How getting caught for tax evasion helped set Richard Branson on the path to success.
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| British billionaire Richard Branson. |
Creation myths about entrepreneurs inevitably include tales of triumph over adversity—a failed early company here, a break with a long-term partner there.
+Richard Branson , the goateed and grinning mascot of #British capitalism, is no different. His Virgin empire grew from a record label that brought us both the Sex Pistols and Boy George to encompass airlines, rails, and mobile phone service.
In the process, it has also spawned a fair number of busts: Virgin soft drinks, Virgin fashion lines, #Virgin makeup. Along with his publicity stunts—such as trans-Atlantic hot-air balloon voyages—these misfires have burnished his reputation as an adventurer willing to try just about anything in business or sport. At the moment, it’s not clear when or if his ambitious space tourism venture, Virgin Galactic, will ever get off the ground. We shouldn’t be too surprised. After all, Branson did write an advice book titled Screw It, Let’s Do It. Guaranteed success isn’t part of the Virgin brand.
But Branson’s march to riches may have truly begun with a somewhat less benign and fun-loving version of failure: a youthful foray into tax fraud, in which he was caught red-handed.
As Branson tells the story, his scam always meant to be short-lived. In the spring of 1971, the future billionaire was a 20-year-old British public school dropout with a restless entrepreneurial streak. He had founded and folded a national magazine, Student, which managed to land interviews with the likes of Mick Jagger, but no profits. His new company, Virgin, was losing money as a discount music retailer. Its record shop on London’s Oxford Street was popular and its mail-order business was growing, but thanks in part to its rock-bottom prices, the company was burning cash and digging itself deeply into debt.
One day, Branson thought he had found a quick way to dig it back out.
The scheme, as recounted in Branson’s memoir Losing My Virginity, was rudimentary: Virgin would avoid paying purchase taxes on its merchandise by pretending to export albums that it actually sold in England. In Britain at the time, music retailers paid a heavy 33 percent levy on records they planned to sell domestically. But the tax didn’t apply to vinyl destined for abroad. While attempting to drive a large shipment of discs to Belgium, Branson discovered that he could stop at customs in Dover, get his export paperwork stamped, then bring the cargo back to sell at home, where he could pocket the tax savings. After a few such profitable trips, he figured, Virgin would be debt-free. “It seemed like the perfect way out,” he later wrote.
The British journalist Tom Bowers, who has written two harshly critical biographies of Branson, cast the young entrepreneur’s motivations in a less innocent light:
For [Branson], the plot to defraud Customs and Excise was just another wacky prank.
“It’s a great wheeze,” he buzzed. Cheating Customs, he urged his employees, would be effortless. … Doubters were swayed by Branson’s enthusiasm for Robin Hood. Helping impoverished adults hear their music despite the ogre-ish government’s taxation, he urged, would constitute a blow for justice.
Branson was, it turned out, far from the first person in England to think up this particular hustle, and it didn’t take customs officials long to catch on to him. According to Bowers, investigators immediately began probing Virgin’s export forms after an employee at the record label EMI suggested there was “something fishy” about Branson’s low record prices. Then they noticed that Branson claimed to have exported 30,000 records inside of a single Land Rover. The four-wheelers were big, but not that big.
To confirm the scam, customs began marking EMI records that Branson was officially buying to export using an ultra-violet pen (the invisible ink was meant to keep Branson from realizing they were on to him). Then, they placed orders for the same records through Virgin’s mail order service; the marked merchandise arrived back in their mailboxes, proving that they weren’t really meant for export after all.
And so customs planned a raid. The night before, however, an anonymous caller tipped Branson off and told him about the invisible ink. The mogul-in-training and his Virgin cohorts bought a sun lamp and ran to their warehouse, where the UV light revealed that, indeed, all of their EMI records were marked with the an E. As Branson recalls:
We began to run in and out of the warehouse carrying piles of records into the van. We then made a terrible mistake: we assumed that the Customs and Excise officers would just raid the South Wharf warehouse. We therefore drove all the records round to the Oxford Street shop and put them in the racks to be sold. We had no idea that Customs and Excise officers have greater powers of immediate search than the police.
Branson had named his company Virgin because he and the people who worked for him were “virgins at business.” They were also, evidently, virgins at crime.
Customs descended on the shops, and Branson was hauled into jail. “I had always thought that only criminals were arrested: it hadn’t occurred to me that I had become one,” he wrote. “It wasn’t some great game about my getting one up on the Customs and Excise office and getting off scot-free: I was guilty.” He spent the night in jail, before his mother showed up and posted a family home as bail. Branson’s headmaster at school had once predicted that the young man would either become a millionaire or go to prison. “By twenty-one, he had achieved the latter,” Bowers wrote, “albeit briefly.”
He had also managed to plunge himself even further into debt. Branson negotiated a settlement with the government, totaling 60,000 pounds, worth more than 700,000 pounds today. If he couldn’t pay, he would be re-arrested and put on trial.
This being the story of a future Davos fixture, the incident turned out to have a silver lining. In order to pay back the previously unimaginable sum they now owed to the queen’s government, Branson and Virgin needed to learn how to business. “The next two years were a crash course in how to manage cash,” Branson wrote. “From being a completely relaxed company running on petty cash from the biscuit tin and a series of unpaid IOU notes, we became obsessively focused. We used every penny of the cash generated from the shops towards opening up another shop, which in turn was another pound towards paying off my customs and excise debt.”
They also began exporting records for real, as well as laying the groundwork for the record label that would, within a few years, mint Branson his first fortune, when it released Mike Oldfield’s prog-rock opus, Tubular Bells, to massive sales. Along with hits from the Sex Pistols and Culture Club, Virgin Records would eventually release albums by iconic ’80s artists like the Human League, Phil Collins, and Peter Gabriel before Branson sold it at a large profit in 1992.
“Incentives come in all shapes and sizes,” Branson wrote, “but avoiding prison was the most persuasive incentive I’ve ever had.” The young Branson seems to have taken away a related lesson from his experience: The value of a good tax lawyer. As he wrote in his memoir, the night in jail impressed upon Branson the need to keep his business above board. According to Bowers, when Tubular Bells became a hit, earning Branson his first millions, he began depositing his earnings and Virgin’s trademarked logo in an offshore “family trust” set up in the Channel Islands.
Today, the Virgin group is a vast warren of around 400 companies registered offshore (in places including, aptly, the Virgin Islands). As David Runciman wrote in the London Review of Books, Branson “has been very careful about when he pays tax and to whom.” Meanwhile, his “wish to avoid being taxed by the British government means he cannot spend more than ninety days a year in the UK.” Such is one of the many ironies of life as Britain’s most famous entrepreneur.
Source:
Slate
