The British tax system is now so complex that even the tax men do not understand it.

We always suspected it, but it is now official. HM Revenue and Customs has miscalculated the tax paid by almost six million people – about 10% of the population of the UK.

UK Treasury Building, London

It is difficult to say which is the more disgraceful: is it the fact that 4,300,000 have been forced to pay the government more than was due; or is it the fact that another 1,400,000 who assumed in good faith they had settled with the tax man for the year will suddenly face additional demands for money?

The average additional demand will be for £1,500 (about $2,250) – quite a lot of money for most people, especially those on a fixed budget in difficult times.

Viewed objectively, the most disgraceful aspect of all in this particular case is that most victims are indeed on a fixed budget, because it relates to PAYE, “Pay As You Earn”, the income tax levied on employees, who are usually on fixed salaries.

Viewed more subjectively, since PAYE is designed as a tax on employees, this particular blunder is less likely to impact directly on most entrepreneurs. However, it does beg an important question: if the tax man can make such a gigantic error in the relatively simple calculation of the taxes on fixed incomes, how many more mistakes are being made in the far more complicated calculation of taxes on entrepreneurs?

Most of us have our horror stories. Some are due to straightforward bureaucratic incompetence, but – to be fair even to the tax man – in many cases it is unfair to blame a poorly educated bureaucrat for failing to understand a system so complex that it baffles some of the sharpest minds in the land.

Everyone agrees that the system is bad, but every attempt at reform has made it more complex and therefore worse. The only solution is to junk the whole thing and start again – with a Flat Rate Tax. Some consider Flat Rate Taxes inegalitarian and therefore “unfair”. Perhaps – but surely not as unfair as a system that overcharges some, springs sudden additional demands on others, and has just been particularly hard on some of our poorest fellow subjects.

Moreover, here is a tax calculation everyone can understand:

Simple = Fair
Fair = Efficient

Some employers are becoming positively paranoid about the abuse of business internet facilities by employees.

It is certainly true that many working hours are “wasted” by employees using company time and company computers to do a bit of online surfing or shopping ... or whatever. It seems that hardly a week goes past without some bureaucrat being fired for downloading pornography on taxpayers’ laptops – thus confirming our suspicions about the sort of people who become bureaucrats and what they spend their days doing.

It is quite right – and rather satisfying – that bureaucrats are disciplined for waste of resources they are given as a public trust.

However, private business can and should apply different standards. Our best advice to anyone thinking of a drafting a policy on employee use of work computers for private purposes is “Chill Out, Dudes”.

Accept that if technology is available, then it is going to be used – and if it can be used for personal purposes, then it will be used for personal purposes. Just accept it.

If you think too much time is being lost because technology is being abused, just reflect on how much time you are saving because you have that technology. Are you really saying you would rather not have it? A degree of wastage is the price you pay for having the technology – a price worth paying.

Of course, it is possible to reduce wastage by a combination of monitoring and tight disciplinary procedure. However, taking the time to check employees’ browsing histories and follow up with disciplinary measures is just as wasteful as unauthorised surfing. More importantly, it creates the wrong atmosphere in the workplace. If you show you distrust your employees, then the best of them will seek work elsewhere, where they feel trusted and valued – and you will be left only with those who need watching.

Here is a better idea. Stretch your employees. Set them challenging targets. At worst, this will leave them less time to waste. At best, it will engage their interest, so that they do not feel the need to relieve their boredom with a little surfing at work. Indeed, they may end up doing work at home, in their own time and on their own computers.

Private enterprise has quite a lot in common with medieval kingship – the ruthless struggle to increase wealth and holdings in spite of the near certainty that what is built up by a strong leader will be lost by his weaker successors.

Amid all this depressing impermanence, there is also a mystical, more enduring concept of kingship, best illustrated by John Boorman’s bloody but brilliant film Excalibur: “The land and the king are one”.

This might sound like airy-fairy nonsense, but a brief glance at the history of the Hundred Years War or the Wars of the Roses will confirm that a strong, vigorous king was more likely to preside over a strong, vigorous kingdom. If, on the other hand, the king was an infant or mentally infirm, his realm would be torn apart by competitors.

So it is in modern business. “The entrepreneur and the business are one”.

If an entrepreneur is full of energy and ideas, the same will be true of his business. It will be expanding. It may sometimes suffer setbacks where its optimism overwhelms good judgement, but that same optimism will enable it to recover quickly.

If, however, the entrepreneur is lethargic, the business will lose its edge. Employees take their cue from the boss. No one who owns a business should expect those with less of a stake in it to take up the slack if he becomes apathetic.

All this brings us to a point we have often made before, but one as old as kingship: an entrepreneur’s business depends on his personal health, and his health depends, in turn, on a balanced lifestyle.

Medieval kings did not live like medieval monks, so the entrepreneur should not be a monomaniac – he should not be obsessed with his business or his personal health. All the science suggests that obsession destroys both its subject and its object. The ideal is instead to develop a virtuous circle in which a healthy personal life leads to a healthy business life, and a healthy business life provides the funding and security necessary for a healthy personal life.

While some activities are innately unhealthy, many of the things that are called “vices” are nothing of the sort – they are bad only in excess. Food and sleep, for example, are biological necessities: they turn into Gluttony and Sloth respectively only when they are taken to an unnecessary extreme. At that point they become counter-productive: instead of sustaining the body, they destroy it. The same is true of business itself. Obsession is unprofitable.

America’s recovery is slow, but there are signs of improvement, at least in some states and some sectors, for those prepared to look for them.

The problem for US politicians is that most voters are not inclined to look. They judge economic progress by the crude measure of “jobs”, and economic growth does not necessarily mean an increase in employment. On the contrary, it might mean that companies are finding more efficient ways of operating.

Some say the policies of the Federal government actually discourage growing businesses from taking on new people.

Since this blog is strictly non-partisan, and since the government’s record on employment will probably be the decisive issue in November’s mid-term elections, it is not for us to take sides.

However, it would be interesting if we could construct an experiment which enabled us to compare different approaches to the economy. For that experiment to be fair, the different approaches would have to be applied to identical situations.

That is impossible in the real world, but it is possible to compare different approaches in places where there are several common factors.

California and Texas are both big states with ethnically diverse populations. Both border Mexico and rely on immigrant labour. Both have significant agricultural and technology sectors. Both have known the extremes of prosperity and poverty in the past. Both have Governors of the same political party.

Yet it is generally accepted that Texas is coming out of recession far more strongly than California.

Perhaps one should not read too much into this. After all, the economic strength of a state varies according to how one defines “wealth”, and most definitions produce patterns that defy neat explanation. For example, several states with “left wing” reputations have a higher percentage of millionaires than most.

So it is unwise to generalise – except to say that it is clear that local variations do matter, and that different policies do produce different results. If this is true within countries, it is true between countries. US politicians should not assume that a return to economic growth will mean a return to high employment. Job generation requires effort – or at least a friendlier attitude from government towards those who might be willing to make that effort.

British pubs are more than just bars. They are a focus of local community life.

Increasingly they are the only focus of local community life. The same politicians who bemoan the decline of community life are partly responsible for the closure of all the others – village schools, libraries, sub-post offices, and, indirectly, churches. It is true that changing social patterns are the primary cause of many closures – ten years ago, your contributor would go almost daily to the local post office with an armful of letters and packages of papers, nearly all of which are now sent by e-mail – but in most cases it was a political decision that provided the straw that broke the camel’s back.

The same is true of the traditional village pub. Alcohol sales have remained strong despite – or perhaps due to – the recession, but many prefer to drink at home or in soul-less urban nightclubs.

Yet there is still great demand for old fashioned pubs. The real problem is on the supply side, and this is where the politicians do their usual damage. High property taxes and the difficulty in finding casual bar staff, not helped by minimum wage legislation and other anti-employment measures, have made prosperous pubs marginal and marginal pubs unviable.

No wonder pubs are closing at an alarming rate.

Running a pub has never been an easy job. Most Britons, certainly most male Britons, have dreamt of doing it at some point in their lives – but it was always a dream that was unlikely to survive a half hour conversation with someone who had actually done it. Now even experienced licensees are leaving the business and not looking back. Their work ethic and knowledge are irreplaceable.

For those of us who believe that business is about more than profit and loss – it is also about meeting collective and individual needs – the damage to what is left of British community life is a double tragedy, but even the most ruthless economic Darwinist must disapprove when thousands of otherwise viable businesses are closed in defiance of the laws of the free market.

Once again, businesses are lost not because of supply and demand but because of state interference with them.         

According to the UK’s Chartered Management Institute, 44% of managers polled consider that they “excel at people management”.

Yet of those who took a diagnostic test only 14% excelled.

Neither of these figures is surprising. Few managers are actually good with people, and poor management in general has been a particular problem in some British companies for decades. At the same time, British managers can be among the most arrogant in the world – a psychological hangover from the days when middle class Britons effectively ran the world.

Indeed, some British managers are particularly bad because they are particularly arrogant.

The best leaders are humble.

This goes against the traditional image of “The Leader” as the self-confident alpha-male, striding around masterfully and shouting out orders without a moment’s hesitation or, apparently, a moment’s weakness or doubt.

Yet those loudmouths are usually the worst leaders in practice. Convinced of their infallibility, they see listening to others as indecision and they refuse to admit it when they are wrong – which, as a result, they frequently are. Since they lack all self-perception, they do not realise that their subordinates can see all this very clearly and hold them in contempt for it.

The good manager, by contrast, is always learning. He is always listening to others – both because others are more likely to co-operate with him if they feel he has listened to them and because he knows they might just be right. He is always open to the possibility that he might be wrong. He is engaged in a permanent quest to improve how things are done.

Above all, he is dissatisfied with himself. This is the key to all self-improvement. Where someone is perfectly content with himself and his situation, he has no incentive to change anything. Positive change can come only from unhappiness with the status quo – and the greater that unhappiness, the greater the openness to change and the motivation to improve.

The meek will indeed inherit the Earth – not least because they are more willing to adapt than the arrogant.

This blog entry is posted in conjunction with our Podcast # 122 – Business Partnerships.

It is often said that whether a partnership works or not depends on whether there is the right chemistry between the partners.

Yet partnership has more in common with physics than chemistry.

In human relationships, as in physics, opposites tend to attract. There are, of course, situations in both where this does not happen, but it is easy to demonstrate how a positive charge will repel a positive charge and a negative a negative – just as people who are too much alike will each want the same thing and will fall out over which of them gets it.

The most successful partnerships succeed because the partners have different characters and different objectives, so that each has his own role in the partnership and is content with it.

There is simply no point in going into partnership with a clone of yourself. The clone brings nothing new to the partnership. He has all of your weaknesses and his only strengths are those you have already. Instead of covering your weaknesses, he will reinforce them. He may extend your work capacity, but at the price of desiring the same rewards as you. This might boost the efficiency of the partnership in the short term, but must ultimately tear it apart.

Dr Evil and Mini-Me were always destined to betray and destroy each other: such was their nature and the nature of their relationship.

We are forced to rely on the Austin Powers reference, rather than something more serious and business-related, because it is often hard for outsiders to see how real partnerships operate in practice. It is wisely said that no one knows what goes on behind closed doors in a marriage, and the same is true of a business partnership.

In any case, the most celebrated, as well as some of the most successful, partnerships are known throughout the world because they were up there on the big screen: Laurel and Hardy, Crosby and Hope, Tom and Jerry...

Of these, the first is the most famous and the best example of how different characters filling different roles compliment each other to produce the elusive “synergy” – where the whole is greater than the sum of its parts, and two plus two equals five.

On screen, the Ollie character is convinced of his own cleverness. The Stan character, while not altogether convinced by his friend, accepts that he is even less intelligent and so he goes along with Ollie. The characters need each other: Ollie needs someone even stupider than himself to impress and Stan needs someone slightly less unintelligent than himself to tell him what to do. So the partnership serves the needs of both and both serve the partnership. There would be no comedy, and so partnership, if both were trying to be clever or both were passive.

Off-screen, the roles were reversed. Stan Laurel was a very intelligent man and a consummate professional, always thinking up new ideas for scripts and routines. Oliver Hardy, while by no means as foolish as his screen persona, was an amiable, easy-going sort, who would rather play golf than think about work.

It is pleasant to be able to record that the two men were great friends in real life, not least because Hardy never meddled with Laurel’s script ideas and Laurel ever interfered with Hardy’s golf.

Zurich, Monday 16 August 2010

When most informed commentators are issuing dire warnings about the economic future of “Europe”, they usually mean the European Union, or at least the Eurozone.

So the warnings do not apply to Switzerland, which is neither a member of the EU nor in a particularly dangerous financial position. This is not to say that everything is perfect in Helvetia, or that the Twenty Six Cantons have some form of exemption from the problems of the global markets – but it does seem that Switzerland is in a far better condition to weather the storms than most other European countries.

Although Switzerland’s independence from the EU is currently working in its favour, it would be facile to attribute the relative prosperity of the Swiss to that one factor alone. It is rather a symptom of a number of deeper strengths that have allowed the Confederation to enjoy hundreds of years of wealth disproportionate to its natural resources.

1   In spite – indeed, because – of its small size, Switzerland has always understood its economy depends on being open to foreign trade.

2   The high sense of civic responsibility of the Swiss, combined with the small size of both the Confederation and its constituent Cantons, have always imposed a tight fiscal discipline on government. It is harder to hide public debt when it must be shared among a small population.

3   Swiss banking and tax laws have always been hospitable to outsiders with money.

4   Switzerland is proof that economic liberalism is compatible with a strong sense of social cohesion, based on shared traditional values. Switzerland is a clean and safe place in which to live and do business – a nation armed to the teeth in which there is little gun crime.

5   The Swiss retain a formidable work ethic, an obsession with the quality and precision of their products, and a passion for punctuality. Although Switzerland has been mocked as the nation which gave the world the cuckoo-clock, the clever little timepiece is actually a good symbol of the virtues that make a strong economy.

The combined impact of these strengths is a healthy economy, which means a strong currency. Perhaps that is why your contributor, trying to stretch out is his devalued pounds sterling, feels so impoverished travelling through this great nation.

An entrepreneur’s most valuable asset is his time.

It is the only commodity subject to an absolute limit. It cannot be bought, sold, transferred, assigned, or delegated. You only get a certain amount, no more. Most of us feel we do not have enough of it – certainly not in the working day.

Yet the world treats our time with contempt – as if we had an infinite amount of the stuff to waste.

Since the proportion most of us spend on administrative tasks is fairly constant, anything unexpected cuts into the time we set aside for earning. This is particularly annoying when the unexpected takes the form of avoidable disputes or vexatious litigation.

In British courts, it is theoretically possible to recover all reasonable legal costs if you win in court. In practice, most winners still end up out of pocket. Even if you do get your full legal costs, you are most unlikely to cover your personal costs. It also adds insult to injury when your lawyer gets paid lavishly for his time and you get nothing for yours.

So, even if you are in the right, a strict cost-benefit analysis of pursuing a case all the way to eventual victory usually concludes that it is cheaper not to bother – and, of course, your opponents are counting on you coming to that conclusion and not bothering.

All credit then to our latest hero, the aptly named Barry Payling. Like most British people at some time or other, the self-employed photographer found himself being pursued by an incompetent but intransigent arm of the Establishment – in his case, the utility British Gas – for money he did not owe. Unlike most, he had the brains to keep a detailed record of how much time he wasted on this unnecessary dispute, and the courage to sue them for it.

British Gas settled before going to court and paid Mr Payling £2,000 – about $3,000 – for his time. This is a victory in which we should all rejoice. It would be churlish to suggest that it would be an even greater victory, worthy of even more rejoicing, if the case had gone to court and Mr Payling had won there. Then a judge would have approved a precedent that would have been of benefit to others in similar situations.

The irony is that it would benefit not only the wronged entrepreneurs but the bureaucrats, bankers, and big businesses who wrong them. If they knew they would have to pay the full financial costs of their inefficiency, perhaps they would try to be a little less inefficient.

What are we to make of the UK’s higher than expected 1.1% growth in the last quarter?

Not too much. It is a one-off combination of a slight rise in confidence as a result of having a new government and the economic effects of the high spending policies of the previous government.

Neither will last. The high spending was always going to end after the General Election, irrespective of who won, and the novelty of having a new government will soon wear out when the spending ends and the cuts begin. There is no doubt that those cuts are necessary – indeed, long overdue – but they are going to hurt, and they are going to hurt business more than most. Many businesses rely on government contracts, and civil servants will cut outside contract before they cut their own numbers or salaries. Even businesses with no government contracts will see their overall markets contract.

Added to this is the weakness of the EU as a whole identified in a recent IMF report. This is the culmination of problems that have been building up for years – over-regulation of business, pension obligations, structural deficits, and all the other “usual suspects”. Some have been warning about these for years, but those in power have laughed at them and simply borrowed more money. Now the bill collectors are at the door.

Although the UK is guilty of some of the same economic crimes, Britain is not as badly exposed as some other EU states – at least not yet. The more immediate danger for British businesses is that their European markets may be contracting at the same time as their domestic markets.

However, we should not be too gloomy. The dreaded “double dip” recession still seems unlikely. Yet the fact that the Bank of England predicts that interest rates will remain low for some time is hardly a sign of confidence.

Things are never as bad as they seem – but they are never as good as they seem either.