Perhaps we should start taxing idiot fuckwits instead?

Be a very rich source of revenue, that would.

Private equity firms looking to make millions of pounds from selling the AA breakdown service have come under attack for the tiny amount of corporation tax its holding company has paid.

Unions and MPs have rounded on the owners of the AA\’s holding company, Acromas, which also houses Saga financial products, for paying tax of 2.7% on profits since its creation in 2007.

The company\’s accounts show that it paid a combined £67.1m in its five-year history, on total operating profit of £2.49bn made from a turnover of £8.75bn during the period.

The revelation will spark further outrage about the extent of UK tax avoidance by corporations, which last week saw representatives of Google, Starbucks and Amazon grilled by the public accounts select committee. UK corporation tax is set at 24% but is expected to fall to 23% next year.

Last week business secretary Vince Cable called on the chancellor to use his autumn statement to \”get to grips\” with companies that are \”systematically abusing\” the UK tax system.

Paul Maloney, regional secretary of the GMB union, which counts many Acromas staff as members, said: \”The chancellor should use this example to end tax relief on private equity loans, which is skewing the corporate sector towards borrowing rather than equity, and leading to an erosion of the tax base. The loss of tax has been huge.

\”Taking advantage of this tax relief is what drives private equity. It has led to excessive leverage across the economy in the likes of the AA, Southern Cross, Four Seasons Healthcare, pub companies and Boots as well as a loss of tax. There is now a wall of debt of £111bn that buyout companies in the UK will have to refinance over the next five years.\”

Moron.

We don\’t actually know whether more tax is paid or less as a result of the deductibility of interest payments. Sure, less corporation tax is paid. But more tax is paid by the recipients of the interest income. Because that\’s the way the system works, see? Income received is taxed.

And, amazingly, the tax rate on income received is likely to be higher than the corporation tax rate not paid.

Corp tax is what, 26% now? So, if the interest is being paid to a company then they\’ll pay that on their profits…..we\’ve just moved the corp tax payment from one company to another.

Or if the interest is being paid to individuals then, assuming that poor people aren\’t buying corporate bonds (unlikely, no?) then they\’ll be paying 40 or 45% income tax on their interest received. Which is, you\’ll note, higher than corp tax rate.

It\’s entirely possible that interest deductibility increases the total tax take.

12 comments on “Perhaps we should start taxing idiot fuckwits instead?

  1. Only if the lending company is in the same country. Most of the funny games involve loans from related companies based in tax havens. So instead of paying 26% in the UK, they’re making loan repayments to a company in the Caymans which pays 0%.

    You’re also making terrible assumptions about bondholders. Pension funds own a lot of bonds and pay no tax on interest received; equally if the bondholder is overseas then there is also no tax payable to the UK exchequer.

    One of the rules of taxation is to tax your natural advantage. If your country has beautiful beaches and scenery, you should probably find a way to tax that (e.g. through hotel rates or national park entry fees). If your country is blessed with oil & gas, find a way to tax it too. In Britain the natural advantage is the business, legal, and investment environment. Corporation taxes are simply a means of taxing that natural advantage.

  2. As Andrew M suggests, it’s very unlikely the people who put up the money and are receiving interest income are sat there happily paying 40% tax on it.

    If a bank lent the money, it ain’t paying tax on gross interest income, for a start.

  3. Well as someone who expands his business using retained profit rather than borrowed money, I’d be quite happy if interest payments were no longer allowable business expenses. Might bankrupt quite a few of my competitors if they had to pay tax on their notional profits AND the interest on their bank loans at the same time.

    Might not not do so much good for the economy as a whole though…………………..

  4. ……..“The chancellor should use this example to end tax relief on private equity loans, which is skewing the corporate sector towards borrowing rather than equity,…….

    Take away borrowing and I wonder how much investment would get made?

    Last year I helped raise $2 billion for a project that is currently employing 8,000 people. If we had only equity, it would never have got done.

  5. The other thing that suddenly occurred to me is that every 5 minutes we get Vince Cable and his ilk on the TV berating the banks for not lending enough money to businesses . Now he shows up demanding businesses pay tax on interest payments (effectively).

    Is he so dim he can’t see the conflict between the two demands, or is he just a hypocritical arsehole who would say anything court public opinion and power?

    (I think I know the answer to that…………..)

  6. Quite honestly I am, and have been for a long time, unhappy about the ability of “Private Equity” firms to borrow 90% of a company’s valuation and get tax relief on the interest, a chunk of which merely represents the debasement of the currency; it isn’t just the tax relief: it’s the ability to pocket 100% of the profit for 10% of the cost if things turn out better than expected and to walk away leaving the bank with 90% of the loss if they turn out worse. So Guy Hands is still doing multi-million pound deals when he ought to be bankrupt. This would be less bad if they didn’t get tax relief on the interest payments but is it worth screwing up our whole tax code to deal with the abuse by “Private Equity”?

  7. @john77 – is the fault with the private equity firms or the people who are prepared to lend money to them at such ludicrous levels of gearing? Caveat emptor used to mean something in financial markets.

  8. @ diogenes
    Both, of course: you are quite right. The interest rate on “mezzanine debt” is supposed to compensate for the risk but often does not.

  9. To be honest, there are quite so many fuckwits and, despite the recent successes of the left, not a particularly strong market for their effluvium that, like finding a rich seam of sewage, I wouldn’t expect to make much money from selling it, never mind taxing it.

  10. Most PE investors are tax exempt so don’t pay tax on the interest income

    Outrageous until you realise they are mostly pension funds…..

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