As the EU has granted another extension to the Brexit deadline, the UK will be going to polls in an early general election on December 12 if the House of Lords agrees. Prime Minister Boris Johnson hopes to win a majority to “get Brexit done”, whereas the Labour Party has plans of its own which include turning stamp duty reserve tax (SDRT) into a financial transactions tax.
The UK has an SDRT rate of 0.5% on share trading, which raised £3.5 billion ($4.5 billion) in 2017/18. Labour’s proposal would expand this to include transactions involving corporate bonds, equity and credit derivatives, raising an extra £2.1 billion in annual tax revenues.
The City of London, the historic financial district home to the London Stock Exchange and the Bank of England, may shudder at the impact a FTT would have on its capacity as a global financial centre, but not everyone shares the same concerns within the banking industry.
“The financial transaction tax is an easy vote-winner to get core Labour supporters out to vote,” said one finance director at a UK fintech company. “It’s an invisible tax to most people, even though they may suffer from it indirectly. It will put a dent in how competitive UK business is.”
Although it may be invisible to most people, the FTT has dire implications for the health of the financial services industry. It would send a shockwave through an industry that has been at the heart of the British economy for decades.
“The FTT is a big deal because it would have a cascade effect through the different people involved in securities transactions. There might be five people involved in a typical acquisition of a share or bond, and all of them would be hit by a FTT,” said Dan Neidle, partner at Clifford Chance.
“Why does Labour want this proposal? Either they don’t understand the cascade effect and what it would mean for the City, or they understand it and want the FTT precisely because they want to shrink the financial sector,” said Neidle.
Fiona Le Poidevin, CEO of the International Stock Exchange, suggested the proposal would make the UK far less attractive to investors.
“A FTT will not make the UK an attractive place to do business. It’s another layer of tax and the effect will be that the retail investors, the pension holders, will be the ones who lose out,” Le Poidevin said. “That can’t be ‘for the many, not the few’.”
The FTT proposal is about much more than day-to-day transactions. Ever since the 2008 financial crisis, the spectre of an FTT has loomed large in discussions about the banking sector, partly because of a lack of regulation.
“The FTT looked like a sure thing after the global financial crisis, but here we are a decade on and it’s still not been implemented,” said one head of tax at a UK retail bank.
The international debate has started to shift to a new focus. “Now the conversation has shifted to the digital services tax, but it’s possible the DST will just be the next FTT,” the head of tax told ITR, stressing: “We may still be talking about it in 10 years”.
The politics of the impossible
Despite the risks, British businesses are warming to the idea of an early election. The Institute of Directors (IoD) found 41% of companies view a general election in positive terms, whereas 42% view a fresh referendum on Brexit in positive terms, just 19% view no-deal Brexit positively.
“Business leaders won’t view the prospect of a general election with any great enthusiasm, however they will hope it could provide the means to break the logjam,” said IoD Director General Jonathan Geldart.
Most British businesses surveyed by the IoD want to see the revised deal passed into law. Some 55% of companies want MPs to pass the EU (Withdrawal Agreement) Bill, and 42% view the deal as positive for businesses.
Several banking groups are weighing up the pros and cons of a Labour government versus Brexit. Some banks have concluded the fallout of Brexit could be far worse than a short-lived Labour government. It is possible measures like the FTT would be revised.
“A year ago, a Labour government would have been a big economic downside risk,” said Christian Schulz, European economist at Citi.
“These risks to the longer-term outlook have not changed,” Schulz said. “But Labour has become more decisively pro-EU over the past 12 months.”
Schulz stressed the Conservative government may be “fiscally profligate” once Brexit is secured, especially if the country enters into a no-deal Brexit. He suggested this is not “enticing” for financial institutions.
The Conservative Party has made it clear it will drop tax cuts in favour of higher public spending for the time being. This means a higher deficit in the short to medium term, coupled with less certainty about the future of the regulatory framework – particularly passporting rights.
Many financial institutions are thinking of relocating to Dublin or Frankfurt. Banks and brokerage firms could move more than £1 trillion in assets out of the UK, according to EY’s research. Ireland is proving to be the most popular option, in part thanks to its lower tax regime.
Oliver Harvey, analyst at Deutsche Bank, acknowledged there were serious concerns about Labour Leader Jeremy Corbyn, but suggested “these fears may be overstated”.
“First, any market-unfriendly policies instigated during a Labour government are temporary (until the government is voted out of office), and must be set against the permanent shock caused by a no-deal Brexit,” Harvey said.
“Second, we see the magnitude of economic damage caused by a no-deal Brexit as much higher than policies proposed in the last Labour manifesto,” he added.
These comments were made before the withdrawal agreement was revised. Today, the financial sector may have more hope about the future, but this still depends on whether Johnson’s deal will get through Parliament.
Many observers would point to Labour’s dismal poll ratings to stress that the Conservatives have the upper-hand. Labour was at 25% on October 30, while the Conservative Party was at 35%, according to the FT’s poll of polls. However, it’s worth remembering that Labour was at 25% in April 2017 and went on to win 40% of the vote in June 2017.
“This is an asymmetric election,” said John Curtice, the UK's leading pollster. “It’s an election that Boris Johnson has to win. If he does not get a majority or something very close to it, he will not be able to stay in government because the Conservatives do not have any friends elsewhere.”
“This is not an election that Labour have to win to stop Brexit, but it is an election that they and the other opposition parties simply need to deny the Conservatives a majority,” Curtice told LBC.
So there is plenty to lose and gain. The next election will decide the future of the UK’s fiscal strategy after Brexit. It will either mean higher taxes with more transparency, or lower taxes with less red tape.
