Jeremy Warner's Outlook: Banks and their capital needs – first they pay it out, now they want it all back again
Now UBM wants to switch tax domicile; UK budget deficit faces EU strictures
Tuesday 29 April 2008
When HBOS was subjected to a bear raid a month or so back of the type which had already sunk Bear Stearns, the situation was thought potentially so dangerous that the Bank of England, no less, had to be dragooned into the task of dismissing the whole thing as hogwash. One by one, everyone stood up to say that, both in terms of solvency and liquidity, the situation was fine.
A month later and HBOS is poised to launch a £4bn rights issue, while it is said already to be one of the biggest takers for the Bank of England's new government bonds-for-mortgages liquidity package. The rumour had it that HBOS had been seeking to activate the Bank of England's lender-of-last-resort facility. Without wishing to cause further unnecessary alarm, it's hard to know how what's happening now is much different.
HBOS is in no danger of running out of money in the way Northern Rock did, but like everyone else, it does have a liquidity problem, and it does urgently need to recapitalise. This is not just because of the £3bn of additional writedowns likely to be announced today on US mortgage-backed securities and other forms of complex debt. These would be painful but containable were it not for the fast-deteriorating UK economy and, in particular, given that Halifax is its largest player, what now seems to be turning into a full-blown housing crash. It is not so much the bad debts so far realised which are causing the problem, as the need to provide a cushion against the possibility of worse to come.
Banks are curiously fickle and irresponsible beasts for organisations that are meant to look after other people's money. In the good times, they pay out as much capital to their shareholders as they can in an effort to seem leaner, meaner and more bid-proof than everyone else. Then, in the bad times, they are forced to ask for it all back again. There's got to be a better way.
Now UBM wants to switch tax domicile
The trickle hasn't turned into the flood the CBI warns of, but there is evidence of a steady stream of UK-listed companies attempting to switch tax domicile.
This week's addition is United Business Media (UBM), the exhibitions and trade magazine group. In an almost exact copy of what Shire, the pharmaceuticals group, did last week, UBM plans to incorporate in Jersey and base itself in Ireland for tax purposes. The manner in which Shire and UBM are switching offshore is so similar that it raises the suspicion of a firm of accountants or lawyers out there marketing the blueprint. Woe betide them once Her Majesty's Customs and Excise finds out who.
UBM says it is moving because of the growing complexity of the UK tax system, because 85 per cent of its revenues now come from outside the UK, and because, unlike Ireland, the UK imposes tax on all companies in a worldwide group. Compliance costs are significant, and the risk of inadvertent tax charges arising is said to be high.
Based on consultations by HMRC, some accountants fear the start of a concerted tax grab by the UK government on the profits of overseas companies owned by UK-domiciled groups, leading to a growing likelihood of double taxation.
Business leaders generally think the UK tax regime more burdensome than it was. This in turn is said to make Britain less attractive as an international business location, which in time could cause the tax base to shrink, the very reverse of what the Government is trying to achieve.
The Government disputes the charge of oppressive business taxation, yet in a sense it doesn't really matter whether the assertion is true or not. Rather, it is perceptions that count, and in this regard the Government is losing the battle hands down.
As with Shire, UBM is less than forthcoming in giving clear-cut reasons for leaving, and not entirely convincing when it comes to costing the benefits. It puts the costs of complying with the UK tax regime at about £1m a year, which is plainly too high, but also trivial compared with the size of the group's cost base, and in any case barely enough to pay the directors' expenses in constantly having to jet off to somewhere else to have board meetings.
The further clampdown on overseas profits is at this stage still a threat rather than a reality. Nor is there any guarantee that Ireland will remain tax-competitive, with the EU determined to achieve better coordination of cross-border tax and the possibility of eventual harmonisation. Where will UBM go then? Liechtenstein?
Obviously there is a debate to be had over the relative merits of a sustainable corporate tax system that allows business to thrive and the contribution that businesses that avail themselves of the advantages of these shores are required to make to the public purse. The right balance is hard to achieve. There is already plenty of evidence to suggest that the Government is getting it wrong, with the consequent likelihood of running up against the law of diminishing returns.
All the same, it is a pretty awkward place that Lord Turner, a longstanding non-executive director of UBM, finds himself in. As head of the Pensions Commission, he recommended changes to the state pension that will involve a considerable increase in public spending. As the Government's climate-change tsar, he also thinks that "rich" countries like Britain are easily capable of absorbing the huge costs of tackling climate change.
Where does he think the money is going to come from for all this spending if the companies he oversees seek to avoid their contribution? Or perhaps he shares the all-too-pervasive view that taxes are only for little people.
In any case, we should plainly expect news soon that Standard Chartered, where Lord Turner is also a non-executive director and which also earns hardly any money in the UK, is to up sticks for Timbuktu or some such other untaxed and unregulated virtual location free from the prying eyes of the UK taxman or wider UK responsibility.
UK budget deficit faces EU strictures
Gordon Brown has so many problems on his hands right now that yesterday's strictures from Brussels on the state of the public finances are scarcely going to make things any worse.
For what it is worth, the EU monetary affairs commissioner, Joaquin Almunia, says he will start disciplinary proceedings against Britain in June for exceeding the EU's budget deficit ceiling of 3 per cent of GDP.
The European Commission's latest forecasts for growth and the public finances would make the deficit proportionately the worst out of any member of the European bloc. Even Italy is forecast to remain below the ceiling for the next two years, while France, which also constantly knocks against the ceiling, ought to avoid an outright breach too.
The UK Government cannot be fined for its naughtiness, in that it is outside the single currency, nor has it ever accepted the rule as a reasonable constraint on public borrowing. Instead it has its own rules. Unfortunately, these are also being blown asunder by a combination of a slowing economy and Northern Rock.
If the Treasury's last forecasts are right, with growth at 2 per cent for this year recovering to 2.5 per cent the year after, then Britain will survive both its own and the EU tests. But if as seems rather more likely the commission is right in assuming 1.7 per cent growth for this year and even less the year after, then both measures are dogmeat and Britain once more begins to look like the sick man of Europe. There is always a price to pay for economic growth and prosperity built on debt.
Interestingly, this relative decline will also eventually reignite the debate on the euro. Britons will never vote for Europe as long as they are able to look across the Channel and see a Continent visibly doing worse than themselves. But if the tables are turned, then the match becomes more even again.
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