I think that one of my favourite anecdotes of the 21st century was from the note left by Liam Byrne, the Chief Secretary to the Treasury, under the last Labour Chancellor to his successor, along the lines of “there is no money left!”, alluding to the fact that the Labour Party had overspent on its promises and that the company was in deep debt, leading to the longest period of austerity for over 40 years.
Well, having perused the latest “Funding Real Change” document, I can see plenty of scope for that happening all over again.
There are many elements of the manifesto which make good reading in terms of the promises to deliver better services in terms of NHS, free dentistry provision, free broadband, housing and social care provision. However there are also quite a lot which don’t make any particular sense, other than to those of the socialist persuasion, such as nationalisation of certain entities, which would be undertaken at huge cost, despite what Mr McDonnell might tell you.
However, all of these promises, whether you believe them to be right or wrong, come at immense cost and from a business and individual perspective, it is obvious that this is going to lead to a massive funding requirement, which is going to have to be paid for by increases in taxation on business and individuals.
There has been a wide-ranging debate for years over the fairness of taxation generally, and I’m sure that everybody has widely differing views on what is fair, and what should be the right level of tax to be paid and by whom. For example, I can think of a number of international organisations, which fail to meet their fair share of domestic taxation through their global arrangements, and legislation should be brought into place to prevent some more obvious abuses.
The Labour manifesto promises a number of key changes to taxation as follows:
- An increase in corporation tax rates for all companies, where turnover is in excess of £300,000, by 7%, from 19% to 26% over the period of the Parliament. The level of tax for smaller companies will be increased by 4%. This is likely to impact primarily on UK companies, rather than global groups, who have the ability to shift profits internationally, albeit with restrictions purportedly in place to stop this.
- Increasing the basic rate of income tax on anybody earning over £80,000, from 40% to (probably) 45%, although the actual rate has not been announced in the manifesto. Whilst the manifesto proudly boasts a table of changes in corporation tax rate across the period of Parliament, no such table has been produced for income tax as it is no doubt a political timebomb, affecting many key workers, including doctors, and also small business owners. There is also an indication that there will be an additional rate of tax on top of this for anybody earning over £125,000 (apparently the Super Rich Rate!!). Again, this is not been specified, but the simple assumption that it could be as much as 50% is not an unlikely scenario. Indeed, it could be more but we will have to wait and see.
- Bringing the taxation of capital gains and dividends into line with marginal levels of income meaning that tax rates on dividends could rise from 7 1/2% to 20% for a basic taxpayer to 50% (see above) and on capital gains from 10%/20% to 50%. A withdrawal of the annual capital gains tax allowances also suggested.
- The withdrawal of Entrepreneurs Relief, which is a relief available to individuals, who sell their interest in the family companies, and which they have put every effort into making successful. Generally, the tax rate with the relief is around 10%, but on the above scenarios, this could go up to as much as 50% if the marginal rate of income tax is increased to this level.
There are a number of other key changes promised to taxation, including the charging of VAT on private school fees, and permitting the increase to local authorities to raise more money from second homeowners.
The manifesto bases its assumptions on a number of papers, some of which were written as far back as 2012, and which, in my opinion, do not reflect the true impact on individuals, their spending habits, and the owners of “small businesses”. (SME’s). SMEs account for 99.9% of the business population (5.9 million businesses) and account for three fifths of the employment and around half of turnover in the UK private sector. Total employment in SMEs was 16.6 million (60% of the total), whilst turnover was estimated at £2.2 trillion (52%).
Most of these businesses were set up from scratch by individuals, who took the risk to establish the new entity, employ people, pay their taxes and generally contributed to the fabric of society. They do not include the large corporations, and deserve to be recognised for the efforts and risk that they take for the benefit of society generally. SME owners have generally created a long-term strategy for their businesses, which deal with growth, succession and sustainability, which their employees, as well as their shareholders, welcome.
The increase in corporation tax rates by 7% will reduce the availability of funds to reinvest in new assets and will reduce the company’s ability to employ new staff; liquidity will reduce in many companies, and for many SMEs, who are then looking at having to pay more to their management staff, as well as owners to compensate for the increase in individual taxation, when combined with the increases in corporation tax on the eventual withdrawal of funds or capital gains tax on the sale of the business, is likely to act as a significant demotivator to many business owners, who may ask the question, “what is the point?”.
An example of where the manifesto gets it totally wrong can be found in the statement, which relates to the withdrawal of Entrepreneurs Relief, which says that it is “… Just a handout for a small number of people”. Well, Mr McDonnell, I think that there are 5.9 million business owners, who would probably give you an argument on that particular statement.
Entrepreneurs need to be motivated to put in the extra effort to grow the business, and hence the economy, and whilst it is certain that many of them have no real issue with marginal increases in taxation to support public services, that motivation can soon be eroded if their plans for the future of their businesses are simply washed away by excessive and unfair increasing tax demands. These are the people who collect the PAYE, and the VAT, pay over the corporation tax due on the profits, and generally keep the majority of industry running in the UK. Disincentivising them to invest, employ and generally build up their businesses for some future value, part of which they may well end up having to be paid to the Exchequer, does not seem to be a very wise course of action for a growing and dynamic economy.
A rather depressing scenario, but one, which has been voiced to me by a number of clients, who are considering their long-term strategies for their business. One businessman, whose business employs over 30 staff, said to me recently that he would simply have to reduce his numbers of staff, as his margins were pretty tight anyway, if tax rates went up, as he couldn’t increase prices to his customers; he also stated that he would probably not work any harder to increase the size of his business, if he knew he was going to be heavily penalised by taxation, if and when he came to sell it.
I haven’t spoken to him yet to see what he thinks, but I imagine which way he might be voting!
22 November 2019