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Price cuts, extensive promotional runs and stock clearances are widespread within the increasingly competitive DIY sector in the UK. Arguably such practices have served only to contribute further to falling profit margins. DIY RIP discusses the prospects of DIY giant B&Q, which reported a 9% fall in its sales for the fourth quarter of 2005. B&Q’s performance is not an isolated occurrence but part of a pattern which is repeated across comparable firms in the DIY sector.

"Markets not only mature but are often replaced"

The programme addresses the question of whether the UK DIY market is in decline. The question is an interesting one, since the rise and fall of industries is an inevitable consequence of economic change. For example, the current growth of the DVD market at the expense of video tapes is indicative of the changing fortunes of products and services. It’s also a salutary reminder that markets not only mature but are often replaced.

From B&Q’s perspective, it’s important to assess whether the DIY sector is facing a temporary lapse in its fortunes resulting from a lull in DIY activity, or whether the downturn is part of a longer term, structural change with far-reaching effects for the sector. The UK market is a mature one. However, it might come as a surprise to learn that the UK market for DIY tools and materials grew by 5.2% in 2004 to a value of £10.74bn.

"Cost pressures show no signs of abating"

The problem remains that growth is not translated into profits, given the high levels of price competition that exist in the sector. And cost pressures show no signs of abating with rising raw material prices and concerns about increasing inflation. A closer look at the economic fundamentals of the UK is required, as disposable income and home ownership are critical drivers of demand.

The period from 2000 to 2004 witnessed economic growth above inflation which, in turn, was reflected in strong consumer spending. This was accompanied by a buoyant housing market which encouraged spending on home decoration and allowed homeowners to release equity to borrow money for home improvement.

"An ageing population is less likely to DIY”

This was not the whole story. First time buyers were the losers in this equation and with them a source of current and future spending on home improvement. Similarly, structural changes in the demographics of the UK continue to paint a less positive outlook for the DIY sector. An ageing population is less likely to DIY and more likely to GSI (or Get Someone In).

While economic fundamentals help to explain changes in the DIY sector, it’s likely that other factors exist. Changes in customer tastes and advances in technology also serve to transform the business landscape. The emergence and success of “lifestyle” brands such as IKEA point to a shift in consumer attitudes to DIY.

With affordable and stylish products available at IKEA, first time buyers are able to buy ready-made shelves and bookcases rather than build them from scratch, albeit in flat pack format. The rise of handyman services (who transform your flat packs into something more functional) advertised at IKEA checkouts, further suggests that consumers are less inclined to DIY than to GSI.

The rise of new market segments, such as that occupied by IKEA, is testimony to the creation of new strategic space. Such space is often created by thinking about Key Success Factors (KSF) and whether they have altered. It is commonly understood that, within any industry or sector, the KSF are likely to change along with changes in industry structure, demand and technology.

Key success factors are the minimum entry requirements of a particular market and, hence, are those factors valued by customers such as price, quality and delivery. While price might have been a KSF of the DIY market, consumers also seem attracted to convenience. IKEA, for example, offers shoppers a convenient way to buy stylish furniture at affordable prices. IKEA also has the advantage of a wide selection of products that customers can rely upon being in stock.

Customers might question this definition of convenience, as they have to take the products off the IKEA warehouse shelves themselves! This is an important point. While KSF may not always change, our interpretation of these terms might have. With the emergence of on-line markets, convenience is likely to be associated not only with ordering (one-click in some cases) but also with home delivery.

"The retail sector is no stranger to fads"

The underlying trend of the DIY sector shows growth, albeit at a slower rate than retailers have come to expect. Perhaps it’s only a matter of time before DIY becomes popular once again. The retail sector is no stranger to fads, and the current downturn in the demand for DIY products might be a setback - but only temporarily.

The grocery sector provides a useful parallel. Groceries were once delivered to the customer’s door until the dominance of local grocers was usurped by the arrival of supermarkets. Supermarkets themselves are now placing home deliveries back on the shopping list, through the development of their online services.

Nevertheless, the current expansion of DIY retailers into new overseas markets suggests that optimism about a return to former levels of growth is in short supply.

Further reading

• Contemporary Strategy Analysis (Chapters 3 and 10) by R M Grant, published by Blackwell Publishing
• ‘Creating new market space’ by W C Kim and R Mauborgne in Harvard Business Review, Jan-Feb 1999
• B&Q website
• IKEA website
• Outsourcing - few companies haven’t considering outsourcing in recent years – what does it mean, and what makes it so compelling?

About the author

Anjali Bakhru is a lecturer in strategic management at the OU Business School. She previously worked for financial institutions in the area of equity derivatives, and her research focuses on resource-based and evolutionary approaches to competitive advantage.

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The pace of life seems to be quickening, people complain of working longer hours, and some surveys have shown a decline in work satisfaction in recent years, largely as a result of the perceived time pressure. However comparisons with time distribution half a century back suggests that the major change is that time that used to be devoted to chores is now spent watching TV, rather than necessarily working longer hours!

The question is does devotion to work and money make us happy? It seems not. Above a certain minimum income, currently around £10,000 per annum, wealth has remarkably little effect on happiness ratings. GDP has more than doubled since the mid 1970s, but the number of people rating themselves as very happy has remained pretty constant since the 1950s.

Of course there are variations across countries. The proportion of those satisfied with their life rises in countries like Scandinavia where inequality in income is least and personal autonomy is considerable. It is lower in the former communist countries where freedom may be more limited and there are considerable differences between the rich and poor.

"Relationships are the critical factor"

If hard work and wealth does not necessarily increase our well-being, what does? Research shows that relationships are the critical factor. On average married people rate themselves as happier than those that are single, as do people with many friends compared with the more isolated. The socially embedded live longer and recover quicker from illness than social isolates. So if you want to be happy keep up the social network!

We need to bear in mind that people have different capacities for happiness. Extroverts for example, consistently rate themselves as happier than introverts. Psychologists estimate that innate tendencies can account for as much 50% of the variance in happiness ratings between individuals. They also say that our level of happiness normally remains pretty similar throughout life. Even after good fortune such as winning the lottery or a misfortune such as a bad accident people generally revert back to their normal level of happiness surprisingly quickly, often within a year.

Nevertheless there are a number of things we can do to draw out well-being. We have already discussed the importance of developing and maintaining satisfying relationships. Another factor is the extent to which people are actively engaged with life. Those who do things they like and/or find meaningful tend to be more satisfied than those who rarely do things they value.

Some studies suggest that it is more satisfying to be actively absorbed in areas in which we are intrinsically motivated and where we get feedback on our progress, such as gardening, dancing, playing golf, surfing, looking after children and cooking than with activities that are more passive, such as watching TV. However watching TV for 50 hours a week is surprisingly common in the UK and the US, though the number of hours watched is falling among the young who spend more time on the internet.

To enhance well-being, watch less TV and get actively involved in something you enjoy and value. Note that almost any work offers the opportunity to do something well and engage helpfully with others.

"There are plenty of happy secretaries and unhappy CEOs"

It is the attitude that a person brings to their work and life rather than the type of work they do and, normally, the situation they find themselves in, which governs their satisfaction levels. Outward achievement is not necessarily the answer; there are plenty of happy secretaries and unhappy CEOs. It can help to remember to count your blessings and avoiding spending too much time ruminating on the empty half of the glass.

The 24 hour culture has benefits. Quite a few studies show people who work part of the time at home rather than in the office are more productive. They also have the satisfaction of saved commuting time to devote to family, partners and friends, the relationships that are so important to well-being. If you are disciplined, asynchronous communication also affords the possibility of answering emails and voicemail at a time of your choosing.

Well-being is enhanced where workers have some flexibility over when and how they work and where they maintain a work-life balance that provides time for themselves and their family as well as work. People vary widely as to what that balance is. One study found half the leaders worked weekends and half not, yet both groups were equally happy with their work-life balance.

Further reading

• 'The Positive Organisation' by Jane Henry in the The Psychologist, 2003
• 'The Healthy Organization' by Jane Henry in Research Companion to Organizational Health Psychology by C Cooper & A Antoniou, published by Edward Elgar Publishing
• 'Strategies For Developing Well-being' by Jane Henry in A Life worth Livingby M Csikszenmihalyi, published by Oxford University Press
• Creative Management by Jane Henry, published by Sage
• Creative and Perception in Management by Jane Henry, published by Sage
• 24 hour working – discover what’s driving our long hours culture, and its impact on our health
• The price of parenthood – having children brings many changes

About the author

Jane Henry is an applied psychologist. She chairs the Open University Business School Creativity, Innovation and Change programme.

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In 50 Cent – Money Machine, The Money Programme focused on the trend of big brands teaming up with rap and hip-hop stars to tap into the youth market. But what are the short and long term implications for Reebok of their banned advertisement featuring the rapper 50 Cent?

Celebrities are a popular and often effective means of promoting products. According to social anthropologist Grant McCracken's meaning transfer model, celebrity endorsers powerfully imbue products with the personality and lifestyle meanings that the celebrities have built up during their careers.

However, using celebrities can also be risky. Brand guru Kevin Lane Keller noted five potential problems:

1. There can be a mismatch between the celebrity and the product


2. Celebrities may endorse too many products, diminishing their value as an endorser


3. The product may be upstaged by the celebrity so that consumers do not remember what they were endorsing


4. Consumers may be sceptical about the celebrity's motives for endorsing a brand


5. Finally, celebrities are human and can, and sometimes do, err. Allegations of impropriety by celebrities, whether proven or not, embarrass the brands associated with them. (The most recent example was Kate Moss, who was dropped by several fashion brands following allegations of drug taking.)

What is interesting about Reebok's involvement with the rapper 50 Cent to promote G-Unit branded trainers is that his 'bad boy' image predated it. So why did Reebok choose 50 Cent in the first place? In a pre-launch press release, Reebok reported that 50 Cent, along with National Basketball Association star Allen Iverson, had teamed up to launch "a street inspired footwear collection designed for young people who want the style of their gear to reflect the attitude of their life".

"Some complained the ad glamorised guns"

However, Reebok's subsequent advertisement, in which 50 Cent featured, drew 57 complaints, which were upheld by the Advertising Standards Association (ASA) and the advertisement was banned. Some viewers complained that the advertisement glamorised guns and might encourage or condone violence. Other viewers expressed concern that youngsters might perceive 50 Cent's violent background as cool or to be aspired to.

In their response to the ASA, Reebok explained that the aim of the 'I am what I am' campaign was to celebrate self expression, individuality and authenticity. The ASA stated that Reebok was responsible for its choice of celebrity and considered that the advertisement appeared to condone violence and implied that the star's life was inspirational for the wrong reasons. The ASA also considered that younger viewers were likely to be particularly influenced by musicians and celebrities and the formulation of the advertisement was unacceptable. The advertisement is described in the full ASA ruling.

What, then, are the possible repercussions of the ban? It is unlikely to damage either 50 Cent's or Reebok's reputations among their target youth audience. If anything, it will only have enhanced their street cred. In a similar way, the consensus appears to be that Kate Moss may still be attractive as an endorser for brands looking to represent themselves as edgy or rebellious. Whilst 50 Cent is likely to prove successful as a celebrity endorser for Reebok in the short-term, brands need constant updating and campaigns involving celebrities typically run for a limited time. Pepsi, for example, has associated itself as a brand with a long stream of celebrities at the peak of their popularity.

The long-term impact of the publicity surrounding Reebok's advertising ban may be less beneficial. The importance of its effects on other categories of consumers will depend on whether these represent important consumer segments for Reebok.

Marketing commentators have suggested that the negative publicity may damage the brand in the eyes of consumers who are more interested in trainers' performance quality. It is also likely to undermine Reebok's apparent attempts to position itself simultaneously as a socially responsible organisation. For example, Reebok promised to donate 50 cents for every pair of G-Unit trainers sold to charity. It also recently hosted a meeting on corporate social responsibility and honours young human rights activists for their contributions to human rights through non-violent means in the Reebok Human Rights Awards, which were established in 1988.

Corporate social responsibility (CSR) is becoming a hot topic. The number and range of ethical products are steadily increasing, as are consumers' concerns about ethical consumption. Political interest is also building and CSR looks set to find a place on the election agenda. The Government is seeking to promote ethical business through a CSR Academy, which it established recently. The leader of the opposition party, David Cameron, was recently reported to have criticised "irresponsible marketing" of unhealthy products in our obesity conscious society and praised brands that have instigated social initiatives.

The concept of CSR is based on the inevitability that organisations have social as well as economic consequences and so cannot dissociate themselves from social responsibility. Chris Marsden, a practitioner, teacher and writer in the field of business in society, argued that the key determinant of CSR was how an organisation conducts its business operations and earns its profits. In other words, it is about the whole business activity, not simply donations or community investment.

Reebok's banned advertisement was criticised because it did not handle the more controversial aspects of its celebrity's past in a responsible way for its intended youth audience. McCracken identified two groups as being particularly receptive to the meanings communicated through celebrity endorsements. These two groups are young people transitioning from one age group to another and individuals joining a new culture. Both groups are more likely to seek out brands rich in meaning as they construct new identities. Given that Reebok's intended youth audience was one of these particularly susceptible groups, the banned advertisement appears to undermine the attempts by the organisation to represent itself as socially responsible.

So whilst Reebok's reputation is unlikely to have been damaged among its young consumers, the longer term effect is that it might hamper Reebok's credibility as a socially responsible corporation. Not only might this impair its standing among other consumers, but also affect its ability to attract employees. This demonstrates the dangers of focusing on one target group to the possible detriment of the wider organisation.

Further reading

• 'Who is the Celebrity Endorser? Cultural Foundations of the Endorsement Process' by Grant McCracken in Journal of Consumer Research pages 310-321, Volume 16, December 1983
• Strategic Brand Management: Building, Measuring and Managing Brand Equity by Kevin Lane Keller, published by Prentice Hall
• 'Making a positive impact on society' by Chris Marsden in Corporate Social Responsibility: partners for progress, published by OECD Publications
• The youth market – companies like Reebok spend a lot of time and effort targeting young people
• The importance of brands – the value of brands explained by this extract based on Open University Business School course material
• Securing your brand – how do you build value into a brand and how do you preserve that value?
• Business briefs: checks and chavs – can brands become victims of their own success?

About the author

Fiona Harris is a lecturer in management in the OU Business School. Her research interests include social marketing and marketing ethics.

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Who would have thought it – an edition of The Money Programme devoted to Fairtrade. It’s another sign that Fairtrade has come of age. It started in Oxfam shops and church halls 30 years ago. Last year 20% of coffee drunk in the UK was fairly traded.

And this is an international phenomenon. What is it about the Swiss and bananas? Apparently 47% of their bananas were sourced through Fairtrade. The fact that such figures are available – through IFAT – is another indicator of the scale and professionalism of these operations.

But what’s the point?

How much help does this really provide to poor producers? Are the supermarkets taking advantage of a consumer fad, adding big mark-ups because a certain sort of soft-headed consumer doesn’t think things through? And isn’t Fairtrade still, if not a drop in the ocean of world trade, not much more than a bucketful?

Fair questions - and ones that Fairtrade activists have argued and agonised about more than most. They know the immediate benefits Fairtrade provides to producers – and that on their own such advances are not enough to ‘Make Poverty History’. They also appreciate the reasons why supermarkets may reasonably charge a higher mark-up on Fairtrade products. Clear arguments and explanations of their case are available on the Fairtrade Foundation’s website.

But perhaps arguments about mark-ups, and whether consumers really know what is happening, are failing to see the wood for the trees? They overlook the way Fairtrade is an example of two broader, long-term trends: global governance and social enterprise.

Fairtrade as global governance

The first big trend is global governance, and the part played by civil society organizations within that. This is not ‘world government’, focussed in a single remote institution, as people used to envision it. Governance is different – it is a distributed, multi-level, form of regulation that takes many forms, blending governmental, commercial and independent elements. Certification, of the sort provided by the Fairtrade Foundation, is one such form.

Global governance has grown dramatically over the last ten years, especially in relation to environmental issues (for example, the mark of the Forestry Stewardship Council) and labour practices in developing countries (for example, the SA 8000 standard of Social Accountability International). Simliar schemes are emerging in energy supply. These are usually the result of dialogue between NGOs (non-governmental organisations) and leading multi-national companies. However, governments can and do play an important role in the background, both in providing discreet support and as major purchasers – the UK’s Ethical Trading Initiative is a case in point.

Fairtrade as social enterprise

The second of these trends is the resurgence of social enterprise around the world. Within the UK the range and variety of products and services available from social enterprises is now so great that it is beginning to look like a parallel economy. It’s not just:

• food
• crafts
• clothing

but:

• banking
• breakdown services
• eco-tourism
• green electricity
• herbal remedies
• polymer resins
• professional services
• telephone systems

There is a whole swathe of public service contractors from housing and regeneration through health and social care to juvenile offender management. And if you are really dying to be ethical...you can choose a green burial.

"If you think this is just beards and sandals...then you should get out more

Viewed in these terms, the Fairtrade Foundation is an international trading intermediary – just one of several, in fact – within a burgeoning alternative, value-based economy. This has been taking shape, almost under the radar of mainstream society, for at least thirty years. If you think this is just beards and sandals and idealistic amateurs, then you should get out more. Or at least visit some websites.

New economy – new brands

Describing things in this way means grouping together very different initiatives:

• ‘green’ businesses
• the trading arms of charities
• co-operatives
• community enterprises

Some are purists, holding to tightly defined principles – others are ‘pale green’ or just struggling to avoid the worst practices of their industries. Like any lively family, they squabble and compete for attention, complain about each other – but also know what they have in common.

That diversity is their strength. There isn’t just a single ‘party line’: you chose the one you most identify with. And identity is important nowadays: what sort of people we are or want to be, is no longer a given, as it used to be. We are back with brands: Fairtrade has become a strong brand. It expresses values, it makes a statement, it offers consistency – you can trust it. It is the archetypal brand of this new economy.

Its social change, Jim, but not as we knew it

What is interesting is the effect of these trends on the mainstream economy. The major retailers dare not ignore this shift in customer values – but by embracing it they also reinforce it.

"No political party can afford advertising on that scale"

Tesco’s website boasts that one third of Fairtrade sales in the UK are made through its supermarkets. And all those Fairtrade messages are scattered though their stores up and down the land, effectively challenging the acceptability of so many other products, along with the business processes and trade regimes that deliver them. No political party can afford advertising on that scale.

Big changes do not start with legislation – that happens towards the end of the process. Whether it is slavery or children being sent up chimneys, the change starts when these practices become controversial. The loss of social acceptability is the turning point.

Of course, the vested interests fight rear-guard actions. Think about tobacco companies and smoking; or the purveyors of junk food in the face of Jamie Oliver and Super-Size Me. But the more thoughtful in the business community, quite apart from the bright young things setting out on their careers, know better. Who wants to spend their life working in a dirty and declining industry? You either clean it up or get out.

Further reading

• You can find out more about Social Enterprise in the UK from the Social Enterprise Coalition
• For a US and international perspective try Ashoka
• Transforming trade – fairtrade has come a long way from church halls and Oxfam shops

About the author

Rob Paton is Professor of Social Enterprise at the Open University Business School. He has had a long-standing interest in values dilemmas and leadership, in hybrid organizations.

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As World Cup fever gathers pace, Umbro is striking out in a tournament of its own. The global sports gear giant finds itself matched against the toughest of opponents: the soccer strip counterfeiters. As the fake trade mushrooms and with internet sites already awash with World Cup merchandise at knock-down prices, Umbro is braced for an influx of copycat kit.

The company is right to be anxious. With 12% of all sports goods now counterfeit, global figures reveal the shocking scale of the problem. Dozens of unscrupulous suppliers are preparing to replicate Umbro’s designs and products.

Consumers queuing to exchange their cash for cheap and cheerful imitations have one question on their lips. Why pay 40 quid for a genuine football team strip when a tenner buys a pretty good rip-off? For Umbro, stemming the supply of these cheap copies is only part of the problem. Handling the demand side: persuading the public to ditch the fakes in favour of genuine items from authorised outlets, is even more of a challenge!

At a time when all types of consumer goods are fair game for the counterfeiters, Umbro’s drive to interrupt supply is understandable. In a market awash with everything from fake watches and designer labels to cosmetics and prescription drugs, even the artificial tan is fake. Soon car boot sales, market stalls, newspaper classifieds and Internet auction rooms will swell with soccer gear, as cup fever fuels demand for the best-loved strips.

For Umbro the stakes are high: these counterfeit encounters are much more than a short-term threat. The risks include long-term damage to its brand and consequences for its financial fortunes.

Supply is fed by an overwhelming influx of dubious goods from counterfeiting hotspots such as the Far East. Consumer protection specialists explain that there is a high price to pay for supporting the fake trade. The image these experts present is stark, and their warning for consumers is bleak: your kit may be cut-price, it may even be the right colour and fit, but it’s likely to be shoddy quality and your consumer rights will disintegrate when the second-rate materials and printing fail in your washing machine.

"Your soccer shirt could be funding illegal trade, gun crime and even terrorism"

More shocking still, your soccer shirt could be funding illegal trade, gun crime and even terrorism. And that’s not all. Legitimate business is paying the highest price. Last year alone 17,000 European jobs were lost as a result of brand counterfeiting. According to the Anti-Counterfeiting Group (ACG):

Legitimate traders are hit when fakes undercut their markets, and the black market each year is worth around £9bn, on which unpaid VAT alone would fund several new schools and hospitals.

Despite such dire warnings, many consumers remain relaxed about the counterfeiting malaise. A recent report for The Organised Crime Task Force revealed that shoppers see fakes as a bargain, justifying their behaviour on the basis of the prohibitive price tags of genuine items. Many are either unaware or unwilling to acknowledge the darker side of the trade.

"Ultimately it is the consumer who decides whether to pay full price or be lured by the bargain-prices of copycat kit"

For Umbro, this is the root of the problem. Ultimately it is the consumer who decides whether to pay full price or be lured by the bargain-prices of copycat kit. These shoppers are savvy, and a growing number are prepared to pay for counterfeit brands. Umbro’s best chance of solving the problem is to develop an effective marketing strategy based on a clear understanding of consumers’ motives, perceptions and behaviour.

Consumer behaviour is defined as the purchase and consumption activities of ultimate consumers who buy products and services for personal or household use. Anticipating these buying patterns is the challenge for all marketing practitioners as they strive to influence this behaviour. Consumer expert Bernard Dubois explains that analysing these aspects of human behaviour involves answering three fundamental questions:

1. Who buys? What is the consumer’s identity?


2. How? What is the purchasing process like?


3. Why? What factors explain the purchase?

This last question is particularly intriguing for businesses striving to understand key customer drivers. Dubois expands on this point by describing three groups of explanatory factors, occurring at these levels:

• individual
• interpersonal
• sociocultural

Taken in combination these variables influence consumer preferences and purchase patterns. At the individual level, this involves an appreciation of consumer motivations, perceptions, experience and attitudes. It is with these factors that Umbro must grapple if it is to successfully attack the fake demand problem.

Umbro needs a twin strategy to tackle the fakers. Whatever action the company takes to locate the counterfeiters and stem supply, it must also strike at the heart of consumer demand. The sports gear supplier must rapidly tune into what motivates shoppers to buy these cheap imitations. Is it really all about price? Is quality a key consideration, or are there other factors at play?

Recent research by ACG pinpointing cost as a key driver in the market for fakes, also suggests that decisions are not purely driven by economic considerations. For buyers of DVDs, speedy access to new movies has fuelled the fake trade, while availability is also an issue for toy buyers. It is these kinds of nuances which soccer strip suppliers must grasp if they are to dissuade consumers from their errant behaviour. Ready, convenient access through a mix of retailing channels may be as important to consumers as low price.

Football pundits are already speculating about which nation will lift the 2006 World Cup. The victorious team will be assured an enthusiastic response from its supporters. Whether the football strip sported by these fans will be genuine, is much less clear. Some of the omens are good, not least because enforcers are demanding tougher legislation and stiffer jail terms for fakers.

For Umbro the message is clear. Winning the game depends on a twin strategy to tackle both the demand and supply side issues. The final whistle in Umbro’s encounter with the counterfeiters may be getting closer, but the tournament is only just beginning.

Further reading

• Understanding the Consumer by Bernard Dubois, published by Prentice-Hall
• The Deadly Trade in Counterfeit Goods by Tim Phillips, published by Kogan Page
• Anti-Counterfeiting Group
• Fake Nation? A study into an everyday crime research conducted by Dr Jo Bryce (University of Central Lancashire) and Dr Jason Rutter (University of Manchester)
• Securing your brand – how do you build value into a brand and  how do you preserve that value?
• The trainer tamer – how Jonah Perretti became the scourge of Nike

About the author

Sally Dibb is Professor in Marketing at the OU Business School. Sally chairs the Academy of Marketing's Special Interest Group in market segmentation.

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Tax avoidance is a subject about which many people have fantasies, but most are a long way from reality. HM Revenue and Customs (the new name for the Inland Revenue) has been levying income tax for more than 200 years and knows a thing or two about it!

It’s more or less true that tax avoidance is for the rich. It costs money to arrange your affairs to reduce taxation, so tax avoidance is only interesting in regimes where income tax is steeply progressive and you earn enough to be paying tax at the highest rates. This is one reason for the popularity of so-called flat tax rates in Central Europe – high earners have little incentive to avoid tax when it’s not progressive.

If your income comes from employment, there is very little scope for avoidance. HM Revenue has it pretty well pinned down. Even if your employer might be prepared to go along with a complex scheme, they might find themselves having to pay your tax themselves, and this discourages them!

However, some avoidance is available because the government encourages it. One of the simplest ways of reducing the tax burden is through paying extra into a pension scheme. You reduce your tax (within limits), but also lose access to the money paid into the pension scheme until you retire, so you need enough income for this not to be a problem. Another way is to invest in small businesses: government has promoted schemes to encourage this in the past.

Assuming you have income other than from a single full time employment (which rules out most people), you could look for more complex schemes, but then the next obstacle is knowledge. You have to find out about schemes, and this means paying fees to tax advisers, and being confident that they know what they’re talking about.

The nature of tax avoidance is such that an adviser may come up with a complex scheme but you cannot be certain that it is fireproof until it has been tested in court – which is not an experience you would enjoy. How do you know what adviser to talk to? KPMG, one of the world’s biggest networks of accountants, paid $500m in 2005 after selling illegal tax shelters.

As you move up the scale of complexity, avoidance schemes take advantage of the issues of territoriality and legal personality. Although there are bi-lateral tax agreements between many countries, taxation is essentially limited to activities in a particular territory, and subject to national statutes. If you have international transactions, you can try to organise things so that you do not fall into any tax net. This is a particularly interesting issue in electronic trading on the internet: whose territory does the transaction fall in?

"National tax authorities have an armoury of weapons"

However, you need to have either investment capital or income which comes from outside the UK, or you need to be resident in a tax haven such as Jersey. And of course, national tax authorities have an armoury of weapons to try to limit your opportunities. Equally the European Union has started to introduce tax cooperation arrangements between member states that provide for exchanges of information, and for tax to be deducted from investment income at source.

Taxation falls on individuals, but legal personality extends to companies: if you form a company and that company receives income, the company becomes a taxable person separate from you. Personal service companies were very popular in the UK, until HM Revenue started taking an interest. The company receives fees from selling the services of an individual, that individual then receives a salary from the company. The company can retain a proportion of the income and might use it to supply facilities and goods to the individual. The company will also pay a lower rate of corporate income tax than the marginal rate of 50% (40% tax and 10% national insurance) that the individual would pay on extra earnings.

"Can you be certain the Revenue is not going to come knocking on your door?"

There are generally some limited opportunities for tax avoidance (legal diminution of tax as opposed to evasion which is simply illegal) even in a mature tax system like that of the UK. However, even the simplest forms require you to have money available that you do not need right now. The more complex forms mean that you will have to pay potentially substantial fees to advisers, so up to a certain level of income the tax saving will be less than the professional expenses. Finally there is always the question of knowledge and uncertainty. Finding out about schemes could have a high initial cost, and then can you be certain the Revenue is not going to come knocking on your door years later?

Further reading

• Tax shelters – nobody likes paying tax – but how far would you go to avoid it?

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.