In the long run, the tax breaks that fuel the entire industry – offsetting interest payments against tax – need to be phased out. It is a sector that has done more to degrade contemporary capitalism than any other. We need more public companies publicly accountable to shareholders and the public, and less indulgence of the indefensible. Britain should not be putting a Brexit deal at risk to save them.
If interest is taxed at the corporate level then it will become untaxed at the investor. Or, of course, it will be double taxed. How’s Willy going to like the optics of the rentier being untaxed?
Eh? Feels like some sentences are missing here.
Who is the rentier?
How is something double taxed? And then again untaxed at what point?
Currently interest paid is untaxed at the level of the corporation paying it out. It is taxed as income to the recipient.
We could change this, sure we could. Stop interest being an allowable expense at the corporate level. But that would mean it is being taxed already. Thus it would be non-taxable in the hands of the recipient. Or, if it were still taxable then interest would be being double taxed.
How’s Willy going to like the optics of the rentier being untaxed?
You’ve almost answered your own question, there. He’s not going to like that at all whereas two lots of taxation – yes please.
Of course given the way these businesses are geared the “phasing out” will create mayhem and a bankrupted care home sector is just what is needed.
“We could change this, sure we could. Stop interest being an allowable expense at the corporate level. But that would mean it is being taxed already. Thus it would be non-taxable in the hands of the recipient. Or, if it were still taxable then interest would be being double taxed.”
You’re not being very clear. What a shareholder receives is not called ‘interest’ its called dividends, or profits. No shareholder receives interest. So the PTB will not consider that interest has been double taxed, any more than anything else a company might buy that is not an allowable expense has been double taxed. A company cannot give away a large chunk of its profits to a random individual and call it an allowable expense, so if it did that would be double taxed. Removing interest from the list of allowable expenses just adds it to a very long list of things that aren’t allowable expenses. Its not crossing some taxation rubicon.
You’re not thinking about this.
Two examples.
Current tax. Company has £100 of profit, £100 of interest bill. Profit tax is 20%. So. Company pays £20 in profit tax. Interest is untaxed at corporate level, taxed in hands of recipients at their marginal rate.
New system. Interest is not an allowable expense. Profit is now £200. Profit tax is £40. The interest has been taxed before distribution. And it it is also taxed at the marginal rate of the recipient then it is double taxed.
Question. Why are dividends taxed at different rates dependent upon the gross income of the recipient? Because they have already paid profits tax at the corporate level.
Jim,
If interest is paid, someone else receives that interest (a bank?). The dividend to shareholders is something else, that comes out of profits at the end of all that.
Willy seems to think that private equity firms are going to demand that their debts are forgiven, or something? Which is nonsense. That seems to be the basis for this latest attack on capitalism, unless I’ve read it incorrectly?
Jim,
Apols, I’ve re-read what you said; ignore my post above. The point is that “mostly” allowables and disallowables are matched. If you can’t deduct it as an allowable expense, and it will anyway be taxed in the hands of the recipient, generally better not to put it through the company.
But interest is integral to property and to business. That would be a massive change. It is a true operating cost when it comes to any sort of property investment. It would also probably shift financial activity offshore if the UK did something like this unilaterally. For sod all benefit?
Of course, morgage interest is no longer an allowable expense on buy-to-let property so there’s a precedent of sorts. Thank you, George Osborne, a man who has lost none of his loathsomeness since leaving parliament.
“But interest is integral to property and to business.
Debt obviously.
Rentier is also German for reindeer.
I have this vision of herds of Finnish stags, smoking cigars and gathering around ticket tape machines. The odd bit of rutting going on as they compete for more Tesla shares…
“You’re not thinking about this.”
Neither are you. We already have a system of allowable and non-allowable expenses for business. Things that are non allowable are doubled taxed, if the company still decides to spend money on them. Most don’t for obvious reasons. Now adding interest to the ‘not allowable’ list might make a big difference to business (it might make things better if everything wasn’t so debt based, but thats a different argument) but it isn’t creating some new never before seen scenario of double taxation. Such scenarios already exist and I don’t see you creating a stink about them.
You are also forgetting the idea of interest being double taxed would be a fact in its favour to many if not most of the people in government today. Saying to the likes of Willy Hutton ‘Oh but that means interest will be double taxed’ would mean he was even more in favour of it.
Indirectly, isn’t Will attacking the whole system of credit? That ability to borrow – in order to buy something before we have earned it through our labour, that might enable us to become more productive and hence speed up our earning capacity – compared to not being able to borrow?
I suppose what I’m saying is you need a better argument than ‘It’ll double tax interest’. Not least because ordinary people can’t borrow money and set the interest against their income, so why should businesses be allowed to do so? Borrowing money to buy your house that you need to live in is an inescapable fact of life in the UK, its a ‘cost’ of living. Ergo why isn’t mortgage interest an ‘allowable expense’ for ordinary individuals? Thats the argument you’ve got to square, not bleating about how wealthy people/entities (as seen in the eyes of your political opponents) might be double taxed.
Oh no, Worstall, not fucking “optics”. Please!
Jim, Interest is an allowable expense for a business where the money borrowed is used to (try to) make a profit. Interest on your mortgage is no paid in pursuit of profit.
Mr. Bison, IIRC interest is still an allowable expense for private landlords, but only up to the basic rate.
And, in general, some expenses are non-allowable for tax (notably most entertaining) but that is either to dissuade such expenditure, or because the recipient is not taxed on it either.
Residential mortgage interest did used to be tax deductable. I’m old enough to remember Mortgage Interest Relief At Source.
“Residential mortgage interest did used to be tax deductable. I’m old enough to remember Mortgage Interest Relief At Source.”
Precisely. And it was removed for private individuals. But not for businesses. Now regardless of the economics of it you’ve got to convince Joe Public that Amazon and Mike Ashley having a special tax rule in their favour that he can’t have is a ‘Good thing’ for everybody. Just waving hands and saying ‘But double taxation!’ won’t cut it. Many people would be precisely in favour of double taxation of ‘the rich’ (which is the way most ordinary people would view big business and the sort of people who buy businesses and load them up with debt just to shift the profits abroad), so its hardly a strong argument. Something a bit closer to home to the average Joe is needed.
I’m still waiting for our host to come up with something though……..
” Interest is an allowable expense for a business where the money borrowed is used to (try to) make a profit. Interest on your mortgage is no paid in pursuit of profit.”
A business may need to borrow money to invest in assets in order to make a profit, a person needs to borrow money to buy a house in order to be able to live a life (ie profit from their life). The principle is largely the same.
And companies don’t only have debt as a source of investment funds, they could issue equity instead. Its just that interest as an allowable expense makes debt more attractive. Especially when sharp suited city types want to shift profits overseas in order to avoid paying taxes. IMO buying a profitable company then loading it up with debt should be outlawed. Thats never about investing in new business opportunities, its about tax avoidance.
There is, in the USA, an objectionable tax break for Private Equity which is the partners taking their profits when they cash out of an investee company as capital gains rather than income, so at a much lower tax rate – Hutton ignores this. Instead he wants the widespread hatred of Private Equity to attack the idea that profits tax should be charged on profits.
It was a black day when Hertford chose a man who studied *Sociology* at Bristol and then failed the Civil Service exam to be its Principal. Whatever one may think of Hertford’s academic ranking (near the lower end of Oxbridge colleges IMHO) the choice works to devalue the wider institution.
“ When you calculate how much UK Corporation Tax your company or group has to pay, there’s a limit (known as a Corporate Interest Restriction). This limits the amount of tax relief you can get for ”
https://www.gov.uk/guidance/corporate-interest-restriction-on-deductions-for-groups#if-youll-deduct-more-than-2-million
Actually, no – they can rent. I need to buy food – and there is no alternative, other than growing my own, which doesn’t work in an urban setting. Your argument would be that food (clothing, too?) should be tax-deductible. People aren’t (in general) businesses – those that are (such as sole proprietors) have to segregate their profit-seeking (business) activities from personal – although no doubt they seek to push the envelope.
“Actually, no – they can rent. ”
And a company can issue equity. So it has options as well. Ok, a private individual can’t do that, its a bit difficult to sell shares in yourself. But thats just a reason for saying limited companies shouldn’t be able to put debt interest against income, while sole traders and partnerships could.
If limited companies were unable to offset interest against income then they would be forced to use equity to expand, and those doing the investing would be far more likely to get involved in the running of the company, and hold the management to the fire, as they have a vested interest in the company doing well, whereas lenders just have to consider whether it can fund the debt, not the long term interests of the company.
Jim
“If limited companies were unable to offset interest against income then they would be forced to use equity to expand, and those doing the investing would be far more likely to get involved in the running of the company, and hold the management to the fire, as they have a vested interest in the company doing well”
That’s not right.
All borrowing does is leverage equity. It makes it riskier. Both “risk and return” – crucial to all analysis of this stuff.
If you are borrowing – in order to increase the risk profile, as in “higher return / higher loss” – trust me, you are every much as involved as if it were just equity, probably even more so. Don’t forget, this is not just your returns, this is your capital / equity at stake as well if it goes wrong.
Which takes us back to Islamic finance, where interest is illegal. How has that worked out for them?
There are different investors, with different preferences for where positions on the risk/return curve. Allowing some to be creditors, while others are equity holders, probably allows us to come closer to an optimum risk/return trade-off for different investor groups, and thus to optimize capital structures.
“Ok, a private individual can’t do that, its a bit difficult to sell shares in yourself. ”
Marriage?
I’m still waiting for someone to come up with an argument that will convince the man on the street that its right for Mike Ashley to be able to borrow hundreds of millions to buy companies and shift all the profits abroad, but he can’t offset his mortgage interest against his profits (ie income).
Not particularly heard of Ashley doing much offshore. Running a listed company it would be difficult as any profits made offshore would have to be brought into the UK to be paid out to investors….
“Not particularly heard of Ashley doing much offshore. ”
I’m using him as a illustration, of the type that is used to paint capitalism in a bad light. Your argument has to defend such people, and make sense to the self interest of the general public.
Still waiting for the argument to drop……………..
Jim, you were the one who asserted
But it is factually incorrect, probably. It’s hard to win a debate where one side isn’t prepared to deal with facts.
‘We need more public companies publicly accountable to shareholders and the public, and less indulgence of the indefensible. Britain should not be putting a Brexit deal at risk to save them.’
It’s about Brexit. Not publicly mcpublicface.
‘They are in the hands of a new class of invisible investors who mortgage companies for self-enrichment, rather as homebuyers mortgage themselves to buy homes.’
Then don’t use the term ‘mortgage.’ Investors borrow money to buy a company. Apparently. You call it a mortgage, then compare it to home buyers.
Hutton’s conflations are creepy.
Take an industry, other than private equity, that is heavily dependent on debt finance. Why do they depend on debt? Lack of growth prospects coupled with regular income streams. Think of utilities and renewable grant seekers. Change the tax status of interest and the water companies, telcos, and windfarms panic.
@ dcardno
The first £12,500 of income is tax-free *so that* each individual has enough money to pay for food, clothes and rent before being asked to pay income tax on income above the amount required for essentials. The same argument applies to zero-rating for VAT of food, rent, public transport and children’s clothes.
@ Jim
Well, if banks want to lend £millions to Mike Ashley then all one can do is quote a former Lord Justice (I trust M’Lud will correct me if I’ce misremembered) that the Law cannot protect a man from his own folly.
@ Diogenes
Also Property companies, Leasing companies. Rents would soar, companies would be unable to hire plant.
Indeed John77, that adds to the reasons why you must think before you ban interest deductions. Also the car pcp trade is destroyed. Is this what you want, Jim?
“Also the car pcp trade is destroyed. Is this what you want, Jim?”
Are you people dim? I’m not against interest deductions. I’m trying to point out that arguing with people who are against them is not going to work if the best you can come up with (as our host did) is ‘its double taxation’. Thats as good as red rag to a bull to the proponents of such things, and probably would make the average man in the street think ‘Yeah those City fat cats need double taxing!’ It’ll take some more convincing arguments than that, if you want to win in the current political environment. I’m beginning to see some glimmers of people coming up with concrete examples of why its not a bad thing, but no great overarching case as to why the undecided should agree with you.
Still waiting for a tour de force argument as to why abolishing interest deductions would be a obvious bad thing for the Man in the Street.
Jim,
For me, being a simple fool, “it’s a cost of business, just like all the other costs of business” should be enough? We tax profit (Corp tax) and then quite separately we (sort of) also tax turnover (VAT). If taxing profit, then interest (and other costs like raw materials) can be a cost of business and hence a reasonable deduction (#). If taxing turnover, the costs of business (be it raw materials or interest) are not deductions (let’s ignore input VAT for a second).
The sort of Joe Public (and / or Guardian journalists) that can’t get their head round that is probably not someone whose view we are going to worry too much about? They are everywhere, especially at the Guardian, but you’ll have to explain “profit” to them (and why it’s not evil in itself) before worrying about niceties such as interest?
# – Whether a financing cost or operating cost (and where interest might be an operating cost – a finance type business), that’s more interesting, but we are outside of the realms of Joe Public.