Forget interest rates. Even combined with some banks’ welcome promises to pass on the full rate cut to small and medium-sized enterprises, monetary policy remains a blunt instrument. Value added tax could prove a more subtle weapon. The decision to trim sales tax to encourage consumers to shop looks ineffectual. But the idea of flexing VAT payment schedules to alleviate pressure on companies’ cash flow has more promise.
Derrick Lyon, an FT reader, has proposed the government extend smaller companies’ payment terms from 30 days after the end of the VAT quarter to as much as 90 days. That would offset the growing pressure on suppliers from their own much larger customers. According to the Federation of Small Businesses, big companies now take 44 days to pay their bills. Mr Lyon, himself the owner and chief executive of a £22m-turnover business with 140 staff, calls his scheme a “tool for controlling corporate liquidity”.
Politicians are on the case. The government is already enhancing support for business on an ad hoc basis: you can now call the tax authorities and request a more flexible timetable for paying VAT, or, for that matter, corporation tax or National Insurance. The Conservatives have suggested smaller companies could defer VAT bills for up to six months, charged at a 7.5 per cent interest rate. Even Nicolas Sarkozy has joined the VAT bandwagon, promising speedier repayment of sales tax rebates as part of the French stimulus package he announced on Thursday.
The Lyon plan has the benefit that it would cover all companies (up to a cap, if required) and strip away the bureaucracy of banks or government. There would be no stigma attached to applying for assistance and it would allow businesses to plan ahead, certain of being able to retain the additional cash for longer, rather than having to negotiate with HM Revenue & Customs. The plan should be voluntary, however, so that companies that don’t want to change payment timetables – or that rely on regular rebates – can stick with the current system. Coincidentally, Ernst & Young has suggested a parallel scheme that would allow larger companies – generally on a monthly VAT schedule – to elect to shift to the quarterly payment timetable used by smaller businesses.
Mr Lyon, who plans to drum up support for his idea with a Downing Street “e-Petition”, says his system could be tailored to different sectors or sizes of companies.
But Lombard prefers the purity of the original proposal. As one cynic pointed out this week on the FT’s letters page, the “fundamental flaw” in the Lyon plan is that it would “actually make sense”. If you agree – or alternatively have strong objections to the idea – e-mail, or use the Lombard discussion forum at www.ft.com/lombard to air your view.
Vision and visibility
It is hardly surprising that a global recruitment group is feeling the pinch in a recession. More startling is that Thursday’s profit warning from Michael Page International took so long to arrive.
The company began scaling down its expansion plans in the spring amid signs of a broadening downturn in the financial sector. Even then, the group seemed upbeat about medium-term prospects, dismissing the importance of “dramatic headlines” of City job losses and exuding confidence about the benefits of its diversification away from the banking sector.
Ordinarily, this would be a sound strategy for risk reduction. But Michael Page has now diversified into precisely those sectors of the broader economy that are also starting to suffer and reining in recruitment, such as engineering and information technology. As holders of asset-backed securities have learnt to their cost, being exposed to lots of different types of risk does not necessarily reduce your overall risk profile.
The company’s failure to anticipate a wider slowdown was myopic given the worsening economic news. That provided plenty of cover to start cutting costs more aggressively. The fact that the recruitment business can usually foresee earnings only six weeks in advance is some excuse. But while Michael Page was the last to get the memo about job cuts and hiring freezes, it should at least have known it was in the internal mail and reacted accordingly.
To those woes must be added the consequences of the decision to reject a bid from rival Adecco three months ago. The board said independence, organic growth and diversification offered better long-term prospects. But while the deal would have brought little business benefit to Michael Page, at 400p a share it was more than twice the current share price. That’s a bitter loss of financial value. Directors now face a long wait before they can start to claim vindication.
Michael Page: john.o’firstname.lastname@example.org
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