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