Last week, Rishi Sunak the conservative chancellor of the exchequer proposed to increase corporation tax rate from 19% to 24%, a move designed to raise £12 billion next year and £17 billion the next year. Is this wise? – The tax increases are a drop in the ocean compared with the £3 trillion of debt and an anticipated unemployment figure of 2.5 million.
While the British economy struggles to get back on its feet – is it wise to hit businesses where it hurts – on profits destined for expansion of the business and future employment?
Of course, the devil is in the detail, but as a Fellow of the Chartered Institute of Tax at first blush I think this is unfair and wrong; for two reasons.
First, a Conservative Government is voted into power to give employers the best chance to expand and grow their business, make more money for their investors and employ more people. Most business owners have struggled this last year, many are debating whether to take back employees from furlough or to let them go. Maybe this tax hike will make the decision easier for them – let them go!
With an increase of corporation tax any plans businesses may have had to save and expand to employ more people may now be scuppered and many will decide not to take the risk - what is the point? If the plan was to expand and then to exit with gains to be taxed at 45% why suffer the pain?
Of course, it is politically attractive to soak the rich to pay for the burdens the Government is facing following this unexpected pandemic – but biting the hand that feeds it is not the way to get out of this mess.
People often forget that it is not just the rich who run businesses – it is also the electrician, the plumber, the builder and the decorator – they employ staff, take risks and tend to vote conservative, this tax hike for them is a slap in the face.
The other threat faced by increasing the tax rate is simply that businesses can and now will move. Why carry on your business in Britain if you can run it out of a nearby financial centre and pay zero corporation tax?
Of course, the plumber, decorator, electrician and builder cannot take their business abroad but any business which is digital with the possibility of being international can.
The Government should not forget that lockdown has proved to many businesses as well as people that they need not be located in central cities; they can be based anywhere in the world; with much lower tax rates.
Of course, the Government does not make it easy to relocate abroad with complex anti avoidance legislation to trap the unwary but it is far from impossible, in fact I have four cases on my desk right now; one based in Guernsey, one looking to relocate to Jersey, another looking to set up in Isle of Man and the fourth looking to become non UK tax resident altogether.
For these four clients their primary goal is to grow the business, none of the them want fancy life styles; yachts or flashy cars, they all love what they do and decided to move before the tax hike, if any one of them had any doubt about the move – it is now a no brainer – and as a result HMRC will get nothing!
Businesses, if they are to grow more often than not need investors, but these investors are taking a risk – the business may not succeed, but they take the risk because the gain when the business they have backed makes a gain is rewarded with a lower rate of tax – capital gains tax. What is the incentive to an investor if the gain is taxed as if it were income?
Cranking up the tax rate to match income tax rates, is not a rich man’s perk it is an incentive for an investor to risk his money on an expanding business. Without this incentive is will be harder for businesses to find backers to enable them to grow, and without growth –the Government cannot expect to raise revenue from an expanding economy, inevitably there will be business stagnation.
But the real headache in these tax hikes is for the investor looking to his investment for income.
Let’s take Ted. For the past twenty years Ted built up a hotel chain, he has 300 staff and at the age of 68 would like to slow down a bit. His plans were to sell the hotel chain and invest the proceeds in his son, Max’s care home business with the idea of living off the dividend income from his investment.
Let’s assume Max’s business makes £1,000,000 income this will be taxed at the higher tax corporation tax rate of 24%. When a dividend is paid to Ted it will be then be taxed on him at 45% if he is a higher rate taxpayer – but remember this revenue has already been taxed at 24% - and there is not a full deduction of this tax against the monies Ted earns from his investment. To say that Ted should pay the same rate as Max who makes earns a salary from his hard work is scandalous – Ted pays a much higher rate of tax than Max on the underlying revenue – and unless he is prepared to work for the business – cannot take an income as a salary.
Although we need to wait for the details, the chances are that the tax on the revenue made by companies on investors – is likely to be well over 50%
Ted now has some hard business decisions to make – should he carry on working and abandon the idea of a sale – and where will Max go to look for investment in his business for expansion. Sunak has just made it much harder for both businessmen to expand, grow and employ more staff – to my mind this is sheer madness.
With this disincentive for investors in mind, businesses seeking to expand, may now need to look to their bank for backing.
But choosing the right bank is not easy – listen to John Cross of Mirabaud bank in Geneva podcast here to find out why.
If you have any comments on this or any other of my Notes please let me know.
Episode 31 -
Banking, John Cross: Mirabaud
In Episode 31, Caroline Garnham talks to John Cross, a Senior Vice President of Mirabaud, an international banking group that provides a clientele of private and institutional investors, companies and finance professionals with highly customised investment, private banking and asset management services. Caroline talks with John about the business of banking and how banks like Mirabaud make its money.