5 Government Policies Set To Damage Your Investments

Published in Investing on 30 March 2012

What's bad for business is bad for shareholders.

What's one of the biggest long-term threats that your portfolio faces? China? A euro-implosion? Upstart developing nations?

I reckon it's closer to home. Much closer to home. Our own government, to be precise.

Not necessarily this particular Tory and Lib-Dem government, I hasten to add. The last one was worse.

No, I mean most governments of recent years, with their focus on the wrong things, their refusal to help support industrial national champions, and their policies of seeing wealth and business as something to be taxed, rather than encouraged.

So here, with no further ado, are five examples of what I'm talking about.

Fuel's gold

Let's kick off with something that's presently very topical: the government's policy towards petrol and diesel. With pump prices at all-time highs, road fuel duty is set to rise another 3p a litre in August. And again, next year.

Businesses most dependent on fuel -- businesses such as hauliers Dart (LSE: DTG), with its Fowler-Welch transport operation, and Stobart (LSE: STOB) -- rightly protest through industry bodies that this hits them hard.

But virtually all British businesses are affected in one form or another by this insidious tax: remember, over 80% of the pump price of fuel is represented by VAT and road fuel duty. And their international competitors, meanwhile, face far more benign taxation regimes.

It is, in short, a tax on doing business in Britain -- and one that is set, by law, to rise at more than the rate of inflation. Madness? I think so.

Tax attack

With its small reduction in Corporation Tax, the Budget was trumpeted as being 'business-friendly'. But the facts are rather different.

Business in Britain is still taxed very highly on its profits, leaving less available to be re-invested or returned to shareholders as dividends. To be sure, a 2% cut from April, and a further 1% in each of the following three years, is welcome.

But it still leaves Corporation Tax set too high. And businesses are voting with their feet. Marketing and communications giant WPP (LSE: WPP), serviced office space group Regus (LSE: RGU) and FTSE 100 pharmaceutical firm Shire (LSE: SHP) have already switched their headquarters from the UK -- WPP to Dublin, for instance, and Regus to Jersey.

The result? A smaller tax base, and a heavier burden falling on those businesses that remain.

Exit door

And it's not just Corporation Tax that is forcing businesses overseas, and potentially into the arms of shareholder governance regimes less robust than our own.

Banker-bashing is very popular, and most financial firms are seen as rapacious evil-doers. Bank Levy -- which went up again in the Budget -- is regarded by government as a price that financial firms must pay for the implicit government support contained in the assumption that such businesses are 'too big to fail'.

But Standard Chartered (LSE: STAN) is a well-managed business that arguably needs no such support. So why should it pay for it? HSBC (LSE: HSBA) likewise. Not surprisingly, both banks now have their headquarters location under review, and may jump ship. Even the man from the Prudential (LSE: PRU) is talking about upping sticks.

Can invest, won't invest

This week came the remarkable news that British businesses are sitting on a whopping £754 billion cash pile -- roughly equivalent, it seems, to around half of UK GDP.

In short, companies would rather save the money than invest it, with capital spending remaining some 17.5% below its pre‑crisis 2007 peak.

What might get British businesses investing in British jobs, factories and innovation? Faster depreciation allowances. But while the government held out the prospect of an above‑the‑line R&D tax credit in the Budget, capital allowances weren't changed.

100% capital allowances aren't a 'tax giveaway'; they mainly affect the timing of tax relief, not the amount. So why haven't successive governments seen sense?

Planning and policy

Yet again, industrial policy is in the news. This time, it seems that Lord Heseltine has been asked to conduct a review. It is -- again -- too little, too late.

In the absence of an industrial policy, great businesses have been left to wither on the vine or go overseas, while new ones in areas such as biotechnology struggle to gain a foothold.

Lord Mandelson's approach to advanced manufacturing was a start, but the companies which benefited most -- such as Rolls-Royce (LSE: RR) -- were arguably those that didn't need the help anyway.

Granted, we've seen some progress. The recent 'Patent Box' legislation, which sees fewer taxes on UK-based intellectual property, lay behind the decision by GlaxoSmithKline (LSE: GSK) to invest £500 million in creating 1,000 new British jobs, including a big plant expansion at Ulverston in Cumbria.

But in the meantime, significant chunks of British industry have been bought by foreign firms from countries where there is an industrial policy. Look at the amount of the UK energy market in the hands of the French and Germans, for instance, or the extent to which the French and Germans control the civil aerospace business in Britain.

GKN (LSE: GKN) and BAE Systems (LSE: BA) are national assets -- but you wouldn't think so from the government's lackadaisical approach to industrial policy.

Foolish bottom line

In short, having studied some of these issues at university nearly 40 years ago -- and some of them, such as industrial policy, were hoary with age even then -- I'm saddened to see the extent to which successive governments have collectively fumbled the ball.

But that's enough of my views. What do you think?

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More from Malcolm Wheatley:

> Malcolm owns shares in Rolls-Royce, GlaxoSmithKline, GKN and BAE Systems. The Motley Fool owns shares in GlaxoSmithKline and Standard Chartered.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

rober00 30 Mar 2012 , 5:51pm

I understand WPP is returning to Britain. Dublin, I do not think so!!!

MDW1954 30 Mar 2012 , 6:45pm

Hello rober00,

If you think WPP is headquartered elsewhere, please let us know, and I'll amend the article. In the meantime, please see:

http://www.wpp.com/wpp/about/whereweare/

Malcolm (author)

mcturra2000 30 Mar 2012 , 7:29pm

Typo: epic for Shire should be SHP, not SHD.

Cyfran101 31 Mar 2012 , 12:26am

I would add that their lack of clarity regarding renewable policy is also damaging. Dithering over nuclear, over reliance on wind to meet future needs and pulling the rug from under everyones feet on solar particular low points. However i'd also point out that there is a lack of support/encouragement in areas such as hydro/wave, anaerobic digestion and geothermal in this country. These areas just don't seem to get any attention at all but could all be significant energy providers.

UncleEbenezer 31 Mar 2012 , 2:22am

Cyfran, perhaps it's wider policy concerning overregulated utilities. A decade of 'Blair Feelgood' with low prices trumping investment leaves us needing lots of investment, but at the same time under pressure not to raise prices as much as that investment requires. So there isn't the money in the system.

Nuclear and Tidal energy need big programmes, while lesser sources like wind and solar go on in background. I say, raise our bills to fund them. But I'm not a politician in need of reelection!

UncleEbenezer 31 Mar 2012 , 2:38am

I disagree about these points.

* Rising fuel costs are a good and necessary thing: they incentivise and reward efficiency, and might have potential to reduce the hauliers' losses from congestion (I speak as a long-term holder of STOB).
* Corportation tax is on a welcome downward trend, and the latest budget appears also to offer a welcome simplification for companies, if not alas for individuals.
* That exit door is in fact a two-way door, and (as with flexible employment) the UK is a net winner from it even if we see a handful of big departures.
* Sitting on cash piles? Yes, agreed. We have a problem of a zombie economy arising from bank bailouts, money printing, and (other) perverse incentives.
* Red Tape? Ours is problematic, though not quite the worst!

tru2me 31 Mar 2012 , 1:42pm

However i'd also point out that there is a lack of support/encouragement in areas such as hydro/wave, anaerobic digestion and geothermal in this country.

Well Cyfran101 there is this?
http://www.wavehub.co.uk/

UncleEbenezer 31 Mar 2012 , 4:41pm

Wavehub was a flagship project of the Southwest RDA.

The disbanding of the southwest RDA is just finishing about now. Last I heard the wave hub had yet to find new backers!

CunningCliff 02 Apr 2012 , 11:51am

"But it still leaves Corporation Tax set too high. And businesses are voting with their feet."

Excluding Ireland (which has ultra-low corporate taxes), the UK's corporation tax is among the lowest in Europe -- and is falling steadily from 28% to 23%. Why cut it any further, when it is already low enough to attract new investment into the UK?

Remember that the government still spends £10bn a month more than it earns, and corporation tax will raise £45bn in 2012/13. Our country needs that revenue from businesses!

Cliff

richjfool 02 Apr 2012 , 12:37pm

And if you leave the UK, or just go abroad to do business, you have to fly from over-congested airports and pay whopping airport taxes. But I guess that's another story.

econ103 02 Apr 2012 , 12:59pm

A major problem is our relationship within the EU. Even after 40 years of the EEC/EU we are still not resolved as a nation to be fully committed to the EU.
We need to have a final referendum to ask the UK population whether they are committed to the EU or would prefer to be an independent country.
A final vote either way would resolve our position in the world and allow certainty to future Investment policy.

ChaircatMidge 02 Apr 2012 , 1:08pm

I think the point about high corporation tax is too simplistic. I note that the companies mentioned are headquartered either in Jersey or the Republic of Ireland. The common factor is that these are countries with small (very small in the case of Jersey) populations and which therefore require less money to provide the functions of the State that businesses like to see - I'm thinking of things like relative freedom from arbitrary arrest, enforcement of contract law, that sort of thing. Nor do they need to spend the absolute amounts that a country like GB needs to because there are far fewer people to spend money on.

So these relatively small countries can get away with low corporation tax rates. Swiss cantons with very small populations try the same trick. It's rather more difficult for countries with larger populations.

richardlordesq 02 Apr 2012 , 1:11pm

In a global economy there will always be cheaper places to do business. Being the cheapest is a race to the bottom, where businesses pay no tax and education, healthcare and the welfare state are woefully underfunded. That's not what I want for the country I live in.

We have to compete by being the best place to do business, not the cheapest. That means a well educated, skilled and knowledgeable workforce, high quality education and healthcare, a simple and fair tax system, and a competent government.

poorMfool 02 Apr 2012 , 2:03pm

Lets face it, when has UK Government ever been any good at business ?

Nationalised industry was bent on destruction as soon as they took control, and R & D has always suffered at their hands through their policies.
Companies spend money on R & D when they have enough cash in hand to be able to afford it, but it is the first thing they cut in hard times.
A lot of the R & D done in this country these days are for the Companies in the far east, which does not benefit British industry.
It is also a fact that the financial institutons in this country have had it good compared with manufacturing, and it is their lack of invesment in manufacturing which has helped engineer, justifiably, the lack of confidence by everyone including Governments.
Banks do need castigating for their policies of creating nothing but a short term chase after cash. These are just gamblers by yet another name and have done little to help create real wealth through capital investent in companies that can generate long term returns.

SpeechieUK 02 Apr 2012 , 4:14pm

Yes, it does look like WPP is coming back to the UK - http://news.bbc.co.uk/today/hi/today/newsid_9701000/9701197.stm

Testoftime 02 Apr 2012 , 7:02pm

As investors, we look at things in terms of returns on our money. We put a company under the microscope to see if the management is taking the business forward.

But given we have little choice where tax is involved, should we not still apply the same thinking to our incumbent government?

As an example,and nothing more, in 2010 there were 8.1 million children in education, the government spent 88.6 billion, so that on average equates to £10938 per child.

How much of this money actually got to the 'coal face', the classroom, how much was lost in administration costs? Have education (R&D if you will) costs exceeded benefit, so much so, that we send the examiners out to inform the teachers of the questions?

It is not just about the amount we are taxed as a nation, but how it is spent, plus, a reasonable return for our taxpayer investment.

ArkWelder 02 Apr 2012 , 11:07pm

*Fuel's gold

A comparison of petrol and diesel prices in Europe:
http://www.drive-alive.co.uk/fuel_prices_europe.html


*Tax attack

Corporate tax rates in the EU (and VAT, Income Tax):
http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1083399946&type=RESOURCES

and the USA and Japan:
http://www.businessinsider.com/oecd-us-worlds-highest-corporate-tax-rate-2012-4


*Exit door

Prudential is considering moving its domicile from the UK due to concerns over EU legislation known as Solvency II rather than for tax purposes. Plus, and increasing level of their business is now in the Far East. A quote from the recently released Annual Report:

"Therefore, in parallel to continuing our preparation for eventually implementing the Solvency II rules, we also evaluate actions to mitigate the possible negative effects. We regularly review the range of options available to us to maximise the strategic flexibility of the Group. Among these options is consideration of optimising the Group's domicile, including as a possible response to an adverse outcome on Solvency II."

http://media.investis.com/P/Prudential/pru_ar2011.pdf


*Can invest, won't invest

Another interpretation is that British businesses would rather retain cash than distribute it to shareholders if they are unable to invest it - sensibly...


*Planning and policy

Is the proposal for a return to Thatcher's nanny state or for a soviet-style 5-year plan? How may times over the years have businesses asked to be left alone so that they can operate free from political influence?

xyon100 03 Apr 2012 , 12:10pm

I am a so called "trailing spouse" with my Wife working a for a large American multinational in Brussels, Belgium. When they finally got a government together they did what they have always done, increased already horrendous taxation, and of course it's aimed squarely at those already paying the most.

There was some discussion suggesting that further punishing the achievers might be counter productive, but it was of course quashed here in socialist central.

She works so darn hard it's scary at times, but is she well rewarded? Well yes. Bonus time in March. Salary for the month...

Gross=29,000 Euro

Net= 12,000 Euro.

And to get that 12,000 Euro to the employee probably cost the company nearer 50,000.

The end result is this is the last time they will do this to her or any of her colleagues because that really was the final straw for the company. With the exception of a small office to be maintained on the outskirts of Brussels, the whole operation is being moved out of the Country to Ireland at the end of the year.

I can't say what company this is as the news has still to be officially released. Now, Mr Di Rupo, what was that about them bluffing about leaving?

Possak 03 Apr 2012 , 10:58pm

"Thatcher's nanny state"?!?!?

On a more thoughtful note, it's interesting (because it's unusual) to see industrial policy argued for in the same article as lower corporate taxation. I would be inclined to suggest that the reason Rolls-Royce hasn't needed help recently is that defence manufacturers were the only industry outside of the City still favoured by the remnants of Britain's industrial policy.

Could you point me to a summary of the capital allowance situation? I'm not sure that I understand what's in question.

ArkWelder 04 Apr 2012 , 11:16pm

Sure, nanny state: the circumstances so reviled by the said former PM. Admittedly, it describes social rather than corporate interference, but I was thinking about the 'hunt or be hunted' approach to business that came in in the '80s. And the calls for less red tape and interference.

Perhaps the article is calling for a regression to the 1970s: seems to be a MF 'thing' given the new article that is trying to make comparisons!

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