Tag: Taxation

A Political Manifesto

A few years ago I penned some policy suggestions for a new political party. I just had a clear out of some of my old files and thought it was worth publishing as it’s still very topical.

Reference Policy Suggestions My suggestions for policies in those areas and others are below:

Finance

1.       The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.

2.       The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.

3.       Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.

4.       The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.

5.       All the above tax simplifications would enable HMRC to be reduced in size and wasted time in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.  

6.       The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.

7.       The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.

8.       Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.

9.       The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.

10.     Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.

11.     Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.

Transport

1.       Way too much money is spent on rail transport and trams which cannot be justified on any cost/benefit analysis. HS2 is just one extreme example of this. Meanwhile the road system does not receive enough investment – this has resulted in traffic congestion, wasted time which is damaging to the economy and lots of poorly maintained roads (e.g. potholes). Only 25% of direct tax on vehicles is spent on the roads.

2.       Public transport should generally pay for itself. In London alone there is a subsidy of £1 billion per year on buses which is totally unjustified. Many of these subsidies are given to people who could afford to pay for their travel, even when they are receiving social security benefits.

3.       Road safety has flat-lined due to an excessive focus on speed reduction and the perversion of the law by the use of police waivers to force people to take useless “education” courses. Policies have been distorted to enable the police to make money from drivers, while improving the roads, better education and other policies to reduce road casualties have been ignored.

4.       Charging of drivers via road pricing to reduce congestion should be opposed (as it does not work and is just a money-making taxation scheme). Likewise Clean Air Zones where drivers are taxed for driving some vehicles, all of which were legal when purchased, should be stopped and the whole focus of environmental legislation should be reviewed. EU regulations in this area have made illegal air pollution levels when there is no real evidence of danger from them. ULEZ and CAZ schemes are just a way to raise taxes with little real benefit on health grounds and no cost/benefit justification.

5.       Likewise the EU has mandated speed limiters (ISA – Intelligent Speed Adaptation) for all vehicles in future which will delay vehicles and not contribute to road safety, while generating millions of speeding fines on innocent drivers. There should be a commitment not to follow the EUs lead on such legislation.

Education

1.       Education should be free for all those who can justify they will benefit from it. At present too many people go to university who will be unlikely to benefit from it and they should be redirected to lower cost vocational courses.

2.       Loans to support students taking courses should be interest free.

3.       There needs to be a much stronger focus on technology education in the UK as only people with such education will contribute positively to the economy.

4.       There needs to be more emphasis on the use of technology in teaching to improve the productivity of that profession which has basically not changed in hundreds of years. The use of on-line resources can assist and would enable teachers to be more productive and hence be paid more.

Environmental, Climate Change, Population and Housing

1.       There should be more attention paid to the real science of environmental impact rather than the hysteria of left-wing campaign groups.

2.       Mrs May’s commitment to a zero-carbon economy, which is financially unaffordable, should be scrapped because there is no practical way to achieve it and it is based on very dubious scientific analyses.

3.       The population of the UK needs to be controlled, if not reduced, to improve living conditions and ensure a healthy economy. This can be achieved by tougher limits on immigration (along with better enforcement of existing rules), and encouraging the population to procreate less.

4.       Housing costs, and the inability to find suitable accommodation, are major problems for the young. Controlling/reducing population would help but other measures need also be considered including the financing of more social/rented housing.

Local Councils and London

1.       The funding of local authorities, and some of their important functions such as providing social care, needs to be reformed. At present they are too dependent on central Government funding which means obligations are often put on them without the funds to cover the cost.

2.       There are wide variations between the efficiencies of different local councils with many being wasteful. They should have guidelines and limits on how they spend their money, laid down by central Government, to avoid waste.

3.       London is a particular problem where it has become dominated by populist Mayors (both Labour and Conservative) and where elections are driven by national politics rather than local issues. The most recent Mayor, Sadiq Khan, has been pursuing a “gerrymandering” policy of increasing immigration to gain more people that are likely to vote for him, thus making London even less acceptable as a place to live than it has been for years. Crime, transport and housing are all in a major crisis. I suggest the position of the Mayor, and the Greater London Authority be scrapped as Mrs Thatcher did with the GLC when Ken Livingstone became so damaging. In other words it should revert to central Government control, with the local boroughs having more control over their own affairs. That would no doubt be popular with London borough councillors.

4.       Transport for London should be taken out of the control of the Mayor be made an independent body with an objective of making it a profit centre rather than a consumer of enormous subsidies. They should also lose control of the road network (the TLRN) where they currently have a perverse incentive to make the road network unfit for purpose so that more people use public transport from which they gain income.

I hope you find the above useful.

Yours Roger W. Lawson, M.B.A., M.B.C.S. ++++++++++++++++++++++++++++++++++++++

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

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Should Pension Funds Invest More In Equities?

This article was prompted by an item in Investors Chronicle entitled “Should pension funds be used to prop up UK markets? I think the simple answer is NO. But apparently City Minister Andrew Griffith said at a conference that “the Chancellor is spending a lot of time looking at how we can better unlock the billions of pounds held in UK pension schemes”.

Certainly one major concern is that the share of the stock market now owned by pension funds and insurance companies has fallen in the last 25 years from 53% to 6%.

Before the last war, pension funds invested almost exclusively in fixed income bonds and shares. But in the 1950s and 60s this situation was reversed as high inflation made fixed income securities less attractive. George Henry Ross Goobey, pension manager of the Imperial Tobacco pension fund, was one of the leaders of this revolution.  In 1955, Ross Goobey persuaded the trustees of Imperial Tobacco’s defined-benefit pension fund, one of the largest pension funds in the U.K., to adopt an idiosyncratic investment policy investing exclusively in equities. Due to the subsequently stellar performance of the pension fund, Ross Goobey acquired a reputation as “one of the most successful professional investors of all time” and, through his public advocacy of equity investment by pension funds, as the “father of the cult of equity – see Reference 1.

But company directors and pension fund trustees have become much more risk averse in the face of tougher regulations and such scandals as the collapse of the BHS pension fund where company directors tried to get rid of their pension liabilities.

We have now swung to the other extreme where pension fund managers are looking to have guarantees that they can match their future pension liabilities with no risk. That typically means buying gilts. But this has meant that investment firms have adopted leveraged Liability Driven Investment schemes (LDIs) which aim to produce higher returns than gilts. This came to a sticky end when interest rates rose sharply and pension funds had to dispose of holdings to match their collateral liabilities.

There is no way you can avoid risk if you wish to get a decent return. Investing in equities is more likely to give a good long-term return that is better than fixed interest, particularly in periods of high inflation which is where we are now.

The cult of the equity may have gone too far in the 1970s but the reversal is just as disconcerting and has led to the lack of investment in UK companies that we now have.

How do you fix the problem of lack of investment? Obviously you could do it by juggling the tax system to provide more returns on risk investments like equities. But the Government needs to look at why pension fund trustees and managers have become more risk averse which has resulted in lower returns. Excessive regulation is certainly one issue to look at.

More direct intervention in what pension funds can invest in is surely a mistake. Bureaucrats always fail to pick the commercial winners and forcing more investment in equities will undermine the market equilibrium.

Ref. 1 Cult of Equity https://www.pensionsarchive.org.uk/19/records/45/Cult%20of%20Equity%20-%20Yally%20Avrahampour.pdf

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

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Good Articles in Investors’ Chronicle

There were several good articles in this week’s Investors’ Chronicle. I cover them briefly below.

The Editor, Rosie Carr, reported on feedback on readers’ views on taxation. Should the wealthy readers of the IC pay more was one question previously posed and the consensus answer seemed to be Yes. For pensioners it was suggested that they should pay National Insurance on their income and that there should be harmonisation of income and capital gains tax rates. It was also suggested that property taxes should be raised and Inheritance Tax raised.

I would support most of those suggestions but not the last. Inheritance Tax is typically a tax on created wealth which has already been taxed in one way or another. Double taxation on the same assets should be avoided in my view although perhaps some loopholes should be closed.

There was a good article by Chris Dillow on the problems created by the “decades-long attempts to cut inventories”. He points out that the adoption of “just-in-time” production methods had a positive impact as inventory is expensive. That is particularly so when debt is expensive and interest rates high. This of course is the result of MBAs like me being taught at business schools that cutting inventory was always a good thing. Now we find that the smallest hiccup in the supply chain such as transport delays proves to be very expensive.

There is a good analysis of the audit issues at Patisserie Valerie by Steve Clapham. He concludes that the sanctions imposed by the FRC “are woefully inadequate” which I also suggested in a previous blog post. I said Grant Thornton was “fined a trivial amount”.

The article does however suggest that there were some warning signs such as very high margins in comparison with other sector players, and high inventories in relation to the revenue. But there were reasonable explanations for the differences. One would have had to do a lot of research to figure out if there was really a problem or not. Clearly the auditors did not do that and most investors do not have the time nor resources to do such research. That’s why we rely on the audited accounts!

It is unfortunately the case that outright frauds can often be easily concealed but the audit in this case was clearly very defective and the published accounts of the company were grossly misleading.

But I do admit to failing to take my own prescription for avoiding problem companies – namely investing in a company with an Executive Chairman with too many jobs!

There is also a good article on “The flattery industry”, i.e. how management improve their reported profits by using “alternative” or “adjusted” measures. The FRC has published a report on this issue.

It is very clear that companies are addicted to alternative performance measures and that applies just as much to large companies as small ones. One company and its “adjustments” mentioned negatively in the article is GlaxoSmithKline (GSK). I sold a holding in GSK back in 2014 for that very reason – way too many adjustments in the accounts. The price of the shares then was about 1480p. It’s now 1407p. Clearly a good decision. Stockopedia currently says it qualifies for the Altman Z-Score Screen (Short Selling). Enough said I think.

But this is surely yet another example of where the FRC is falling down on its job. There should be regulation of what can be published as adjusted figures and there should be rules about how they are published. There should be consistency and not excessive emphasis on adjusted figures. At present we have a quagmire of data with no easy way to compare different companies.

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

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Budget Summary – Austerity Coming to an End

Philip Hammond’s budget today can be summarised as:

  • More money for the NHS.
  • More money for the MOD.
  • Money for schools.
  • More money to fix potholes.
  • More money for housing.
  • More money for the Universal Credit scheme.

Yes “austerity” is being relaxed. Changes to taxation are relatively minor, but there will be a new tax on “digital platforms” which is clearly aimed at large companies such as Facebook and Alphabet (Google) who generate large revenues from their operations in the UK but pay very little tax on the resulting profits. There will also be a new tax on plastic packaging (comment: that could have been tougher if the problem of plastic pollution is to be tackled). These new taxes may be at relatively low rates initially but once a new tax regime is in place, the rates tend to go up if history is any guide.

Fuel duty is frozen, beer and cider duty are frozen, spirits duty is frozen but wine duty will rise to match the increase in the cost of living. Tobacco duty will rise also.

There will be a new Railcard for the 26-30 age group to help the millenials.

Personal income tax allowances will rise in April 2019 – £50,000 for higher rate taxpayers. And capital gains tax allowance will rise to £12,000.

All the suggestions about changes to pension tax relief, inheritance tax and AIM tax advantages seem to have been ignored, so there is little to dislike about this budget for stock market investors.

In summary a confident performance from Mr Hammond with an avoidance of unnecessary changes to taxation which helps with longer term planning.

More information available from the Treasury here: https://www.gov.uk/government/news/budget-2018-24-things-you-need-to-know

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

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Chancellor’s Budget and How It Affects You

What follows is a summary of Chancellor Philip Hammond’s Budget speech today, and the impact of the tax changes. Private investors were particularly concerned about the impact of tax reliefs in the VCT/EIS schemes following the Patient Capital Review but these are in fact relatively minor (see end of document).

This is a summary of the key points he announced:

  • The Chancellor said we are on the brink of a technological revolution, we must embrace it. Britain is at the forefront, but we must invest to secure it.
  • Regrettably our productivity performance remains disappointing.
  • Our debt interest is too high. OBR expects debt to peak this year and fall thereafter.
  • He maintained his commitment to fiscal responsibility but will use the headroom to prepare Britain for the future.
  • The strategy is to raise productivity and employment in all sectors of the economy. A white paper will be issued on this within a few days.
  • Following the Patient Capital Review an action plan will be published which commits to more funding of the British Business Bank, including £2.5 billion of Government seed funding (to co-invest with private firms). But there will be some restrictions on EIS tax relief (see later).
  • First year VED on cars that do not meet the latest emission standards will be increased. However there will be no “benefit in kind” from the provision of free electric charging of vehicles at work.
  • There will be more support for maths teaching including specialist schools. More maths for everyone! And there will be a tripling in the number of computing teachers. There will also be more “distance learning” support.
  • Universal credits will be paid more quickly and there will be easier access to advances to overcome complaints in this area.
  • The National Living Wage will rise by 4.4% from April (Comment: this will obviously impact employers of large numbers of low paid staff such as retailers and hospitality firms).
  • The Personal Tax Allowance will rise to £11,850 from April and the Higher Rate Threshold will also increase to £46,300, in line with inflation.
  • Taxes on beer, wine and spirits will be frozen (apart from cheap cider). A Merry Christmas to all. Fuel duty will also be frozen.
  • An additional £10 billion of capital investment will go into NHS frontline services. That includes £7.5 billion this year and next, plus there will be a review of staff pay.
  • There will be more attacks on tax evasion. In addition, the anomaly of the indexation of capital gains for companies (but not individuals) will be removed.
  • The VAT registration threshold will be reviewed but it is not intended to amend it from the current £85,000 level for at least two years.
  • There will be amendments to business rates to help smaller businesses.
  • There will be a review of international taxation arrangements. Royalties paid to low tax countries will be taxed and on-line marketplaces will be jointly liable for the sellers VAT.
  • Councils will have powers to tax empty properties, plus the Government will look at barriers to long tenancy agreements.
  • The Chancellor said house prices are getting out of reach. Successive Governments over decades have failed to meet the demand for housing (comment: surely nobody can dispute that). He committed £45 billion in capital and loans to boost the supply of skills, resources and building land. Plus there will be reforms of the planning process/laws. There will also be an inquiry into why plots with planning approval are not built.
  • Seven new town developments are planned with 1 million new homes in the Cambridge, Milton Keynes, Oxford corridor. The plan is to build 300,000 new homes per year.
  • Stamp duty will be abolished on the homes up to £300,000 in price for first time buyers and the same allowance available for homes up to £500,000 in price.

More details on taxation changes.

Changes additional to those mentioned above include:

  • The IR35 rules allowing contractors to avoid being taxed as employees may be tightened further (to follow through changes in the public sector to the private sector).
  • There will be a consultation on reform of the taxation of trusts to make them simpler, fairer and more transparent (Comment: surely a positive move).
  • Individuals operating property businesses will have the option of using mileage rates to simplify their tax affairs.
  • ISA subscription rates will remain unchanged (£20,000 for 2018-2019).
  • Lifetime allowance for pensions will be increased by inflation to £1,030,000.
  • Carried interest transitional arrangements will be removed with immediate effect (so pity those asset managers who will now pay full capital gains tax rates).
  • The restriction of relief on VCT investments sold within six months where VCTs merge will no longer apply to mergers more than two years after the subscription or where they do so only for commercial reasons. This will avoid a trap that investors can accidentally fall into.
  • VCT and EIS schemes tax relief will need to ensure they are investing in assets subject to “real risk” rather than those simply aiming for “capital preservation”. Certain “grandfathering” provisions that enable VCTs to invest funds under older rules will be removed from April 2018.
  • VCTs will need to invest 30% of new funds raised to be invested within 12 months.
  • VCTs will need to have 80% of their funds as “qualifying” investments (currently 70%) from April 2019, but they will have 12 months to reinvest the proceeds of disposals (currently 6 months). This presumably might enable them to smooth dividend payments somewhat when currently they often have to pay out the result of realisations rapidly.
  • EIS rules will double the limit on the amount an individual can subscribe in a year to £2 million, but any amount over £1 million must go into “knowledge intensive” companies. Comment: I await some simple definition of what they might be. Such companies will also have the limit on annual EIS and VCT investments raised to £10 million

I have only included what seem to be the most significant changes in the above. In general there seems to be a policy to avoid rapid and abrupt changes to taxation (which thwart people from planning their tax affairs) which is to be welcomed.

Whether the VCT and EIS tax changes will have significant impact on those vehicles remains to be seen although some of the changes had already been indicated and threats of major changes that had been rumoured seem to have been avoided. This writer expects that the managers of those funds will adapt as they have already been doing. Encouraging investment in riskier assets may increase the risk profile of those companies but might also increase the returns and a large size and diverse portfolio will provide a hedge against the risks.

The full report on the Patient Capital Review consultation has also been published and is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/661398/Patient_Capital_Review_Consultation_response_web.pdf

I may provide further comments on that after reading.

In summary I view this budget positively with no unexpected surprises or likely perverse outcomes from unintended consequences we have seen from the surprises announced by previous Chancellors. But it would be interesting to get readers comments – please add.

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

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