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: https://www.conservatives.com/manifesto)? 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: http://parliament.uk  (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

Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

Employee Directors at Sports Direct

It seems that controversial company Sports Direct (SPD) are likely to become the first UK public company to have a worker on their board. They plan to appoint an elected “Worker’s Representative” who will attend and speak at board meetings although they would not formally be appointed as a director. A spokesman for Sports Direct said: “Having explored all options we believe this is the best way to ensure the Workers’ Representative is free to champion the interests of all staff. We see this as a major step forward in bringing about positive change.”

Comment: if that improves their employee relations, which has seemed far from ideal in the past, then so much the better. But is there not a risk that the person so appointed might be seen as a “shadow director”? For those not familiar with that concept, anyone who has significant influence on the operations of a company and its board could be seen as a shadow director and in that case the legal position is that they have the same duties and obligations as any other director (and the associated legal liability).

One objection to these kinds of arrangement is that employee directors might have power without the associated obligations and hence make cavalier decisions. But in this example, not being formal directors they presumably will not be able to vote on any board resolutions.

ShareSoc has not adopted any formal policy on employee directors although we do think that a Shareholder Committee is a better way to improve corporate governance and stakeholder engagement. The presence of a worker representative on a Shareholder Committee might be an alternative solution.

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

Secret Cautions by the FCA

The Financial Times reported this morning that it had obtained information from the FCA on the number of private warnings it had issued over the last 5 years using a Freedom of Information Act request. The answer given was that there had been 39 of them.

ShareSoc has complained about this practice in the past, particularly with regards to AIM companies where the LSE has a similar approach. Indeed we complained about the use of private warnings in our submission to the FCA’s consultation on its “mission” only in January.

John Mann, M.P., who sits on the Treasury Select Committee was quoted in the FT article as saying: “Transparency is absolutely key. Anything that allows things to be dealt with in secret is damaging to the whole culture of financial services, and opens the regulator up to challenge”. One surely cannot but agree with that. Justice must be seen to be done as the well known aphorism goes.

Shareholders in companies do need to know if the FCA has criticised directors in the past, and the details of any such complaint. It also apparently causes problems for those handled in this way because they do have to disclose private warnings to new employers and can only appeal them if challenged with a judicial review (an extremely expensive process).

It’s that old “city club” mentality again. “We’ll just have a quiet word with the chap” rather than disclose it in public and damage his/her reputation seems to be the attitude. It’s surely time such practices were dropped. If it’s serious enough that the FCA formally investigates the matter, then any conclusion should be made public and the people involved named.

Roger Lawson

Clamp Down on CFDs – ShareSoc’s Comments

The Financial Conduct Authority (FCA) is proposing to clamp down on CFDs (contracts for difference) and similar financial products such as binary bets. CFDs are complex financial products that have historically been used by sophisticated traders. But they have been growing rapidly in usage by small retail “investors” and the FCA reports that 82% of them lose money based on a review of such accounts.

ShareSoc has now published it’s formal response to the FCA’s consultation on their proposals to tackle this problem. You can read it here: http://www.sharesoc.org/CFDs-Conduct-of-Business-Rules-Response-2017-03-03.pdf

In summary we support the FCA’s proposals with only minor reservations.

Roger Lawson

Government Action on Dormant Accounts

The Government has today reported that as much as £2 billion is sitting idle in dormant accounts such as share trading accounts, ISAs, pensions and insurance products. That includes £715 million alone in investment and wealth management accounts.

This is noted by the Independent Dormant Assets Commission set up by the Government which has looked at whether the existing scheme for dormant bank and building society accounts should be extended. Minister for Civil Society, Rob Wilson, suggests that this money could help change millions of lives if it was donated to charities.

Readers may not think they will ever lose track of accounts but as folks get older, move house or emigrate, accounts are often forgotten. Regrettably the use of nominee accounts to trade shares hardly encourages stockbrokers and platform operators to follow up on inactive accounts. Any dividends on shares simply accumulate within the client account but presently the account operator gets interest on that which they retain. This can continue for ever (even after the client has died) unless inactive accounts are chased up. The lack of even regular postal communications to the last recorded address now that everything has moved on-line makes it easy to lose track of clients and the longer it is left, the more difficult it is to trace account holders. With digital communication being the norm, and people changing email addresses regularly, so that messages to them just disappear into the ether you can see why this is a growing problem and why the sums involved have become so large.

When investors are on the share register, dormant accounts and the associated dividends return to the company who issued the shares eventually so they revert to the benefit of other shareholders. Whereas with nominee accounts the nominee operator gets the benefit.

So this is yet another dubious aspect of the nominee system and why stockbrokers are so keen on nominee accounts perhaps. ShareSoc has of course been complaining about the iniquities of the nominee system for some time.

The Commission has suggested that the introduction of a scheme to ensure these dormant accounts are donated to good causes should be voluntary, but it would surely be better that it was compulsory. Note though that no client can lose money as a result if they reappear. They can always reclaim the lost assets in any case.

Roger Lawson