Conviviality Fire Sale

Conviviality (CVR) has now gone into administration, and the ordinary shares are probably worthless (they were suspended some days ago and are likely to remain so). The administrators have already sold the major parts of the business in “pre-pack” administration deals. That’s where arrangements are made to dispose of assets in advance of the appointment of administrators by the prospective administrators before they have in fact been appointed. Is that legal you may ask? Yes it is because of a past legal case however perverse the result might be.

It’s interesting to look at the deals done by the Conviviality administrators:

  1. Retail chains Bargain Booze and Wine Rack have been sold to Bestway for £7 million.
  2. The wholesale division comprising the former businesses of Mathew Clark and Bibendum has been sold to C&C (owners of Magners Cider) for £1, although it seems the new owners have taken on some of the debts owed.

Matthew Clark was bought by C&C for £200 million three years ago and Bibendum was bought for £60 million in 2016. You can see why I call this a “fire sale” when the administrator seems to have lined up buyers in just a few days and disposed of these businesses at a value that seems to be a great bargain for the buyers.

One of the problems with administrations is that often the administrators have an objective to sell the business absolutely as soon as possible. This is to protect their own financial interests it frequently appears to me as much as it is to protect the jobs of employees and maintain a business as a “going concern”. Administrators can only get paid out of the cash that is present in the business or can be collected. That’s why nobody wanted to take on the administration of Carillion and it went straight into liquidation.

Administrators have an obligation to market a business for sale but can that be done adequately and the best price obtained when the deal has clearly been done in just a few days? That obviously does not allow any time for the normal due diligence on a substantial deal so the buyers won’t have paid anywhere near the normal market price for the assets.

In summary, the buyers of the assets get a great deal, the jobs get preserved (at least to some extent), the bankers to the company often get their loans back and the administrators get well paid while minimising their risks. But the previous owners of the business (the ordinary shareholders) get left with nothing. Is that equitable?

In effect the current legal structure, and particularly the pre-pack arrangements, enable the rapid dismantling of a business when it might have been recoverable if the company had been able to have more time to refinance the business and stave off its creditors for just a few weeks.

This is why I argue that the current UK insolvency regime needs reform. It destroys companies in short order when ordinary shareholders have often invested in the company to grow the business in the past. In the case of Conviviality it only listed on AIM in 2013 and did subsequent placings to finance its expansion.

The reason for the invention of “administration” in the insolvency regime was to enable a more measured wind-up, disposal or restructuring of a business rather than a liquidation. But insolvency practitioners (i.e. administrators) seem to have changed it into a short-cut to wind-up. Reform is surely needed.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Moneysupermarket and Private Eye

Fame at last. This week Private Eye published a letter of mine on the subject of Moneysupermarket.com Plc. This was in response to a somewhat inaccurate article on companies ditching their advertising agents. This is what the letter said:

“Sir, Contrary to your article on companies ditching their advertising agencies in EYE 1466, where it is stated that Moneysupermarket.com lost money last year, the truth is that they actually made profits of £78.1 million.

However, as an investor in the company, I applaud the action of the new CEO in firing their advertising agency. I always thought good advertising was about promoting the merits of the product or service you were offering. But Moneysupermarket’s recent campaigns, such as a prancing “twerking businessman with a giant arse” as you put it, was nothing of the kind. Perhaps the new(ish) CEO (he has been there a year) took a similar view. Particularly when the financial results for last year were indeed disappointing, albeit revenues and profits were up 4% – but that’s not much more than inflation.”

Private Eye often publish some revealing articles on financial matters and this latest edition contains one such by “Slicker”. It covers the “existential crisis in corporate governance” which he says has increased since the financial crisis of 2008 with no top bankers, auditors, lawyers or regulators in court. The article covers many of the scandals that have come to light in that period, and this is a particularly pertinent comment therein: “Non-executive directors, who supposedly oversee the executive directors, have too often become an over-rewarded mafia of mediocrity, exhibiting all the signs of Stockholm Syndrome, their captors being the domineering CEOs to whim they never say no”.

He suggests some remedies which include “a corporate vicarious liability law” as in the USA, a Sarbanes-Oxley style law, and the banning of LTIPs. All well argued and it’s certainly worth reading.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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More Annoyance from Link Asset Services

I have complained before about the services from the registrar Link Asset Services that frustrate shareholders from voting – see https://roliscon.blog/2018/03/14/voting-shares-via-link-asset-services-its-infuriating/

The latest example is on another company where Link sent a paper copy of the Annual Report out, and a Notice of the AGM, but no paper proxy voting form. They suggest in a covering letter that I can either vote on-line using their “share portal” or request a paper proxy form.

For those of us who do not wish to sign up for their share portal, and just want to vote our shares (which are on the register), this is exceedingly frustrating. It’s just another way that shareholders are being discouraged from voting, and the exercise of their rights made more difficult.

I have written to the Company Secretary suggesting they fire Link Asset Services and switch to using another registrar who can provide a better service. Unless Link have a change of mind on this issue.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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GKN and Melrose – The Reality

Melrose has won the battle to take control of GKN although the Government might yet step in to halt the takeover. On what grounds is not exactly clear. Never having held shares in either company, I thought it worth looking at the facts rather than the hyperbole surrounding this deal as there seemed to be some myths being propagated.

Is GKN a key business in the UK’s engineering and technology infrastructure based on a long history of innovation? Or is it a financially poorly performing conglomerate that was vulnerable to a bid?

It has been said that GKN produced Spitfires in the Second World War but in reality they did not develop the plane but were just one of several assembly plants that were subcontracted to produce it in volume, In the 1960s I well remember the company under the name Guest, Keen and Nettlefold and in Birmingham they had large factories producing nuts and bolts. Hardly high-tech engineering even at that time. Later they did make a success of car parts production particularly with constant velocity joints (CVJs) as used in the Mini and other front wheel drive vehicles. But they are now proposing to split off the driveline business and merge it with another company. They plan to focus on the aerospace business. You can see a “polished” version of the history of the company here: https://www.gkn.com/en/about-gkn/history/ . In reality a long history of dubious diversifications, followed by later rationalisations.

The recent financial performance has been disappointing. Reported earnings per share in 2017 were the same as five years previously with a trough in between. Dividends in that period grew slowly and at the current share price equate to about 2% yield. Return on assets a measly 5.6% last year, and even that was an improvement on previous years. Although the financial prospects based on analysts’ forecasts might be slightly improving, is it not simply a case that institutional investors might have become disillusioned with the management in recent years and seen an opportunity in the Melrose bid to improve the financial returns?

There will no doubt have been some activity by share traders, arbitrageurs and hedge funds of late who might have influenced the outcome. But that’s capitalism in action. Holders, even long-term ones, sell to higher bidders.

Personally I oppose any suggestion that short-term holders should not be allowed to vote, and the use of other “poison-pill” mechanisms that can defeat takeovers. If I purchased a share in a company last week, I want to be able to vote it! I may not have known that a bid was coming and how I vote will depend on the arguments put by both sides. Clearly in this case GKN simply lost the argument.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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All Change at Intercede, and Drug Development Costs

An interesting announcement this morning was the news that founder Richard Parris is losing his role as Executive Chairman at Intercede Group (IGP). He is stepping down to the role of Non-Executive Director and they are looking for a new CEO.

The company operates in the digital identity area. I once held quite a few shares in it but became disillusioned with the leadership some years ago and the company’s remuneration arrangements, so I now only have a nominal holding. For a company with interesting technology in a hot sector, it has a disappointing financial track record. Slow growth and lumpy sales, and consistent losses in recent years.

It is surely good news that Mr Parris is stepping down, although the share price has fallen today at the time of writing. He and his wife do hold quite a significant proportion of the shares. Let us hope the new management is able to make this company a world beater after all – it seems to have suffered the problem of many UK technology companies in failing to develop a sales and marketing strategy to turn good technology into market leadership.

I spent an interesting day on Wednesday meeting with Professor Jonathan Barratt at Leicester University. He is researching IgA Nephropathy, a disease that can lead to kidney damage and ultimately the need for a kidney transplant (as in my case). It included a tour of the labs and attending a lecture he gave on the subject which was most interesting. It’s a worthy cause if any investors have surplus cash after the recent stock market rout as Prof. Barratt and his team are making significant progress. Remember there are tax benefits from charitable donations.

One of the things Prof. Barratt mentioned was the enormous cost of drug development. According to the Tufts Centre, they suggested the cost was $2.6 billion in 2016 to get a drug to the FDA approved stage. One can see why relatively rare diseases do not get a lot of interest from drug companies, particularly those like IgA Nephropathy where the progression of the disease can be so slow that clinical trials take years to complete. I also now know exactly why I don’t invest in drug development companies, where the chance of success and obtaining a good financial return is so low.

But one aspect that Prof Barratt is working on is the possibility of improved diagnosis by using blood tests based on antibodies to identify the disease at an early stage which might assist with prevention. This is an area where I am invested though with holdings in Abcam (ABC) and Bioventix (BVCP). The latter produced some unexpectedly good interim results due to one of their customers identifying some royalties due that had not previously been reported. But even without that the figures were good.

One important future revenue stream for Bioventix is a troponin test which is a marker for heart attacks. This might speed up the diagnosis of chest pain. That is important if you arrive in A&E with severe chest pain as there can be many other causes although doctors often focus on that to the exclusion of problems such as gall stones or gall bladder infections which I was once told were more common. Delayed or misdiagnosis is obviously a major issue here that the new test might prevent.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Aviva Preference Shares – FCA Announcement

Readers who take any notice of financial affairs will be aware of the furore over the threat by Aviva to redeem their preference shares by a “share cancellation” process – they claimed that is a different legal process, even though the shares were described as “irredeemable”. The shares concerned dropped in price to a significant extent because their high coupon interest rate meant they were trading at a premium when cancellation would have meant redemption at the original par value. Aviva have reconsidered the matter, but the interesting aspect today was a response from the Financial Conduct Authority (FCA) to a letter from the Treasury Select Committee. You can read it here: https://www.investegate.co.uk/financial-conduct/rns/fca-response-to-tsc-on-aviva-plc-preference-shares/201803280704471964J/

It basically gives lots of reasons why they cannot yet respond to some of the questions as they are still looking into the issues, but in response to Question 4 they seem not to concede that they should be involved in “the resolution of the legal questions”. In other words, they would be quite happy to leave it to an enormously expensive law suit by investors to resolve the key questions.

They do not seem to accept that they have an overriding objective to ensure a fair market for securities and that investors should not be prejudiced by small print, concealed or opaque legal terms and other sharp practices.

The response to Question 6, seems to try and excuse the problem by saying the shares were issued more than two decades ago and the FCA has taken subsequent action “in order to restrict the retail distribution of regulatory capital instruments….”. This is surely not an adequate excuse. The shares concerned were and are publicly traded and there is nothing stopping any investor (at least a “sophisticated” one) from trading in them. But even sophisticated private investors and some institutions were caught out by the unexpected threat from Aviva.

The FCA is again proving to be toothless in the face of seriously unethical practices. In other words, they are not doing their job competently and should be reformed in my personal opinion. I believed the FCA adopted an objective of more “principle-based regulation” a few years back but now seem to have abdicated that responsibility and are quite happy to let lawyers argue over the wording of a prospectus while ignoring the ethical issues. Just as they did with the RBS and Lloyds cases. It’s simply not good enough to issue the kind of response they have to the Treasury Select Committee.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Which Is The Cheapest Platform?

Many investors do not research which trading platforms (a.k.a. on-line stockbrokers) are the cheapest before they sign up with them. Neither do all platforms offer the same facilities – for example all the different types of ISAs and allow investment in both funds and investment companies or direct shares. Retail investors tend to depend on which name they remember from advertising, from friends’ recommendations and other sources. But now the Association of Investment Companies (AIC) has provided a useful comparison tool.

The AIC represents investment companies and has issued the following press release about the launch of their new platform comparison tool: https://www.theaic.co.uk/aic/news/press-releases/aic-launches-platform-comparison-tool-on-its-website

This is an exceedingly useful tool and shows that the platform charge on several platforms can be as high as over £3,000 p.a. or as low as less than £100 p.a. for a portfolio valued at £1 million invested solely in open-ended funds. In other words, an enormous range!

They also have separate tables for investments in investment trusts so you can compare those charges against open-ended fund portfolios, or a mix. Funds are often more expensive. You might notice they don’t give the cost of directly investing in shares, but these would be the same as investment trusts as they are simply listed company shares.

They don’t include transaction costs on trading which is worth bearing in mind though. The volume of trading as well as the size of portfolio affects the overall costs.

Surely you don’t need reminding that minimising what you pay to platforms is one of the key ways to maximise long-term investment performance as they can seriously erode your returns. If you are looking for a new stockbroker, it would be worth reviewing this comparison tool first because although service quality is important there is little correlation between cost and service. Some of the lowest cost brokers provide very good service in my experience so one wonders why there is such a price difference in this market. One reason might be the difficulty investors have in switching brokers that reduces competition in this market.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Alliance Trust, Katherine Garrett-Cox and Perverse LTIPs

I have previously commented positively on the outcome of the “revolution” that took place at Alliance Trust (ATST) as reflected in their latest accounts which were recently published. That revolution resulted in the departure of former CEO Katherine Garrett-Cox who resigned in February 2016.

The latest Annual Report shows that she is still being paid large amounts though. For example, total “single figure” remuneration for the 2016 calendar year is given as £1,305,000 and was £832,000 for 2017.

She is likely to be paid still more in future as she is still entitled to LTIP and performance share awards that will vest in 2020. The pay-outs will depend on the positive performance of the company which has been achieved since her departure, which she obviously will have had little influence over. Certainly not by 2020.

Now she may be contractually entitled to these payments under her contract or as might have been agreed to ensure her timely departure, but is it fair and reasonable for her to claim such amounts? Some shareholders think not and are writing to her to suggest that she might like to consider waiving her entitlement or donating the value to charity.

This is of course yet another example of how LTIPs and other performance schemes in public companies lead to perverse outcomes.

P.S. Would anyone like a proxy appointment to enable them to go to the Persimmon AGM on the 25th April in York – and harass them about the wonders of their LTIPs? I can supply if you telephone 020-8295-0378.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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RBS, Shareholder Committees, LTIPs and Weir

It is good news that the Royal Bank of Scotland (RBS) have accepted a requisition for a resolution on a Shareholder Committee at their forthcoming AGM. ShareSoc and UKSA, who jointly promoted this under the leadership of Cliff Weight have issued a press release confirming the resolution has finally been accepted after some legal evasions to try and avoid it.

Shareholder Committees are a way to improve corporate governance at companies and ensure that the views of shareholders (and potentially other stakeholders) are noticed by the directors. It might put a stop to such problems as wildly excessive pay in public companies which non-executive directors have been unable to do – mainly because they are part of the problem.

RBS has an appalling track record of mismanagement and dubious ethics in recent years, from the dominance of Fred Goodwin who pursued a disastrous acquisition and then a right issue (in 2008) that was promoted by a misleading prospectus, to the activities of its Global Restructuring Group (GRG) which is still the subject of regulatory action and law suits, through involvement in the sub-prime lending problems that caused the financial crash to PPI complaints.

A Shareholder Committee might have tackled some of these issues before it was too late. You can read more about the campaign to get one at RBS, and how shareholder committees operate here: https://www.sharesoc.org/blog/campaign-to-obtain-shareholder-committee-at-rbs/ . I wrote the original note on the subject published there by ShareSoc back in 2011 and I still consider that it would be a step forward in UK corporate governance to have one in all public companies. But there is still strong opposition from boards to the idea mainly apparently on the principle that it might interfere with their decisions. That may be so but only if they are unjustifiable and it would not undermine the “unitary” structure of UK boards.

Shareholders in RBS should make sure they vote for the resolution to appoint one at the AGM, but winning the vote will not be easy. RBS have made it a “Special Resolution” which requires 75% support.

Another aspect of RBS that has concerned investors is the delay in paying out the legal settlement that was agreed over the Rights Issue. This has received a lot of media coverage but the problems faced by the legal firm now handling the settlement, Signature Litigation, should not be underestimated. It appears that they face two problems: 1) confirming the eligible claimants and their shareholdings; and 2) confirming the contracts with “litigation funders” who helped to finance the legal action and their entitlements.

You might think that confirming the shareholders would be easy but it is not. A very substantial number of the claimants will have held shares in nominee accounts (i.e. the shares they subscribed for were not put on their names on the share register of the company). They are quite likely to have subsequently sold the shares due to the collapse in the share price. After 10 years the nominee operator may not be able to confirm their past holding, and if they ever received a contract note or other written confirmation of their holding they may not have printed it out or retained a copy in digital form. Many claimants may have died in the meantime or become senile, or moved house or changed their email address so that would create other problems.

There are two morals to this story: 1) Make sure you always keep accurate records of share transactions, including any contract notes or confirmation of subscriptions; 2) do push for reform of the share registration system so that everyone is on the share register and there is no doubt about who owns what and when the shares were acquired.

As regards the contracts with litigation funders, it is entirely appropriate that Signature Litigation seek to confirm the details of those contracts and that they were appropriate, i.e. that real services or funding was provided and the commission due was fair and reasonable. The fact that these arrangements seem to be difficult to confirm, or at least are taking time, certainly raises some doubts that the campaign and legal action was competently managed all through its duration.

However, as I recently said to a member of the fourth estate, the action group(s) and shareholders involved in this case should be complimented in continuing the fight for ten years against very difficult odds and a ridiculously expensive legal system. I know exactly how difficult these cases are – the Lloyds Bank one is similar and is still in court. To obtain a settlement at all in the RBS case was an achievement, when there was no certainty at all that it would be won.

As regards corporate governance, an interesting item of news today was that from Weir Group Plc (WEIR) who are changing their remuneration scheme to replace LTIPs. That was after losing a “binding” vote on pay two years ago. The new scheme means shares will be awarded (valued at up to 125% of base salary for the CEO per year) with no performance conditions attached, although the board may be able to withhold awards for underperformance. The base salary of the CEO was £650,000 in 2016 while Weir’s share price is still less than it was 5 years ago. The justification for scrapping the LTIPs was that they paid out “all or nothing”, often based on the prices of commodities that directly affect Weir’s profits and share price. They are also changing the annual bonus so that it focuses more on “strategic objectives” rather than “order intake and personal objectives”.

Comment: as readers may be aware, I regularly vote against LTIPs on the basis that I am not convinced they drive good performance and tend to pay out ludicrously large amounts. The new scheme might ensure that directors do hold significant numbers of shares, which is a good thing, but with minimal performance conditions this looks like a simple increase in base salary, in reality a more than doubling for the CEO. Looking at the history of remuneration at Weir this looks like a case of wishing to continue to pay out the same remuneration by changing the remuneration scheme when past targets were not achieved.

They really have not learned much from past mistakes have they? This would be another company where it would be good to have a Shareholder Committee to bring some reality into the minds of the directors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Musings on Mortality, and Year-End Tax Planning

The death of Steven Hawking at the age of 76 gives those who are trying to figure out how long we may live some cause for thought. He was given only a few years life expectancy soon after he was diagnosed at the age of 21 as having motor neurone disease. This problem of forecasting how long you may live is a key concern of many elderly people like myself as it has a big impact on investment and tax planning.

I am likewise living much longer than my doctors forecast 20 years ago. Despite one near death experience I have reached the age of 72 in reasonable condition, although I do get offered seats on tube trains of late. Do I really look that knackered?

But can I live another 7 years? That’s how long you need to do so to avoid tax on gifts. It can even be as long as 14 years if you have made gifts in prior periods. Now even allowing for the pessimism of doctors who seem to err on the downside on the principle that at least if their forecasts are wrong the patient may be pleased, I think tax planning will have to take another approach in my position.

Gifts of £3,000 per year are possible regardless, and gifts out of “surplus income” can also be made so now is the time of year to work out what you can do in this regard before the tax year ends. Of course it means that you need to have kept track of all your income and expenditure during the tax year which many people do not. If you have not, perhaps it’s time to start for the new tax year? The wealthiest man in the world at the time, John D. Rockefeller, was reported in his biography as keeping a pocket notebook with him at all times where he recorded the smallest expenditure. Perhaps no need to go to such extremes but the principle is worth following.

As it’s coming up to the end of the tax year, now is the time to review holdings and transactions that are not in ISAs or SIPPs in case you are likely to be paying capital gains tax. I get my accountant to work out my capital gains tax position a few weeks before the year end, then if I have gains exceeding the annual allowance (£11,300 for the current tax year), I sell any losing positions to reduce the liability. If I have gains less than that I might sell profitable holdings to maximise the use of the allowance. One can always buy any holdings back later that you prefer to keep them (more than a month later, or buy them in your spouse’s name).

This year, with the stock market being buoyant and not having made any big investment mistakes, I don’t seem to have much in the way of losses to realise. So I thought I would take a quick look at an EIS fund which was the subject of a mailing I received (EIS funds are also topical because of the Government consultation on future options for them). I previously expressed some doubts about EIS funds, but the one I received information on (Guinness AIM EIS) has been around for some time and AIM listed stocks should be less risky than unlisted investments. But when I look through the information on “historic” investments it lists the following: Chapel Down, Coral Products, Fishing Republic and Yu Energy which I do not view very positively although the last one is growing rapidly. The charges on the fund are high – 5% initial, 1.75% annual and a 20% performance fee.

You don’t get the EIS tax relief certificate until the funds are invested which could be a year or more after the closing date according to the prospectus. You also need to stay invested for at least three years to retain the income tax relief and bear in mind in any case that these are long-term investment vehicles. The immediate tax relief might be substantial but it could be a long time before there is a good return on your investment. If you die holding an EIS investment then the capital gains relief you obtained still applies (i.e. there is no tax due), but the complications of death are mind boggling on EIS investments. Anyone considering EIS investments should certainly consult an accountant who is expert in this area.

EIS funds might be one way of deferring capital gains tax liabilities, but I think I might pay the tax instead. Capital gains tax rates are currently low (10% or 20% on shares depending on your total taxable income), and there is no knowing what future Chancellors might do to change the rates and EIS rules.

There is one change in tax rates to bear in mind for the new tax year. This is that the dividend tax allowance reduces to £2,000 from April. So wealthy investors will be paying a lot more tax as a result of the dividend tax credit system being dismantled. Just to remind you, the companies you have invested in get taxed on their profits, and now you are also being taxed on the profits they distribute as dividends to you. So investors are being taxed twice on the same profits!

The conclusion is that you should avoid receiving dividends if possible. If you wish to hold high dividend paying stocks then put them in your ISAs or SIPPs. For direct holdings, it’s preferable to achieve gains by buying growth stocks rather than low growth mature companies that pay high dividends. You can always sell a few shares to generate cash income if needed. Alternatively buy such holdings indirectly in investment trusts and funds, who do not have to distribute the income, although it’s generally a good idea to avoid “income” funds. Such funds tend to underperform as Terry Smith recently pointed out. That’s probably because they tend to buy low-growth mature businesses which is a sure recipe for pedestrian stock market performance. High dividends do not compensate for lack of growth.

Another way to minimise dividend income taxes is to put money into Venture Capital Trusts. Dividends on those are tax free.

Lastly, don’t forget that giving money to registered charities can minimise your tax bill so that’s another subject to consider before the tax year end.

In conclusion, I would suggest three mottoes to follow: 1) Don’t bet on your life expectancy – it could be much longer, or shorter, than you think; 2) Keep your tax affairs simple; and 3) Encourage the Chancellor to simplify the tax system, and not keep changing the rules.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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