Quantitative Easing – so what does it actually mean?

Conventional methods of stimulating the economy appear to have been increasingly unsuccessful in the current economic environment. The Bank of England has already cut UK interest rates to a new all-time low of 0.5% but, whilst lower interest rates usually provide a boost for both lending and spending, with interest rates already their lowest in BoE history another cut is unlikely to produce the usual stimulative effects.


The credit crisis has left banks reluctant to lend; moreover, in the current recessionary climate, businesses and individuals are more inclined to hoard what money they have. The BoE has largely run out of scope to control the economy through interest rates, so it seems quantitative easing is the next plan of action.

How does it work?

Quantitative easing helps to increase or reduce the supply of money held in commercial banks’ reserve accounts at the central bank. The BoE will buy securities from commercial banks, and will pay for them by adding money electronically to the banks’ reserve accounts. The BoE hopes this will encourage the banks to extend credit to businesses and households, increasing the amount and flow of credit in the UK economy and fuelling economic recovery.

Encouraging the banks to lend

However, in order for the programme to be successful, it is vital that the commercial banks cooperate by lending the money to households and businesses. The banks remain reluctant to lend and prospective borrowers are reluctant to increase their debts; however, the BoE hopes that banks will tire of squirreling away their cash for a minimal return of 0.5%, and decide to lend out the money at a more profitable rate, making it easier for companies and individuals to get mortgages and loans. This would help to revive spending, providing a valuable boost for economic growth.

Creating “new” money

The BoE has already bought assets in an attempt to kick-start the flow of credit. However, the central bank issued new Treasury bills to pay for these purchases, whereas quantitative easing involves the creation of new money. Although the process of quantitative easing has been described as “printing money”, the BoE does not crank up the printing presses at the Royal Mint and put new banknotes into circulation; the process is purely electronic, although it does result in the creation of new money.

Getting it right

Quantitative easing is not guaranteed to work. It was tried in Japan a few years ago, but the commercial banks opted to sit on the additional cash, doing nothing to boost money supply. The BoE’s Monetary Policy Committee is monitoring the effectiveness of the programme by measuring the supply of money and credit to see if it has increased. However, it will take time before we know whether quantitative easing has worked for the UK.

John achieves his Statement of Professional Standing

It is a requirement from 1st January 2013 that all retail investment advisers hold a Statement of Professional Standing (SPS), issued by an Accredited Body.  This confirms that an adviser adheres to ethical standards, holds appropriate qualifications for their role (including completion of gap fill) and has undertaken appropriate CPD (Continuing Professional Development) during the year. 

John has successully completed all of the above and been awarded his SPS, which is renewable on an annual basis.

John's specialisms include Pensions and Retirement Planning.

Another Pass!

Congratulations to Alison Holmes who has just passed her R02 (Investment Principles & Risk) exam. Well done!

What is your current Attitude to Risk?

It is often said that stock markets are driven by fear and greed – and, right now, it is probably fair to say that fear is winning. A combination of negative factors – from disappointing economic data, fears of a “double-dip” recession, the eurozone’s sovereign debt crisis and the fiscal crisis in the US to the ongoing unrest in the Middle East and North Africa and the effects of the Great East Japan Earthquake – have conspired to undermine investor sentiment. Amid an atmosphere of uncertainty and a backdrop of volatility, many investors are unsure what to do next.

The benchmark FTSE 100 Index lost more than 11% of its value over the first nine months of the year, although during early August, it dipped 15% below its starting level. The most recent figures from the Investment Management Association (IMA) suggest that investors have become increasingly risk-averse and, during July, net retail sales dropped to levels last experienced three years ago. Although demand for bond and balanced funds remained relatively robust, equity funds registered net outflows for the first time since February 2009, and net outflows from UK, US and European funds outstripped inflows into Japanese, Asia-Pacific and Global funds during the month.

Amid the tumult of market and macroeconomic noise, it is worth taking a step back and looking again at corporate fundamentals. Although the current backdrop is saturated with significant structural and macroeconomic problems, many individual companies are in good shape, and the share prices of some high-quality firms look relatively inexpensive. Corporate balance sheets have strengthened; many companies retrenched during the financial crisis and recession, and have subsequently found themselves able to resume or raise dividend payments. That said, it is worth considering any significant intensification of the eurozone’s debt crisis could squeeze corporate finances, reducing companies’ ability to return value to shareholders.

Looking ahead, there is still good value to be found in the equity market, although investors should probably prepare themselves for a bumpy ride. In the current climate, it is worth re-examining the structure of your investment portfolio and ensuring that it is properly diversified and appropriately structured to meet your needs. Above all, it is worth reassessing your attitude to risk. The summer’s extreme volatility has led many investors to reconsider their own definition of what constitutes “risk” – and, in some cases, to find that their tolerance for loss is rather lower than originally thought!

Congratulations Alison on passing R01

Alison Holmes has passed her R01 Financial services, regulation and ethics exam. Congratulations Alison from all of your colleagues at Culverhouse & Co.

Private tutors, coaches & e-marketplace traders under HMRC Spotlight

The latest groups of trading activity that HMRC are targeting for underpaid tax are private tutors and coaches (including fitness instructors) and those who intend to make a profit through buying and reselling goods in an e-Marketplace and have not fully declared their income.

HMRC’s announcement does not give any timescales, but it does suggest that for those who regularise their tax affairs and volunteer undeclared income and gains prior to being challenged by HMRC, the terms will much better.

 

Congratulations Claire!

Claire Wise recently passed her RO1 Financial services, regulation and ethics exam.  Congratulations Claire from all of your colleagues at Culverhouse & Co.

Small business tax to be reviewed

Specific tax issues faced by individuals starting a business, along with the most problematic tax hurdles encountered by small businesses are under review by the Office of Tax Simplification (OTS), in an aim to simplify the tax regime.

OTS stated that many small businesses were struggling under the administrative burden and that plans are afoot to set up surveys and roadshows to identify the steps that cause most difficulty.

The first phase of the OTS small-business review, published earlier this year, found that Revenue & Customs was “feared” by small businesses. It said there was a strongly held opinion that the Revenue viewed small businesses as tax evaders, and that this impacted their approach.  The review also reported that businesses felt that they spent too much time sorting out the Revenue’s errors.

Further findings of the review are due to be published prior to the next Budget.

Poor Inheritance Tax Planning Costing £££s

Our failure to plan for inheritance tax (IHT) is likely to cost us £1.3bn in 2011, according to the professional advice website Unbiased.co.uk.   Their latest annual Tax Action Report found that this year unnecessary tax payments by UK tax payers will amount to £13.5bn, 10 per cent of which will be IHT.

Using your annual exemption, making regular gifts out of surplus income and small gift exemption are just some of the simple strategies that you can use to help plan your IHT liability.

Unbiased.co.uk also report that 9 out of 10 people have not actively reviewed their tax situation in the past 12 months and therefore could be paying more tax than needed.

 

Congratulations Dan!

Dan Haley recently sat for and passed his RO1 Financial services, regulation and ethics exam. Congratulations Dan from all of your colleagues at Culverhouse & Co.

Tougher penalties for late self assessment returns

Late self assessment returns will be subject to a new penalty regime announced by HMRC.

 

Under the new regime, from 6^th April 2011 people failing to meet the relevant deadline will incur an automatic £100 fine that will increase by £10 per day, up to £900 for the first three months.  For returns that are filed in excess of three months, the greater of £300 or 5% of the tax will be added to the £900.

 

In addition, there will be penalties charged for paying taxes late, which will be of 5% of the tax owed, increasing by 5% every 30 days.

 

The new penalties will apply to paper returns submitted after the October deadline and the January deadline for online returns.

 

IR35 here to stay....

IR35 will remain in place, announced the Government in this week’s Budget, despite its criticised complexity.  The controversial freelance tax rule, details whether, for tax purposes, freelancers are treated as employed or self-employed.

The Government has introduced measures to better administer IR35 and has announced that an IR35 forum is to be formed that will monitor HMRC’s approach, along with the set up of a dedicated helpline  which will be manned by specialists. Review will be restricted to high risk cases. 

End of tax year planning....

With only weeks to go to the end of the tax year, now is the time to assess investment positions in order to keep capital gains tax and income tax liabilities to a minimum and to maximise use of allowances, exemptions and reliefs.  Remember that some allowances may be lost if not used before the end of the tax year.

Simple actions such as managing savings within a family so that the individual earnings allowance before tax of £6,475 is utilised could achieve significant savings.

It may also be worth researching possible tax planning opportunities that may arise with the rules surrounding pensions changing and new limits being introduced for 2011/12.

Act now, don’t miss out...

 

Director Appointment - Dave Knight

Congratulations to Dave on his appointment to the Board of Directors on 1^st November 2010. Dave has been with the Company for over 6 years and he is now responsible for developing and promoting the Accountancy and Taxation side of the practice.

 

John Culverhouse

Congratulations to Dave Knight

 

Dave has successfully applied for and has now  been awarded his Practising Certificate from the Association of Chartered Certified Accountants.

 

Well done!!!

 

John C