Increased Friction Costs

We start today’s article with a cry for a return to common sense and a reduction in the unnecessary Friction Cost in the economic system (especially here in Britain).

Friction Cost, in economic terms is defined as:

  1. The implicit and explicit costs associated with market transactions.
  2. The total cost, both direct and indirect, of a transaction after commissions, interest rates, taxes, research, time, and other expenses. (Financial Dictionary)

What we will be focussing on today is the ‘hidden cost’ element of Friction Costs.  As in definition 2 above, it is the Total Cost, including the economist’s ‘Opportunity Cost’ than needs to be considered in this discussion:

We start of the debate with a quote from Dean LeBaron:

“Market inefficiency exists because we do not root out their basic causes. These causes are easy enough to identify, if one looks with enough dispassion and rigor.”

As we are entering a politically charged season, we want to remind everyone of the key word in the above quotation:


We believe that too many decisions and arguments are framed in the ‘emotionally charged world’ and that too few dispassionate thinking and analysis is applied to the really big questions and problems facing us today…

Let us briefly focus on an example of what we mean by ‘hidden costs’:

This is a criticism of British legislative fervour and spurious targeted ‘efficiency’ gains.  This leads to sub-optimal solutions.

Our actual real life example:

By April 2011, most businesses and individual subject to the ‘Self-Assessment’ tax regime must file online, irrespective of size or individual circumstance.  Nothing wrong with these facts so far.  However, we are still embroiled and faced with legacy Information Technology systems that cannot cope with the 21st Century IT revolution and government collection tax collection regime aspirations.

A typical example is where certain legal entities (Limited Liability Partnerships) are forced to file online, not with the HMRC’s system and software, but have to purchase additional commercial software to file (An example of a friction cost, that is not very clearly recognised).

Further to this, should the entity actually comply and file their tax return online and in time, the legacy systems at the HMRC, does not automatically recognise this fact, even though an acknowledgement of receipt has been issued by the HMRC’s system.

The actual Tax Return submission is acknowledged, but not the physical filing of the data.  The consequence is that a penalty notice is sent to each partner (another friction cost) and has two consequences:

  1. HMRC and The Treasury has made a false penalty determination, but the revenue gets recognised  in the HMRC’s accounts, therefore falsely inflating the tax takes
  2. The business has to incur another Friction Cost as they have to respond to the penalty determination and dispute the claim.

Therefore a compliance costs has escalated into an opportunity cost as the individuals in the firm have to allocate time and resources in dealing with more unnecessary compliance mitigation work by refuting the spurious penalty determinations.

When will we recognise in this country that the process should not be:

  1. Create a target
  2. Legislate the target
  3. Then build the solution process
  4. Beat up the citizens for not being able to comply

But Should be:

  1. Build the solution
  2. Integrate the solution
  3. Test the solution
  4. Create the target
  5. Legislate the target…

This way we will create a new culture of efficiency, compliance and citizenship that respects and endures the necessity of tax regimes to deliver wealth creating opportunities for all willing and able participants in the system.

theMarketSoul ©2010


Should you experience any taxation compliance challenges, please do contact us on theMarketSoul ©1999 – 2012

(Click the name for a link to your email client)

Further themes and related issue to the above debate are:

  1. XBRL compliance
  2. Annual Accounts submissions at Companies House

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