Tax relief on equity would be disruptive

/ 1 July 2014

A promise from Ed Balls to “redress the systematic bias in favour of debt finance” could cause uncertainty, experts have warned.

The shadow chancellor announced a consultation into introducing a so-called Allowance for Corporate Equity which would give tax relief on equity investments to match the deductibility of interest payments on debt.

An industry insider said: “Business likes stability. For a long time now, debt has been tax deductible and equity has not been – and to introduce a whole new concept could create a lot of economic uncertainty.”

However, the CBI welcomed the move saying a broadening of finance options would benefit small businesses.

Source: The Daily Telegraph

We Say: As a general principle, a simple tax system with a low rate of tax is much to be preferred to one with a higher rate of tax relieved by various forms of relief to incentivise whatever currently happens to be in fashion for the government of the day – especially when the inevitable consequence of anyone’s actually claiming the relief seems to be St Margaret Hodge bleating about tax avoidance and “the right amount of tax”. On the specific proposal, treating equity like debt for tax purposes would require the over-turning of some very basic tax principles and the re-writing of acres of tax legislation. So, on the whole, a thumbs-down from here.

For more information, please contact London Accountants, Berg Kaprow Lewis.