Welcome to the October 2005 edition of the PMMC Freelance eNewsletter.

In this edition, we discover just how easy it is to start a business in the UK, only to come to the realisation that the owners of small businesses are Gordon Brown's unpaid tax collectors and that small businesses in the UK are amongst the most heavily taxed in the world.

Also this month: An essay by Brian Durrant takes us back to the '70s - a dark chapter in the history of Britain - with a warning that history might soon be repeating itself.

If you find the newsletter informative and useful, please feel free to forward it to friends or colleagues by using the link at the bottom of this message. You are also invited to contribute to future editions: if you would like to air your opinion, pass on pertinent information for freelancers or contractors, place a free 'advertorial' or simply comment on the newsletter in general, please contact us.

Starting a business in the UK has never been simpler, according to recent research carried out by the World Bank. Not only is it the easiest place anywhere in the world to obtain credit, but it takes entrepreneurs an average of just 18 days to launch a business (although it takes even less time in Canada and New Zealand). What’s more, start-up costs in the UK are equivalent to just 0.7% of gross national income and, unlike other countries, no minimum deposit is necessary for obtaining a business registration number.

Wonderful, you may say. But the truth is that what the Government gives with one hand, it may be snatching away with the other. HMRC figures obtained by the Daily Telegraph state that the Government is collecting in excess of £1.5 billion more in tax payments every week than it did in 1997 – the year that Labour seized power from the Conservatives. This is not including NI and VAT payments but does include income, inheritance and stamp duty taxation.

In fact, UK businesses are not only taxed higher than their counterparts in France, Germany and Japan, but, when compared to companies “across the pond”, pay more than twice as much tax and over double the number of individual tax levies. (Source: “Doing Business 2005” report by the World Bank). Only companies headquartered in Italy, Holland, Brazil and parts of Scandinavia and Africa actually hand over more of their profits to their governments than the UK!

These countries tend to operate very complex tax regimes incorporating many separate tax payments every year. By contrast the tax system in Hong Kong demands one single payment per year whereas the UK asks for 22 individual payments.

“Doing Business 2005,” reports that the UK has consequently slipped from seventh to ninth place in the global league table for doing business and starting up a company in spite of the facilities available.

The UK also does not fare well when it comes to enforcing commercial contracts. It takes an average of 56 days longer than its OECD neighbours to gain the necessary legal powers. And when it comes to workforce productivity, figures just released reveal that UK workers are almost 25% less productive than their peers in the US, 11% less than the French and 10% behind the average work rate of their comrades in the G7 group of nations.

And, although HMRC figures show that the Government’s tax revenue was up 11% on the previous year (2003/2004 to 2004/2005), the headline rates of income tax, National Insurance and VAT have not actually changed. The main difference for small to medium sized businesses in the UK was a piece of legislation in 2004 which introduced a minimum of 19% corporation tax on distributed profits where previously companies paid lower rates if their profits were less £50,000.

A number of initiatives are underway to establish how to relieve the regulatory burden on smaller businesses. HMRC is asking small business groups to contribute to the debate on the simplification and efficiency of tax collection and cost reduction while PricewaterhouseCoopers has been commissioned to develop ways of improving the small business’s dealings with the tax system.

All of which seems particularly relevant against the backdrop of dire warnings of future “stealth taxes” and criticism of over-optimistic financial forecasts from the Treasury as the Chancellor is accused of failing to recognise the economic slowdown in the UK.

Sue Pakenham-Walsh

Editor's Note: Sue Pakenham-Walsh is an experienced freelance writer specialising in finance and property.

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There are some striking parallels between what we are experiencing now and what happened in Britain in the early 1970s. Back then investors had nowhere to hide, and Britain was brought to its knees. The UK stock market crashed by two-thirds, inflation let rip to reach 26% and the country became literally ungovernable.

Could it happen again? You cannot afford to be complacent.

In 1971 the Conservative Prime Minister, Edward Heath, decided to embark on a dash for economic growth. His concerns about the consequences of rising unemployment were focused on the imminent closure of the Upper Clyde Shipbuilders yards. The local Chief Constable, David McNee, warned the cabinet that violence on the scale then becoming familiar in Northern Ireland was a real possibility. In the event, the shipyards were 'rescued' with public money, the 1972 budget was a giveaway and money supply growth went through the roof.

Part of the reason money supply growth skyrocketed was due to a change in legislation in May 1971 known as Competition and Credit Control. The aim was to no longer ration credit but to let the price mechanism do the job. But when higher interest rates were needed to curb runaway credit growth, the Prime Minister refused to countenance them. The consequences were a massive consumer and speculative boom. Annual broad money growth accelerated from 11% in 1970 to 14% in 1971, to then reach 22% in 1972 and 23% in 1973. Broad money balances in the financial sector shot up 75% in 1972 and 46% in 1973.

So where did this money end up? Well, it spawned a boom in share prices followed by a speculative frenzy into property. The FT Industrial Ordinary Index of shares climbed by 65% in the year to May 1972. This turned out to be the peak in the equity market. Asset price buoyancy in the rest of 1972 and during 1973 was instead most marked in real estate. Both residential and commercial property registered enormous price increases, at a pace never recorded in UK peacetime history.

The Heath Government had hoped that the easing of monetary conditions would provoke a boom in investment in industrial plant and machinery. But the money ended up virtually everywhere else! Consumers used their new Access credit cards to buy Japanese electronics, German cars and Italian deep freezes, sending the balance of payments deeply into the red.

At the same time, a new breed of whiz kids took advantage of relaxed credit conditions and turned their talents to 'asset redevelopment' and property speculation. It was a new Klondyke. In the two years following May 1971, bank advances doubled, private borrowing trebled and loans to property and financial markets quadrupled. House prices increased by 70% in just two years.

But the Heath Government did not only fuel a boom with relaxed monetary conditions; it also increased public spending by massive proportions. It had grandiose plans to extend the scope of higher education, and to reorganise local government with more tiers of administrators. Planning and publicity departments proliferated and in the NHS the ratio of administrators to medical staff swelled.

Employment figures increased by 200,000 in education and by 100,000 each in the health service and local government. These workers were not producing marketable goods and services, and acted as a drain on the productive sector of the economy by competing with it for manpower and burdening it with higher taxation.

Sound familiar?

Meanwhile, commodity prices soared. In the 12 months to June 1973, The Economist's index of commodity prices rose by 76%. Inflation started to rip into the economy. The position was becoming unsustainable. Having resisted attempts to prevent mortgage rates reaching politically undesirable levels, the Prime Minister could not hold out any longer. In July 1973, interest rates were raised from 7% to 11% in just eight days. There was a sour smell of panic in the air as boom was followed by bust. Secondary banks went under and commercial property values slumped. And there was worse to come.

Following the 1973 Yom Kippur War, OPEC curtailed the supply of oil to the West and by mid-October the price of crude had jumped from $3 to $5 a barrel. Two months later the price more than doubled to $11.65 This pushed up inflation in the UK and Heath's incomes policy was in tatters.

Then the National Union of Mineworkers struck. Heath put Britain on a three-day week and went to the country in February 1974 - and lost. The Labour Government won a second general election in October 1974 and by then the FT Industrial Ordinary was little more than a third of its value in May 1972.

Fast forward to 2005, and why aren't sharper, higher oil and commodity prices...the explosion of public sector employment...and double-digit money supply growth generating serious inflationary pressures today? The reason why history is not repeating itself - yet - lies in the increased flexibility of our labour and product markets.

Back in the 1970s a combination of higher petrol and food prices and heavy recruiting in the public sector pushed up wages. Unions were stronger and management, both in the public and private sectors, were frightened of them.

Moreover, there wasn't the influx of cheap and skilled labour from Eastern Europe as there is now to keep wage levels down. And today, inflation in the High Street is being held in check by falls in the prices of clothing, footwear, electrical appliances and home entertainment devices following the emergence of China as a leading manufacturer with a massive pool of cheap labour.

In other words, the current Government is enjoying favourable external influences that are keeping inflation in check. But this good fortune won't last forever. Underlying economic conditions are deteriorating and it is imperative that the Bank of England keeps its eye on the ball. UK economic growth in the first two quarters of this year has been a feeble 1.2% and 1.5%, respectively. CBI retail surveys reckon that conditions in the High Street are their worst for 22 years. The numbers of those claiming unemployment benefits have risen for six months in a row.

Meanwhile, the belated effects of a bloated bureaucracy and excessive red tape are starting to impinge on Britain's international competitiveness. The World Economic Forum said that the UK had slipped to 13th in the international competitiveness league table from fourth in 1997. Our excessively complicated tax system, poor infrastructure and inadequately qualified workers are seen as the main culprits. Consequently, productivity growth was only 0.5% up on a year earlier.

At the same time inflation is beginning to rear its ugly head. This month's inflation numbers will not be comforting reading and the word 'stagflation' - that unhappy combination of rising inflation and unemployment - may soon come back into vogue...

Brian Durrant

Editor's Note: Brian Durrant is a Cambridge economics graduate with nearly 20 years experience in and around the London Stock Exchange as a stockbroker, a financial journalist and head of the research department of London's leading futures and options broker. Today, Mr. Durrant is investment director of the Fleet Street Letter, where a version of this essay first appeared.