There is a problem with family companies, much of which comes down to too much tax planning

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The FT reports this morning that:

Only one in 12 of the UK’s family-owned companies has plans to expand aggressively over the next five years, suggesting they could struggle to compete against their more dynamic foreign competitors.

The survey that supports the report was undertaken by PWC. As they noted:

only 16 per cent of turnover for UK family businesses came from overseas, compared to a quarter of family business turnover globally. Furthermore, only 8 per cent of UK family companies said they aimed to expand aggressively in the next five years, compared to 57 per cent in China, 40 per cent in the Middle East, 40 per cent in India, and 16 per cent in the US.

Let's ignore for a moment PWC's reasons for doing this work, and any spin they might have put on the results and presume the findings are true. Then let's think about what this means.

First, it says that family business is not as important in the UK as it is in most economies. We have a much larger non-family sector proportionately than most economies because quoted companies are so significant in the UK (although China, obviously, has significant state enterprise). So it is probable that like is not being compared to like here. That has not been highlighted, as far as I can see.

Secondly, the report ignores relative expected growth overall. The IMF hopes the UK may manage 2 to 3%. In developing countries it is still expecting 5% or more (which is a doubling of the economy in 14 years). That's something of an omission.

Third, the report likely ignores realism: UK businesses are, I suspect less likely to over inflate their ambition than US ones.

But all that being said, let's get down to the nitty gritty. First, this is a sales pitch by PWC. Obviously you would hope that they were selling their ability to solve the underlying fundamental problem, which is a lack of entrepreneurial skill in the UK, but that, of course, would be too much to hope.  Instead they are selling their services in succession planning,  and this no doubt comes down to their ability to sell something else, which is absolutely at the core of this issue,  and that is tax planning.

The term ' family company'  does in itself have a strange connotation to me.  I have had a career as both a practising chartered accountant, where I focused as much upon entrepreneurial advice as on tax, and as an entrepreneur, creating and growing real UK businesses.  The truth is that most growth does not happen in family companies:  real entrepreneurial activity requires the putting together of a team of people with compatible skills, vision, and drive to create new products and services and it is rare that all those skills are available within the constraints of a marriage or an extended family, let alone across generations. They might exist, but don't count on it.

So, in that case 'family companies'  usually represent inherited wealth where the primary motivation is maintaining that wealth and not risk taking.  In fact,  those with wealth are by far the least likely to be risk takers because the fear of loss is much greater in their case  than any  perception that they might have of potential upside gain from risk taking. This is especially true in a society as status driven as the UK is.

And that means that  in these companies, just like large business, tax planning is likely to be the focus of more 'innovation'  then any other activity.

So, what is the real need that this report highlights?

The first is that  there is a pressing need  for more business advisers who actually understand what real  entrepreneurial business is. They are sorely lacking in the upper echelons of the UK accountancy profession. And for the record,  being promoted through the ranks of an accountancy practice to partnership, or having worked for an extended time in a large company where there was a guaranteed salary at the end of the month is not in any way relevant entrepreneurial experience:  it is instead just about the most conservative career path that anyone can take.

Secondly,  current tax incentives that encourage the concentration of wealth, including those in inheritance tax legislation, need to be revisited. We need incentives that encourage the wider ownership wealth, including the ownership of so-called 'family companies'.

Thirdly, we need to stop thinking that the Big 4 have the answers to problems. They don't. All they have are good sales pitches.