Midlands pottery industry will be exempt from climate change charges. Mr. Osborne also fully endorsed Lord Heseltine’s proposals plan for a regional fund to stimulate economic growth in the region; this measure is fully supported by the Liberal Democrat coalition partners. On environmental matters, tax incentives were announced for ultra low emission cars.

For the military, reeling after cuts in personnel, projects and future procurement projects in recent years, after praising their courage, Mr Osborne announced that the recommendations of the Armed Forces Pay Review Body would be adopted, bringing with it an exemption from “progression” pay limits. Indeed, Mr Osborne went further, announcing increased funding for Combat Stress, Help for Heroes and similar charities; this would mostly be funded by bank fines from the Libor scandal.

Reflecting the fact that the Bank of England will see new management later this year as Canadian Mark Carney takes over from Sir Mervyn King, the rate of inflation was left at 2%. The Bank of England’s remit is to be altered so it can tackle growth in addition to inflation and currency stability. These measures give Mr. Carney a lot of scope and flexibility when he takes over to implement changes to stimulate the economy.

Gloom aside, Mr. Osborne stated that his budget was in favour of British businesses; and it was. In measures designed to get businesses trading and growing, corporation tax was cut (to 20% from 21%), with tax reliefs for businesses who invested in social enterprises. Government procurement from small to medium businesses (SME’s) is to rise, and stamp duty on certain shares is to be abolished.

The real boost for business was over National Insurance. A new Employment Allowance will cut National Insurance bills for businesses by £2,000, with 450,000 SME’s paying no NAtional Insurance. With the extra money, more staff can be hired, and more money can be invested in growth or procurement strategies.

In a measure designed to stimulate both the property market and first time buyers, yet another government scheme was announced. Government backed interest- free loans, worth up to 20% of the value of new-build properties- will be available, and shared equity schemes will be be expanded. Again government- backed, banks will offer and underpin £130bn of new mortgages. Coming into affect from 2014, these measures are particularly aimed at first time buyers; after previous and similar government interventionist schemes, whether these schemes will in reality stimulate the property market remains to be seen.

As a reminder of recent high profile scandals, tax avoidance and evasion agreements will be signed with other jurisdictions, particularly in the Channel Islands, aiming to get back up to £3bn in taxes. Such matters of overall financial policy aside, families and households will be directly affected by some budget outlines.

Fuel duty- set to rise by 3p in September- will remain the same for now. Beer duty- set to rise by 3p in April- will instead be cut by 1p. An annual rise of 2% in beer linked to inflation will stop, but wine, cider and spirits will still have the same “duty escalator” as before applied, as will tobacco duty, which will rise to 2% this year.

The big break for taxpayers is that the personal allowance (the threshold at which taxpayers start paying tax on earnings) will rise, reaching £10,000 by 2014. For families, the proposed single flat- rate pension of £144 a week will come into force from 2016, a year earlier than originally planed.Additionally, from 2015 a tax relief of 20% will be placed on childcare, up to £6,000 per child.For those who bought Equitable Life policies prior to 1992, and lost money, there will be payments up to £5,000.

The Chancellor was criticised for bringing before Parliament a Budget of “much of the same”. Similar to pat budgets, cuts in public spending were once agin announced. However, this was counterbalanced by measurers designed to boost business, and more efforts to re-energise the property markets. Family and business friendly policies were central to the Budget, and will improve the financial prospects of families and businesses alike when they come into effect.

However, the figures and measures in George Osbornes’s budget show that Britain will be in a deficit and in debt for longer now. The immediate relief provided by some measures in the budget are counterbalanced by the stark reality that Britain’s economic problems will last for longer as some recent economic measures are not working. Stimulating a flagging economy (with European economic worries as a backdrop), reducing the deficit, lowering unemployment, establishing economic security again, and similar  will take more time and effort form government and the private sector alike.

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It’s That Time of Year Again – The Self-Assessment Deadline Looms!

The dreaded self-assessment tax return deadline is just a few days away, and many people are still a long way from completing it. The truth is it’s not the difficult beast that we all believe it to be: simply keep a sensible record of your income and business expenditure, and you have it all to hand. Are numbers simply not your thing? Ask a friend who is more mathematically minded – you don’t need to be an accountant to fill in what is a simple form. Let’s have a look at some important tips.

Meet the Deadline

The most important part of filling in an online self-assessment form is that you meet the deadline; for online applicants this is 31st January, 2013, and if you miss the deadline by even one day you may be made to pay a penalty of £100. This applies, you should be told, even if you do not owe any tax! Even later, and the fines become more harsh, so it is vital that you plan in advance. The online form is simple to fill in and there are useful guidelines at the HM Revenue and Customs website, so make sure you take a note of what is required.

What Do I Need?

You will need your user ID, the email address you have registered with HMRC, and your unique taxpayer reference, as well as your chosen password. The problem for many people is that as this is a once yearly exercise, it is easy to lose one or all of the above. Your unique taxpayer code should be at the top of any communication from HMRC – it may be labelled Tax Reference and is a 10-figure number, but without your email or ID it is very difficult to get hold of a forgotten password. There are helpful online help channels you can use.

Do I Need to Fill in the Form?

If you are self employed and even if you did not earn enough to pay tax you must fill in a self-assessment form; not to do so is to act fraudulently, and the penalties are very harsh. It really is not as hard as many make it out to be, and in simple businesses can be as easy as telling the tax office your income, expenditure and profit across the year. Avoid those penalties, and get it done right now.

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