Abolishing stamp duty on AIM shares will not address the tax advantages of debt financing
The TUC has long been concerned that the tax deductibility of interest payments on corporate debt encourages companies to carry high levels of debt and fuels highly-leveraged company buyouts.
So our ears pricked up when George Osborne acknowledged in his Budget speech that the UK tax system ‘biased debt financing over equity investment’, implying – so we assumed – that he was going to take steps to address it.
However, his next sentence “So today I am abolishing altogether stamp duty on shares traded on growth markets such as AIM” was a complete non-sequitur which will do nothing to address the tax advantages of debt financing.
Stamp duty is paid when shares are traded and is charged at 0.5%. There is no evidence that stamp duty is a major deterrent to investment, and if you buy and hold your shares you will only pay it once. Abolishing stamp duty on just the AIM and the ISDX growth market is unlikely to have much impact on investment levels and will do nothing to address the tax advantages of debt financing. It is the tax deductibility of debt payments alongside the non tax-deductibility of dividend payments that encourages debt financing over equity financing, not transaction taxes.
The insignificance of the measure is clear from the Budget figures – it is projected to cost the Government £175 million per year. To put this in perspective, EMI was brought by private equity firm Terra Firma in 2007 for £4.2 billion, funded with £2.6 billion of debt. Saddled with unsustainable debt levels, EMI has since ended up in the hands of the bank that funded the deal, Citigroup.
Some UK banks are still paying no corporation tax at all because of the levels of debt they incurred when the Government bailed them out during the financial crisis.
Addressing the tax system’s bias in favour of debt may not be easy, but it needs to be done. The financial crisis showed that high levels of leverage create substantial risk throughout the economy and especially within the financial sector. Recognition of the problems caused by the tax advantages of debt financing has increased since the financial crisis, with both Nigel Lawson and Andy Haldane calling for reform.
The TUC does not believe it is possible to address this issue without reforming the tax deductibility of interest payments on debt. In our view, there is a fundamental difference between debt used to fund organic growth through investment in research and development, innovation and training and debt used to buy up other companies, and this distinction should be reflected in the tax rules. In other words, tax-deductibility on debt would not apply to debt used to buy up other companies. The size of debt relative to company turnover could be used as a possible proxy to distinguish between debt to fund organic growth and debt to fund takeovers.
One thing is clear: in the context of the tax advantages of debt financing, abolishing stamp duty on AIM and the ISDX is an irrelevance.