Double Taxation and Broken Promises

The most recent changes to dividend taxation in the Chancellors Spring Budget are a major attack on private investors. The simple change to reduce the Dividend Tax Allowance from £5,000 to £2,000 only a year after it was introduced will have a big impact on the tax paid by many investors. It’s also another example of a broken promise about “no increases in taxes” made in the Conservative manifesto.

The Chancellor, Philip Hammond, has already had to back-track on the increases to National Insurance over the broken promise. Perhaps he should reconsider the above changes also.

Let’s go back eighteen months when his predecessor George Osborne issued his last budget. That scrapped the dividend tax credit system and introduced the Dividend Tax Allowance. This is what I said at the time about that:

“Dividend tax change. Few people understand the dividend tax credit system so this might be seen as a worthwhile simplification, but it will increase the Government’s tax take, particularly from wealthy investors, very substantially. For example it is forecast to raise over a billion pounds per year in tax!

The original reason for dividend tax credits was to avoid double taxation on the same profits. When both corporation tax and personal tax rates were high, profits made by a company could effectively be taxed twice – once within the company by corporation tax and then when the profits were distributed in dividends. It could result in very high combined rates. But tax rates are now lower, particularly corporation tax.

The new £5,000 allowance will mean the vast majority of individuals who receive dividends will not be adversely affected. However, those with substantial dividend income will be. For example, someone who receives £50,000 a year in dividend income may be £3,800 per year worse off!”

The latest reduction in the Dividend Tax Allowance to £2,000 will mean some investors are now an additional £1,000 worse off than stated above.

What did the Conservatives say in the 2015 Manifesto (which you can read here: It says on page 27 that “A Conservative Government will not increase the rates of VAT, Income Tax or National Insurance in the next Parliament”. Most people will have read that to mean that they will not be paying more Income Tax or National Insurance. Hence the complaints from the self-employed concerning changes to the latter. But the impact of these changes to dividend taxes are even more damaging to those living on dividend income in retirement.

Obviously the way we are headed is for the Dividend Tax Allowance to be scrapped altogether and dividend income is clearly now a target for more tax raising from the Chancellor.

I would urge all private investors to complain to their Members of Parliament about this change. You can write to your M.P. by post or email. You can obtain their contact details from this web page:  (enter your post code at the bottom left). This will take you to a page giving their name, postal address and email address – an email will do fine.

Roger Lawson

It’s a Budget – But Not As We Know It

The Chancellor, Philip Hammond, delivered his Spring budget yesterday. But as most of the big changes have been moved to the Autumn, this was a “steady as you go” statement in essence.

However there were some significant changes for private investors. The biggest is that the tax free allowance on dividends has been reduced from £5,000 to £2,000. So if you rely on dividend income, say in retirement, this will cost you substantially more – over £1,000 extra in tax in some cases if you pay higher rates of income tax.

The Chancellor seems to have decided to attack the growing number of “self employed” and those who are paying themselves via limited companies. Hence the change to dividend income. Hence also Class 2 and Class 4 National Insurance being raised but the impact of other changes are actually quite complex. Irrespective the Chancellor has decided that the current high differentiation between taxes (and benefits) between employed and self-employed “undermines the fairness of the tax system” even though the latter get fewer benefits. One surely cannot argue with that although he has been accused of breaking a Conservative manifesto promise not to raise taxes.

There are of course some simple steps to avoid higher taxes on dividends. If you don’t need the cash for spending money, then move your high dividend paying investments into an ISA or SIPP. The ISA allowance will increase to £20,000 from April this year as previously announced so enabling you to shelter substantial amounts from the taxman, particularly if you are married and hence can put in twice as much. In addition you might consider investing in Venture Capital Trusts (VCTs) where dividends are tax free. These have become more popular of late because of the limits on pension contributions and the recognition that they have generated good returns in recent years from the best companies, although the availability of new subscriptions to them is now low.

The Chancellor has taken some steps to increase productivity in the UK which is a hot Government theme at present – see the last ShareSoc Informer Newsletter for more discussion on that. So there is money for research into hot technology areas, investment in 5G networks, improvements to the road network (£690m), and £500m to improve technical training (for “T-Levels”).

How is the economy doing generally? Economic growth is now good after the failure of the Brexit decision to dent it as expected. But the Government is still planning to run a deficit so overall Government debt will still rise this year to a new record of over £1.6 trillion. Indeed with some attacks on tax avoidance, overall tax raised will rise under this budget to the highest proportion of GDP since the 1980s. Will this prove a drag on the UK economy and businesses in general? We have yet to see. The Government is also considering how it can raise taxes on on-line retailers who often avoid business rates and will try to close a loophole whereby sales are made VAT-free by being made from overseas.

Thinking of moving overseas for your retirement? The Chancellor is imposing a tax charge of 25% on pension transfers to qualifying schemes (Qrops) from the new tax year with some exceptions. This is to try and frustrate the move of pensions to more favourable tax regimes which has apparently been subject to abuse of late.

But as rather expected, the Government is making a lot of money from pensions being cashed in under the new freedoms to do so devised by former Chancellor George Osborne. The latest estimate has doubled to £1.6 billion!

Or considering what to do after your time as Chancellor ends? Just take note that former Mr Osborne is going to be earning £650,000 per year as an advisor to Blackrock for working four days per month. It was disclosed in the register of MPs interests on budget day.

Roger Lawson

AIC Press Release on VCTs

To follow on from my last blog post, another interesting press release from the AIC today was that on the performance of Venture Capital Trusts (VCTs). That’s particularly so when everyone is considering their tax bills at this time of year, i.e. those just paid and how they can avoid such big ones for the current year and next.

VCTs do of course offer upfront income tax relief when investing in new shares, and also tax free dividends thereafter. Many have been achieving high dividend yields in recent years. The AIC notes that the VCT sector “as a whole is up 82% by share price total return over the last decade”. In addition the top 20 VCTs are up an average of 141% over the last 10 years and have paid our an average total tax free dividend of 87 pence per share. The press release tells you which have been the top performing VCTs and when buying shares in these trusts it’s probably best to go for those who have demonstrated good long term performance as running these funds is not easy and proven experience is what seems to count. AIC press releases are given here:

Needless to say perhaps that Foresight VCT, which ShareSoc recently commented on, does not get a mention as it’s not in the top 20.

The AIC does of course give you comparative historic performance data on most investment trusts including VCTs on their web site.

Roger Lawson

Brexit, Industrial Strategy and Productivity

What next now that we are committed to Brexit? Well first we need an “industrial strategy” to help us develop a new place in the world and possibly to pay for the up to £60 billion that might be demanded by the EU (as settlement for outstanding commitments if you believe that – yes divorce can be expensive). Now it just so happens that the Government has just published a Green Paper entitled “Building our Industrial Strategy” on that topic which is worth reviewing.

If you don’t think revolution is in the air, or would prefer it was not, it’s worth quoting from the Prime Minister’s foreword to the document: “Last summer’s referendum was not simply a vote to leave the European Union, it was an instruction to the Government to change the way our country works – and the people for whom it works – forever.”

Another comment in her foreword is on the need to tackle low productivity in the UK and she says: “This is vital because if we want to increase our overall prosperity, if we want more people to share in that prosperity, if we want higher real wages, and if we want more opportunities for young people to get on – we have to raise our productivity.”

That is undoubtedly true. Productivity in the UK has been a problem for many years as the Paper explains. It improved up until the financial crisis in 2008, but then fell behind our competitors in France, Germany and the UK (they produce as much in four days as UK workers do in five). There are also bigger disparities across the UK than in other countries, with London being 72% higher than the UK average. Note: this probably reflects the very high “added value” achievable in financial services in London and over reliance on that distorts the UK economy in many ways.

Now Governments, particularly socialist ones, tend to talk at length about improving the economy by improving productivity, backing new technology, backing selected winners, developing sectors where we have obvious strengths, improving capital investment, developing a more educated workforce and suchlike. This makes for good political speeches but in practice does not often result in much change. Or worse, a lot of money is wasted on backing losers, or subsidising industries in decline.

So let’s just pick out what might be new in the Green Paper. The Government proposes ten “pillars” for the strategy – investing in R&D, developing skills, upgrading infrastructure, supporting start-ups and early stage businesses, and several others with somewhat woolly definitions.

The Government is to invest an extra £4.7 billion in R&D funding. How this will be spent has not yet been determined but a whole list of possible “hot” sectors are given that might be supported by the new “Industrial Strategy Challenge Fund”.

There will be effort expended to develop improved technical education and improvement in STEM skills where the UK has long been behind other countries (we basically have too many people studying for useless or easy degrees, and not enough focus on less glamorous technical skills – best not to comment perhaps that the Prime Minister has a degree in Geography; she may have realised her mistake as she promptly joined the Bank of England before going into politics). The creation of a new system of technical education is promised.

There will also be a commitment to improve our transport infrastructure – rated second lowest among G7 countries. That includes, roads and railways, energy production, housing and even our digital infrastructure. The failure of long term planning in these areas is surely obvious to everyone. The road network is a particularly good example of under investment and obstructive planning processes resulting in some of the worst traffic congestion in the developed world. This certainly damages productivity.

The low level of investment in infrastructure, and in plant and machinery, is a long established aspect of the UK economy which the Government wishes to change.

To promote the growth of long term investment the Government has launched a new Patient Capital Review, led by the Treasury. It will be looking at the problems of obtaining and providing development capital for growing innovative firms. And it will consider the role of “market practice and market norms” in facilitating investment. It even suggests that dual class share structures such as those of Google, Facebook and LinkedIn where founders can retain dominant voting control might assist in the development of winning businesses, even though UK stock market investors generally dislike them.

One can anticipate a big fight over this idea as surely this is not the cause of those companies success. Indeed if you look at Apple, where in its early days Steve Jobs was dominant he made so many mistakes that he was removed and replaced by a businessman. Only later did he return and make a success of the company in a conventional share structure. The dominance of Henry Ford over Ford Motor Company and his reluctance to change meant that he subsequently lost out to General Motors where a more normal corporate share structure was present. The beauty of a conventional structure is that when the CEO is going awry, they can be changed. A dual share structure can block change. The Government’s analysis here is surely simplistic and they have spent too much time talking to entrepreneurs rather than students of business history.

Anyway it seems we are soon going to get a discussion paper from the Financial Conduct Authority that will review the structure of the UK’s listed markets. So that’s one more consultation to add to the current pile – we seem to be snowed under with them at present. But it sounds like we will definitely need to respond to that one. And you can of course respond to the Industrial Strategy Green Paper as it poses some questions to which they would like answers.

For those who invest in smaller companies, the Minister for Small Business will take on the role of “Scale-Up Champion” and there will be a review into entrepreneurship led by the “Chief Entrepreneurial Adviser to the Department for Business, Energy and Industrial Strategy (BEIS).

Comment: The responses to the Green Paper by businesses and the media was unenthusiastic (“politely lukewarm” as the FT called it). They have no doubt seen it all before, with no obvious benefits arising. Unfortunately asking civil servants, or politicians, to develop sensible business development strategies does not work simply because they have no relevant experience or understanding. There are not many people with MBA degrees for example in the Treasury or BEIS I would guess, and even fewer with real business experience. In simple terms asking them to pick technology or market sectors to back is not realistic, and they will waste a lot of money backing projects and people that fail.

The existing approach of providing tax relief to those who back smaller companies (via EIS and VCTs for example), and risk their own money, has worked. Providing direct stimulation does not. Exiting the EU will enable us to escape from the limitations of EU rules in this area concerning tax relief. But providing a good educational framework can help and that should surely be one of the key roles for Government to play. Fixing the infrastructure is also where Government can assist.

If you wish to make your own comments, the Government’s Green Paper is present here:

Note that I hope to write an article for the next ShareSoc newsletter than will explain the conundrum of poor UK productivity. There are a lot of misconceptions about what can and what cannot improve productivity.

Roger Lawson

Losses From Withholding Taxes on Dividends

An issue that has come to the notice of ShareSoc is the problem of the Withholding Tax introduced on dividends in South Africa. Even though Pan African Resources Plc (PAF) is registered in the UK, it is dual listed on AIM and the Johannesburg Exchange (JSE). Because of the way South Africa introduced the tax change, any shareholder is going to get 15% deducted before payment (or 10% for UK residents under a dual tax treaty).

To get the lower rate, you need to submit a “Tax Resident Beneficial Owner Declaration Form” to the company’s registrar (Capita). So far, so good, if your shares are held directly (i.e. you are on the register).

However, if your shares are held in a nominee account (i.e. in an ISA or SIPP), your broker would have to submit such a claim for you (and any other clients for which they are holding the company’s shares in a pooled nominee account).

Checking with a couple of brokers, AJ Bell Youinvest and the Share Centre, they are refusing to submit such claims on the basis that they never reclaim such taxes. That’s despite the fact that they do reclaim tax deducted on UK listed REIT dividends.

This seems somewhat unreasonable even if it would be some effort to ensure the 5% of dividends were not lost. At least investors should be warned of this. Pan African is not likely to be the only company affected by this.

This is of course, yet another example of the negative aspects of nominee accounts. The fact that you are not the registered owner of the shares if you hold them in an ISA or SIPP account, or indeed in most broker accounts, undermines your legal rights including your dividend rights!

Roger Lawson

Stamp Duty Review

The Office of Tax Simplification is currently undertaking a review of Stamp Duty. Stamp Duty is paid on share transactions, although there are numerous exceptions and ways to avoid paying it. Although this review seems to be primarily focussed on technical aspects and how to remove paper processes (still needed for off-market transfers for example), ShareSoc argues that the tax should be scrapped altogether.

Our full submission to the review can be read here:

This is a simple example of the work ShareSoc does to represent retail investors.

Roger Lawson 24/12/2016

Chancellors Autumn Statement – How Does It Affect Investors?

The Chancellors Autumn Statement yesterday was effectively a cold shower for those who might be positive about the economy. Government debt is going to be allowed to rise so as to ensure that growth is not too anaemic and some of that money will be spent on improving infrastructure such as roads and including the support of house building. Inflation is forecast to rise, while real incomes decline as wages will not keep up so that does not bode well for the retail economy. Needless to say, those factors caused the pound to fall. The Chancellor, and the Treasury no doubt, are taking a cautious view on the economy and the effect of Brexit. Whether that will turn out to be the case or not is surely anyone’s guess as betting on the forecasts of economists and politicians is a mugs game.

He is particularly concerned about productivity so there will be steps to tackle that (lack of real productivity growth ultimately inhibits wage growth). But it is not totally clear how or where any expenditure will make a big difference there. Labelling investment in roads, broadband, R&D and house building as productivity schemes under the label “National Productivity Investment Fund” may be seen as “spin” as there could be little direct connection. But £13 million is being provided to improve management skills. The additional money for house building did nothing to improve the share prices of house building companies.

Unhappy that you lost money on banks in the big financial crisis of 2008? Well the Government, using your money, is now facing a loss of £27 billion the Chancellor reported. Future Governments may hopefully be less keen to take stakes in banks in a forceful manner in future (diluting that of other investors massively) on the premise that that they would come out ahead in due course as previously happened in the Swedish banking crisis and bailout which the UK Government was keen to imitate.

There will be a ban on the charging of letting fees as soon as possible, which may further dampen the buy-to-let market but the biggest impact was on companies in the estate agency sector, such as those like Foxtons (down 14% on the day).

Planned cuts to Corporation Tax will go ahead though as will increases in personal tax allowances and maximum ISA contributions (£20,000 from next April).

The state pension “triple-lock” will remain in place, despite rumours it was being reconsidered. But the allowance (Money Purchase Annual Allowance) to stop money being recycled through a pension once benefits are being taken, and hence collecting tax relief twice, is being reduced to £4,000.

A new National Savings Bond offering an indicative rate of 2.2% will be available from April 2017. Hardly generous considering projected inflation, and there will be a limit of £3,000 you can put in, so this will only be attractive to the small savers who can’t think of anything better to do with their money than deposit it in a bank.

One interesting mention was that there will be a review of stamp duty on share transactions. That is surely long overdue as there are lots of anomalies in that tax and the Government has consistently opposed “transaction taxes” in EU circles which is what it is. Shares registered overseas, and ETFs do not pay it, and anyone trading in CFDs does not. Likewise not everyone pays it, such as market makers. It has already been dropped for AIM shares. It would certainly be a useful simplification of the tax system and improve liquidity in markets.

There are to be changes to the rules for Tax Advantaged Venture Capital Schemes (VCT, EIS). This includes a number of measures and I repeat what HMRC issued on it below:

  • A consultation will be carried out into options to streamline and prioritise the advance assurance service.
  • The Finance Bill will clarify the rules for share conversion rights for shares issued on or after 5 December.
  • The Finance Bill will provide for additional flexibility for follow-on investments made by Venture Capital Trusts (VCTs) in companies with certain group structures, to align with EIS provisions, for investments made on or after 6 April 2017.
  • The Finance Bill will introduce a  power to enable VCT regulations to be made in relation to certain share for share exchanges to provide greater certainty to VCTs, to take effect from Royal Assent.
  • But the government has also announced it will not take forward replacement capital (using EIS/VCT money to buy second-hand shares) for the time being, but will review the case over the longer term.

Funding of the British Business Bank Venture Capital will be substantial to help growing companies (rather than have them sell out at an early stage) and that is likely to be invested alongside venture capital firms. There will be a review set up to target “patient capital” improvement.

Fintech is being backed in a big way with the DIT providing £500,000 a year for FinTech specialists and the government has commissioned an annual ‘State of UK FinTech’ report on key metrics for investors.The National Living Wage will rise to £7.50 per hour from April 2017, but that might be less than expected. This will hit those companies who employ lots of low cost staff.

Tax rises were generally thankfully absent but Insurance Premium Tax will rise from 10% to 12%.

The National Living Wage will rise to £7.50 per hour from April 2017, but that might be less than expected. This will hit those companies who employ lots of low cost staff.

The government will go ahead with reforms to restrict the amount of profit that can be offset by historical losses or high interest charges. This might affect highly geared companies and private equity investment companies. This is what the Government said in detail as this is quite an important aspect for investors:

“Tax deductibility of corporate interest expense Following consultation, the government will introduce rules that limit the tax deductions that large groups can claim for their UK interest expenses from April 2017. These rules will limit deductions where a group has net interest expenses of more than £2 million, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. The government will widen the provisions proposed to protect investment in public benefit infrastructure. Banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors.In summary, this is a “steady as she goes” budget. But the market seemed generally unimpressed. Nobody likes a basically pessimistic Chancellor perhaps.

Reform of loss relief – Following consultation, the government will legislate for reforms announced at Budget 2016 that will restrict the amount of profit that can be offset by carried-forward losses to 50% from April 2017, while allowing greater flexibility over the types of profit that can be relieved by losses incurred after that date. The restriction will be subject to a £5 million allowance for each standalone company or group. In implementing the reforms the government will take steps to address unintended consequences and simplify the administration of the new rules. The amount of profit that banks can offset with losses incurred prior to April 2015 will continue to be restricted to 25% in recognition of the exceptional nature and scale of losses in the sector.”

In summary, this is a “steady as she goes” budget. But the market seemed generally unimpressed. Nobody likes a basically pessimistic Chancellor perhaps.

Roger Lawson