FDs assess coalition government

What do finance directors want from the new government? Common requests are for certainty and stability. Britain’s new Conservative-Liberal Democrat leadership, the first coalition since 1945, has promised stable government that will reduce the country’s gaping budget deficit, while ensuring economic recovery.

But working out what the new government could mean for FDs is tricky. Political conventions are being discarded, policies ditched, while economic policy is more fluid than usual.

A Con-Lib Dem coalition document setting out its key ambitions published in the days following the announcement of the coalition outlines key tax and economic policies – including a surprise rise in capital gains tax (CGT). But details of some policies remain unclear. And with two key economic portfolios held by Liberal Democrats – Vince Cable stepping into Lord Mandelson’s shoes as business secretary and David Laws as chief secretary to the Treasury, serving, supposedly, shoulder to shoulder with George Osbourne as the chancellor of the exchequer – the tone and strategy of the Treasury is still being shaped.

Meanwhile, speculation mounts about a future hike in the VAT rate, which now seems inevitable. Tax experts are reserving judgment on the coalition government until the emergency budget, to be held on 22 June, and the Finance Act to pass the measure into law, which normally comes one month later.

Top of FDs’ concerns will be whether the coalition honours the promise the Tories made to cut corporation tax from 28 percent to 25 percent, or from 21 percent to 20 percent for smaller businesses.

“That would have an immediate effect for the business of the FD. It will be intriguing to see how much the [coalition government] wants to push this through,” says Francesca Lagerberg, head of the national tax office at Grant Thornton.

Vital agreements
“The parties appear to have reached agreement on some of the most contentious taxation issues which is vital for us and our consumers,” says Brian Mullens, UK finance director at McDonalds. “Agreements on income tax, national insurance and inheritance tax are less important than the fact that we now have certainty which allows us to plan. The challenge for the new administration will be to continue this approach through the emergency budget and comprehensive spending review, so that consumers and businesses know where they stand.

“We do need to tackle the deficit sooner rather than later, but in a way which doesn’t jeopardise the recovery. It’s just like having a credit card at home: you need to start paying it off before it gets out of control, but in a way that doesn’t threaten the mortgage,” he adds.

The coalition’s policy agreement says CGT for non-business assets, such as shares and second homes, will rise. Currently 18 percent, it is expected to be pegged to the income tax rate. This will help pay for increasing the personal allowance for income tax, a key Lib Dem economic policy. Any increase in CGT, which would hit the pockets of many FDs, would normally come at the beginning of the financial year in April, though Grant Thorton’s Lagerberg thinks the government might decide to increase the rate before then.

Bob Eastoe, finance director at bed manufacturer Hypnos, thinks the Tory-Lib Dem pairing in the Treasury could create an economic dream-team.

“Labour’s planned increase in national insurance contributions was definitely a tax on jobs and would clearly be a cost to our business which we can’t afford, other than reducing our numbers,” says Eastoe.

Concerns over what direction the coalition will take – and if it will take one – remain high. Vince Cable, the new business secretary, is on the left wing of his party and is far more interventionist on the economy than the chancellor, George Osborne.

“I think both parties have got the message that they need to set a direction, and that may be, for example, that we need a good internationally competitive tax system for business,” says John Whiting, policy director at the Chartered Institute of Taxation (CIoT). He thinks FDs should watch for changes to rules on tax avoidance and tax havens – the Lib Dems have claimed they can raise about £4.5bn by grasping the latter nettle – and new environmental taxes. “We all know that life is going to be tougher [for business], but can we minimise the uncertainty?”

City reaction
The effect on business of the coalition’s economic policies will, of course, also be determined by the reaction of the City and global financial markets. On the day the new coalition government published the first draft of its policies, the FTSE-100 finished nearly 50 points higher.

Some in the private equity world have questioned if an increase in CGT really would boost receipts for the taxman. According to figures from the British Venture Capital Association (BVCA), since 2007, when the Labour government raised the rate from 10 percent to 18 percent, tax revenues from CGT have more than halved, from £5.3bn in 2007-08 to £2.5bn in 2009-10 so far.